Strategic Compensation Management Project

On

Strategic compensation-Alignment creates the edge

Submitted To : Submitted by:

Dr Hargovind Kakkar Navormi vats (A55)
Akanksha singh (A-54)
Gauri Agarwal (A-53)
Vivek singh (A-49)
Nidhi khulbe (A-48)
INTRODUCTION
Compensation refers to a wide range of financial and non-financial rewards to
employees for their services rendered to the organization. It is paid in the form of wages,
salaries and employee benefits such as paid vacations, insurance maternity leave, free travel
facility, retirement benefits etc.

The compensation in one word can be defined as “Exchange”.

The system of compensation should be effectively designed so that we can achieve the following
objective:-

 The capable employees are attracted towards the organization

 The employees are motivated for better performance
 The employees do not leave the employer frequently

The components of compensation are:-

Base pay

Incentives

Benefits

Compensation is a tool used by management for a variety of

purposes to further the existence of the company.
Compensation may be adjusted according the business needs,
goals, and available resources.

COMPENSATION STRATEGY (MEANING)

Organizations use compensation strategies to define how it views and manages employee pay
and benefits.
The strategy serves as a guide and should be outlined in a written document that clearly
articulates the organization’s approach to managing employee compensation.

An effective compensation strategy motivates current employees and is used as a tool to attract
new ones.

People often think of compensation as merely salary. However, the total cost of employee
compensation includes every aspect of employee benefits..

This includes the cost of health benefits, retirement benefits, bonuses or any other non-salary
benefit that is considered part of a total compensation package.

7 Keys To An Effective Compensation Strategy

1. Budget Allocation

The strategy should include the organization’s approach to allocating compensation dollars into
salary and benefits. This strategy will determine how much of the total compensation budget will
be spent on salary and what percentage will be spent on benefits and other incentives.

For example, for a budget of $1000 for compensation, if 90% is salary and 10% is benefits, you
need to determine how that 10% is spent – one scenario might be – 7% on health benefits, 2% on
retirement savings and 1% on tuition reimbursement.

Allocating specific budget dollars to pay and benefits can help control labor, health care and
other miscellaneous benefit costs.

2. Develop Salary Ranges

Developing salary ranges is critical to ensuring employee pay is competitive with other
organizations. To be competitive, it is important to benchmark like jobs within the same
industry and create a pay structure.

Smaller organizations often pay a vendor to help develop salary ranges, whereas larger
organizations may have the HR resources to conduct the research internally.

Regardless, it is important to look at all jobs and determine what work is done, how the job is
slotted and establish salary ranges that match all job descriptions.

3. Salary Audits

Markets change therefore it is important to perform routine salary audits to ensure salary ranges
reflect current compensation trends in a particular industry.
When performing an audit, the goal is to determine how competitive are those particular jobs and
what is the external market demanding.

Ask the question, is it a growing or dying profession?

It is important to pay attention to market changes and to stay current because failing to
keep up with the competition lead to employee loss.

4. Benefit Package

Many organizations use benefit packages, in addition to salary, to attract and retain employees.

Their goal is to be competitive with health, retirement, tuition reimbursement and other benefits
because they understand that it can be the determining factor for a job candidate who is deciding
whether to accept a position with an organization, or an employee who is considering leaving.

For instance, I know employees who have stayed with organizations because the benefits were
too good to walk away from.

5. Performance Management System

It is important to have a structured performance managemt process to ensure employees are

meeting corporate objectives and are assessed on a regular basis.

This process should include development of annual goals annual performance appraisals and a
structured process for coaching and mentoring employees.

Compensation strategies can positively influence employee engagement and improve employee
productivity.

6. Legal Compliance

A well defined compensation strategy will incorporate legal requirements to ensure the
organization is in compliance with all federal and state laws.

7. Structured Administration

As with any other business process, structure is important. Developing an annual review
process, salary audit, raise process timeline and making sure someone is responsible to ensure all
areas are completed is critical to successful compensation management.

