Professional Documents
Culture Documents
C/R possibly the most critical & strategic area of HRM Employers perspective , Employees perspective,
Concept of compensation,
An organization exists to accomplish specific goals & objectives
hence, hires employees. The individuals hired by the organization have their own needs. One is for money, which enables them to purchase a wide variety of goods & services available in the marketplace. Hence there is a basis for an exchange: the employee offers specific skill/behavior behaviors desired by the organization to meet its goals and objectives in return for money, goods, & / or services. Sale of hands brains soul??
days work. Purely extrinsic A quid pro quo contract All forms of financial returns and tangible services and benefits employees receive as part of employment relationship Cash- compensation Base Pay, D. A. Short Term Incentives, Long Term Incentives (Equity Incentives) Benefits Income Protection, Allowance, work/LifeProtecting ones Bonuses (attendance, performance based etc) Shifts, Supplements. Danger money/ Dirt money Immediate focus Trade off between pay & efforts Monetary contract
Compensation Dimensions Pay Work and Performance: Pay for work and performance includes money that is provided in the short-term (weekly, monthly, and annual bonuses/awards). Pay for Time Not Worked Disability Income Continuation Differed Income Spouse (family) Income Continuation: Life Insurance plans, Pension plans, social security, workers compensation, and other related plans provide income for the families of employees when these conditions arise. Health, Accident, and Liability Protection
Methods of Payment Time Rate System Payment by Results System Measured Day work Concepts of Reward
CONCEPT OF REWARD Money as a MotivatorLimited Role of Financial Rewards Composite of all organizational mechanisms, and strategies used to finally acknowledge Employees behavior & performance. It includes all forms of compensation, specially non- monetary, awards & recognition, training opportunities, promotions, assignments, working conditions etc.
Located more in behavioral science It part of broader strategies of enhancing loyalty, motivation & satisfaction Encompasses career opportunities, job- securities, learning opportunities, achievement, recognition
Economic incentives are becoming rights rather than rewards. So we must acknowledge that insufficient monetary rewards for performance can not be rewards for performance and can be compensated by good human relations. If talent is an organizations most important asset, maximizing that talent is its most critical challenge. The challenge lies in issues relating to developing the skills to motivate people to perform at their best, making work meaningful and rewarding, fostering commitment & innovation, retaining top performers & improving their job performance today & giving them the edge they need to become the leader of tomorrow.
More prospective in focus To unleash latent potentials To create sustained commitment Psychological contract Personal recognition can be more motivational than money asserts Bob Nelson, author of 1001 Ways to Reward Employees (Workman Publishing, 1994). You can obtain from your employees any type of performance or behavior you desire simply by making use of positive reinforcement.
The non- financial compensation system contains many of the reward components that behavioral scientists have been describing for the past 50 years as critical for improving workplace performance. 1.Enhancing Dignity and Satisfaction from Work Performed 2.Enhace Physiological Health, Intellectual Growth, and Emotional Maturity 3.Promote Constructive Social Relationship with Coworkers 4.Design Jobs that Require Adequate Attention and Effort
5.Allocate Sufficient Resources to Perform Work Assignments 6.Grant Sufficient Control over the Jobs 7.Offer Supportive Leadership and Management
What to Reward?
Performance Organizational level Unit/Department level Speed and efficiency Loyalty Innovation
Upholding values Technical Solution Learning Good Behavior Sense of Humor Teaching Publications Event Management
How to Reward?
Empowerment Recognition Career Growth Development Celebrating and Fun
PERSPECTIVE
Attracting & retaining good performer Improving Individual & Corporate Performance Improving Motivation Clarifying job- role & duties Improving communication Reinforcing management control Identifying developmental opportunities Importance that job deserves (Status, Skill, Responsibility) Encouraging loyalty to the Organization Controlling cost Complying Govt.s Policies/ Laws Maintaining Co.s Image
Total reward system Total Reward System has both monitory and nonmonitory components, comprising incentives such as base- pay, variable pay, benefits, an exciting and challenging work environment the opportunity to work with excellent colleagues and leaders and industrial growth opportunity- the concept has been derived from Herzbergs theory of motivation- Hygiene factors + motivators
Direct financial- Base-pay, variable pay, incentives, stock options, Bonus, Merit increases, Spot-rewards, deferredpayment etc. Indirect-financial- Benefits, Perquisites, non-cash-recognition, sabbaticals, Q.W.L-/Clubs, Cos paid holidays, children schooling, home-office, career-counseling etc.