Finally, a comprehensive compensation strategy can be the foundation for creating an

environment that recognizes and rewards employee performance and helps to establish a strong
culture of employee engagement.
 Organizations are only as successful as their approach to hiring the right people, setting clear
expectations, managing performance and recognizing and rewarding employees for a job well
done.

INTERNATIONAL PERSPECTIVE OF STRATEGIC COMPENSATION

Designing and developing a better compensation enclose for HR professionals for

the international assignments requires knowledge of taxation, employment laws, and foreign
currency fluctuation by the HR professionals. Moreover, the socio-economic conditions of the
country have to be taken into consideration while developing a compensation package. It is easy
to develop the compensation enclose for the parent country national but difficult to manage the
host and third country nationals. When a firm develops international compensation policies, it
tries to fulfill some broad objectives:

1. The compensation policy should be in line with the structure, business needs and overall
strategy of the organization.
2. The policy should aim at attracting and retaining the best talent.
3. It should enhance employee satisfaction.
4. It should be clear in terms of understanding of the employees and also convenient to
administer.

Major Components in an International Compensation

International Compensation is an internal rate of return (monetary or non monetary rewards /

package) including base salary, benefits, perquisites and long term & short term incentives that
valued by employee’s in accordance with their relative contributions to performance towards
achieving the desired goal of an organization.
The following are the major components of an international compensation package.
1. Base Salary

This term has a slightly different meaning in an international context than in a domestic one. It
denotes the amount of cash compensation that serves as a benchmark for other compensation
elements like bonus, social benefits. It denotes the main component of a package of allowances
directly related to the base salary and the basis for in-service benefits and pension contributions.
Base salary actually forms the foundation block of the international compensation.

2. Foreign Service Inducement Premium

This is a component of the total compensation package given to employees to encourage them to
take up foreign assignments. In this context, the definition of hardship, the eligibility criteria for
premium and the amount and timing of this payment are to be carefully considered. Such
payments are normally made in the form of a percentage of the salary and they vary depending
upon the tenure and content of the assignment.

3. Allowances

The most common kinds of allowance internationally is the cost of living

allowance(COLA). It typically involves a payment to compensate for the differences in the cost
of living between the two countries resulting in an eventual difference in the expenditure made.
A typical example is to compensate for the inflation differential. COLA also includes payments
 for housing and other utilities, and also personal income tax. Other major allowances that are
often made are:

 Home leave allowance

 Education allowance
 Relocation allowance
 Spouse assistance (compensates for the loss of income due to spouse losing their job)

4.Benefits

Thus, firms need to address a number of issues when considering what benefits to give and how
to give them. However, the crucial issue that remains to be dealt with is whether the expatriates
should be covered under the home country benefit programmes or the ones of the host country.
As a matter of fact, most US officials are covered by their home country benefit programmes.
Other kinds of benefits that are offered are:

 Vacation and special leaves

 Rest and rehabilitation leaves
 Emergency provisions like death or illness in the family

These benefits, however, depend on the host country regulations.

5. Incentives

In recent years some MNC have been designing special incentives programmes for keeping
expatriate motivated. In the process a growing number of firms have dropped the ongoing
premium for overseas assignment and replaced it with on time lump-sum premium.

6. Taxes

The final component of the expatriate’s compensation relates to taxes. MNCs generally select
one of the following approaches to handle international taxation.
1. Tax equalization: – Firm withhold an amount equal to the home country tax obligation of the
expatriate and pay all taxes in the host country.
2. Tax Protection :- The employee pays up to the amount of taxes he or she would pay on
remuneration in the home country.

7. Long term benefits or stock benefits

The most common long term benefits offered to employees of MNCs are Employee Stock Option
Schemes (ESOS). Some of the commonly used stock option schemes are:

 Employee Stock Option Plan (ESOP)- a certain nos. of shares are reserved for purchase and
issuance to key employees. Such shares serve as incentive for employees to build long term
value for the company.
 Restricted Stock Unit (RSU) – This is a plan established by a company, wherein units of
stocks are provided with restrictions on when they can be exercised. It is usually issued as
partial compensation for employees. The restrictions generally lifts in 3-5 years when the
stock vests.

Employee Stock Purchase Plan (ESPP) – This is a plan wherein the company sells shares to its
employees usually, at a discount. Importantly, the company deducts the purchase price of these
shares every month from the employee’s salary

COMPENSATION LINKING WITH STRATEGY

Compensation management is a strategic matter.

Compensation would include rewards when you offer monetary payment such as incentives,
various bonuses and performance bonus. Organizations reward their staff when they attain the
goals or targets that they have jointly set with the employees.

Rewards can be non-monetary such as a paid vacation for two.

Rewards can be non-monetary such as a paid vacation for two.

When we mention about compensation, we would refer to a salary scale for different levels.
Generally, we would classify the salary scale into non-executive, executive and managerial
before the salary range is established.

Next, you may ask whether compensation is a hygiene factor or a motivational factor. We would
consider it a hygiene factor when the salary paid out on the monthly basis is fixed. Here is where
you want to compare or evaluate to determine whether you are paying ‘competitive’ rates. Thus
you may want to participate in an established salary survey, which may produce vital
information pertaining to reward matters. This is the cash remuneration component. The other
component is the benefit. Benefit management is another aspect of compensation.

For the compensation to be considered as motivational factor, it needs to be variable. It varies

proportional to the result, target or goals that are mutually established. This payment is usually
termed as incentive. That’s why you would hear the term “incentivise” your employees to raise
productivity. Incentives become a variable cost to your business or operations cost and it varies
directly to your operations output or your service level. Your business would be able to absorb
such variable cost as it is not a fixed manpower cost.

Thus we consider compensation as a strategic matter.

You need to design and develop compensation & reward system to attract the right people for the
right job. Next you would need to implement the system effectively so that it ensures retention.
Last but not least, is for talent managing. Compensation is one of the techniques for talent
attraction and retention. However, you still need other talent management tools such as to
measure or talent mapping for high potential, high professional & technical employees. You
would also develop your compensation to motivate employees as team player, creative people
and productive workforce.

Likewise you need to design and develop the rewards based on the profile of your employees and
the nature of work. Rewards need to be significant and meaningful to the recipients. An example
is the recipient has a choice to choose from a range of rewards. This would make them feel the
reward is personalised to them as they produce their effort to achieve the goals. An example of a
recent reward item is the iphone or even the iPad, as these items catches current attention. Does
everyone like to own one? You have the answer.

How do you get started?

To begin, you need to determine whether you are paying a premium to get the top performers or
at 60 percentile or 50 percentile salary rate. This would depend on the numbers of employees and
the affordable manpower rate in relations to your business cost.

Next, you need to do the job analysis, job description prior to do job evaluation.

Some companies do job re-design after the job analysis or using technology to upgrade the work
process resulting the change in job description.
From the job analysis and job description, you will determine

(1) Skill-based compensation; or

(2) Competency-based compensation, or

(3) Time-based compensation.

Most companies will like to opt for pay for performance. Nonetheless, these companies used the
time-based and also inflation / cost of living as an indicator for salary increment. They have
recently shifted from annual increment to performance increment. Performance indicators would
be the performance of the business (profit or cost determinant), performance of the department
and finally assessment of performance of individuals.

Salary range – minimum and maximum

After you have completed the job evaluation, you would have to determine the salary range for
each class and grade.

What would you do when you note that some employees have hit the maximum of the salary
range?

You can either treat the performance increment multiply by 12 months and pay out quarterly or
half yearly or be the monthly performance allowance per month valid for 12 months. This would
be a catalyst to help your employees be motivated and retain experience workforce. Next you can
upgrade them by encouraging them to take up learning initiatives under Workfare package, Work
Skills Qualification (WSQ) and rewarding them upon achieving the statement of attainment.

You need to get them to go back to a learning mode to acquire new skills or enhanced skills.
Communication of the achievement is the recognition of their learning and effort. With the
newly acquired skills, they shall be assigned to take up expanded roles and thus move up the
salary grade. You shall review your salary range every two-years to stay competitive.

When you initiate the learning journey for those who reach the maximum, you may create
additional grade to bridge the knowledge gap. At the same time review the job description to see
whether you can download some of the higher job grades to bridge the skills gap.

THE FOUR F’S

Ultimately, companies that enjoy a competitive advantage in the marketplace don't just initiate
quality rewards programs. They sustain them. Their ability to do so is dependent in part on the
way in which they identify the issues and problems they face and then address them according.
We classify these issues in the following categories. In asking the questions associated with each
category, a business can better assess its area of greatest priority in dealing with its compensation
development.

Future • Are employees compelled by the future of the organization? • Is there a belief in the
business strategy of the company? • Are there opportunities for personal and professional growth
and development? The Compensation “Pantry”

Foundation • Is there an alignment between the compensation philosophy of our company and
its mission, values and vision? • Do we have a rewards value proposition that has attraction
capacity – that will help us recruit and retain great people? • Is there an ownership mentality
throughout our organization?

Framework • Are we achieving an efficient return on our compensation investment? • Is our

compensation program properly balanced between long and short-term rewards and guaranteed
versus incentive compensation? • Have we established clear performance standards for the
achievement of rewards in the organization?

Focus • Have we created "line of sight" in our organization between the vision and strategy of
the company and the roles, expectations and rewards we have and provide for our employees? •
Do we have a rewards reinforcement strategy in place that keeps employees focused on the
expectations we have of them and how they will be rewarded for performance? • Are we
consistently achieving the desired results we want from our employees?

COMPENSATION LINKED WITH PERFORMANCE

Performance-based compensation is an incentive-driven compensation schedule for paying

portfolio managers. It can be used in traditional investment management. In the hedge fund
industry it is generally standard for funds to charge performance-based fees.

In recent decades, growing proportion of firms have included performance-based pay schemes in
their compensation packages, linking pay to employee or company performance. According to
Bryson al. (2011, 6) such growth in incentive pay schemes has been fueled by the concern over
inefficiencies in the workplace and the belief that incentive pay can raise productivity.
Traditional pay systems for non-executive staff have generally been characterized by
standardization across and within sectors (e.g., government, particular industries) and within
organizations. With economies gradually opening up to world trade and foreign investment, local
employers were forced to compete with companies with sophisticated technology, more
productive ways of providing goods and services, and the advantage of being global players. In
many instances these foreign companies are also able to attract the best local talent.

Governments and private companies have had to compete in the global market by developing
competitive advantages, which are affected by costs and quality. Economies which are seeking to
progress from low wage cost manufacturing to highly skilled and technology-based production
need pay systems which not merely recognize skill differentials (as standard pay systems do), but
also provide an incentive to acquire skills and multi skills facilitated by years of careful and
correct investment in education and training. In the area of industrial relations, the outcomes of
collective bargaining often leave employers with little or no capacity to make further payments
on account of performance under a scheme. According to de Silva (2012) the movement towards
decentralization of collective bargaining has been the result of the need to address efficiency and
performance issues at the company level and the desire to seek ways to introduce performance
criteria into wage increases.

The definition of compensation can include all forms of financial return and tangible benefits
employees receive as part of the employment relationship. There are multiple dimensions of
compensation and reward management (e.g. benefits, pay level, pay structure) of which this
study focuses on pay-for-performance (PFP). PFP is an interesting phenomenon, especially due
to its potential as a basis for organization differentiation from competitors as well as a potentially
powerful driver of performance (Gerhart & al. 2009, 4). However, as performance-based pay is
only one dimension of employee compensation, the effects of merit or variable pay plans will
most likely depend greatly on the larger compensation context.

CASE STUDY ON INFOSYS

Infosys has the responsibility to attract and retain top quality talent to be effective in the
transformation journey that the company has embarked upon. In this context, the company
undertook a comprehensive survey of best practices and benchmarked senior management
compensation with key Indian and global companies. The compensation structure reduces the
proportion of cash component in the total compensation and has introduced higher stock
incentives (to be vested over a 4-year period); it was rolled out for the entire senior leadership
including Mr. Pravin Rao, Chief Operating Officer.

Mr. Pravin Rao's compensation revision reflects the philosophy of aligning the interests of their
leadership team to long term shareholder interests. While the breakup of Mr. Pravin Rao's
compensation has been provided in the postal ballot, it is relevant to note the following:

The cash component of his compensation has decreased from Rs. 5.2 crores (including annual
cash bonus) to Rs. 4.6 crores, a decrease of 10.6%

The performance based component of the compensation (directly linked to company and
individual performance) has been increased from 45% to 63% of total compensation.

Referring to Mr. Rao's compensation revision, Dr. Vishal Sikka, Chief Executive Officer said,
"Pravin's commitment and contribution to the company has been immense, and his partnership
over the past ~3 years has been critical to the successes and growth of their company. It is
essential for us to see that this revision in his compensation, as with several of our senior
leadership team, is focused on making Infosys more competitive, is benchmarked against peers,
is critical for us to retain key talent and aligns the long term interests of our leadership team with
that of our shareholders."

The compensation proposal was placed before the shareholders. The Infosys Board would like to
state that it acknowledges the sentiments of shareholders who have not voted in favor of the
resolution, and has also taken careful note of the statements expressed by the company’s
promoters. This Board views this as important feedback as it continues to work with all
stakeholders to ensure the long term interests of the company.

CASE STUDY OF TCS

TCS was established in 1968 with its headquarters in Mumbai. It was formed as a division of
Tata Sons Limited (TSL), one of India's largest business conglomerates, and was called 'Tata
Computer Center.' F C Kohli (Kohli) was appointed as the first General Manager in 1969.
Despite being rated as one of the top IT employers in India, however, TCS had drawn criticism
for its compensation structure. According to the employees the salaries were not on a par with
the industry standards. TCS was also under pressure to follow the Employee Stock Options
(ESOP) schemes followed by its competitors. ESOPs had emerged as one of the most powerful
tools for retaining employees. In January 2008, the management of TCS gave a jolt to its
employees by announcing its plans to cut 1.5 percent of the variable component of the total
compensation of its employees.

CASE STUDY OF GOOGLE

Google has nearly 57,000 Employees worldwide.

They believe that Googlers deserved programs tailored to their preferences, not just because a
technique or strategy proved successful at other companies didn’t automatically mean it would
be effective at Google.
For approximately the last 18 months, the compensation group at Google was on a mission: to
create a variety of reward and recognition programs that met the specific needs of its workforce.

Google spent the doing what it does best: gathering and analyzing information. It administered
surveys, held focus groups, conducted academic research, perused U.S studies, and interviewed
and observed employees.
The company figured out what turned employees on and off in terms of rewards and
recognition.
Finally they have supported four types of programs:
1- Spot bonus Program.
2- No name program.
3- Peer Bonus.
4- Kudos.

Spot-Bonus program: allows managers to award any employee who served on their
project teams with a larger monetary award of their choice or noncash recognition,
such as dinner for two. No name program: was designed for executives to recognize teams for
outstanding performance with group awards, ranging from team celebrations to team trips.
Bringing the first two into closer reach for employees was the end result of a
laborious fact-finding mission.
Peer Bonus: whereby they can nominate their peers for $175 rewards—have been modified
based on the compensation group’s findings.
Kudos: a peer-to- peer recognition program that lets employees send online thank-you notes to
co-workers without going through an approval process that has accessibility through many
devices.
Employees keep accumulating the kudos and then convert it to financial or non financial
rewards from the “Rewards catalog”.
Custom Rewards is a feature that lets the organization custom select what items you’d like to
put in a virtual catalog. From movie tickets to dinner at a local restaurant to VIP parking.
PAY FOR PERFORMANCE PROGRAMME

REFERENCE

Aggarwal RK, Samwick AA (2003) Performance incentives within firms: the effect of
managerial responsibility. J Finance.

www.google.compensationmanagement.org

www.scribd.com

journals.sagepub.com
class notes