Quality of Work Intangibles (typically intrinsically valued) Work/Life Balance Inspiration/Values Enabling Environment Future/Growth Opportunity Cars Clubs Physical Exams Retirement Health and Welfare Time Off With Pay Statutory Programs Income Replacement Stock/ Equity Performance Shares Perquisites
Total
Benefits
Total
Tangible
Difference Compensation
Rewards where we can Annual Incentive assign an Bonus/Spot Awards objective dollar value Base Salary Hourly Wage
Long-Term Incentive
Total
R e m u n e r a t i o n
R e w a r d
Profit is the most important criteria Scheme may use cash, or share Gain sharing Share office scheme Employees share ownership plan Higher software system offers a platinum stock option no real share transfer, employers receives a cash payment equivalent to the rise in value of national stock Incentive Non cash awards Skill based pay allows employees to program through a range of grade Broadband pay
Compensation system
Indirect compensation
Direct compensation
Protection programs Pay for time not worked Services & Perquisites Medical insurance Vacations Recreational facilities Care Life insurance Holidays Financial planning Disability income Sick leave Low cost or free meals Pension social security Jury duty
Base pay
Merit pay
Salary
Incentive pay Bonus Commission Piece rate Profit sharing Stock option Shift differential
Wage
Emerging Trends
Charles Handy- The new org equation for success is that profit & productivity are best created by half of the workforce, paid twice as well and producing three times as such. This can be achieved through performance linked incentive and reward system. Such a system works on a very simple promise- If you measure it, people will do it. If you measure it & pay for it, people will do it in spades. If what you measure matches corporate goals and strategies, the co. will be successful.
- Risk-sharing partnership, not entitlement Flexible opportunities to contribute, not jobs Lateral promotions, not career path Employability, not job security Teams, not individual contributors
- Enterprise wide information sharing - Training, cross-training and skill development are crucial - Symbolic egalitarianism adds value - Long-term perspective matter - measurement matters
4)The Surplus Values Theory of Wages (Marxian):5)The Bargaining Theory of Wages (John Davidson) 6)Employment Theory (Supply and Demand Theory)
7) Competitive Theory 8)Behavioral Theory (a) The Employees Acceptance of a Wage Level:- This type of thinking takes into consideration the factors, which may induce an employee to stay on with a company. The size and prestige of the company, the power of the union, the wages and benefits that the employee receives in proportion to the contribution made by him-all have their impact. (b) The internal wage structure (c) Wage and Motivators Limitations of Economic Theories
Physiolo gical
Belongi ng
Estee m
Self Actualization
Hygiene Factors
Motivator Factors
Relatedness (R)
Process Theory Assists in explaining & Promoting understand of human behaviour, why, How?
b) To fix statutory minimum wages in selected industries and promote fair wage agreements in the more organized industries (industrial Policy Resolution. 1948). c) To ensure equal pay for equal work (Constitution of India). d) To provide for wage differentials. e) To regulate wages and salaries to eliminate/reduce undue disparities. f) To link remuneration to productivity. g) To compensate for the rise in cost of living. h) To determine fair wages over and above minimum wages with due regard to (i) the productivity of labor; (ii) the prevailing level of wages; (iii) the level of national income and distribution; and (iv) the place of industry in the economy of the country.
Legal Framework
The Payment of Wages Act, 1936 The Minimum Wages Act, 1948 The Payment of Bonus Act, 1965 The equal Remuneration Act, 1976
Institution Mechanism For Wage Determination Unilateral Pay Fixation Collective Bargaining Wage Boards Pay Commissions
Wages & Productivity Low wages and low productivity is suicide; Low wages and high productivity is exploitation; High wages and low productivity leniency; High wages and high productivity and/or value addition is ideal. Therefore, compensation requires to be linked with performance for competitive advantages. Concept Of Internal Equity & External Parity
Job Evaluation
- Job Analysis:- The process of examining the content of a job, breaking it down into its task, functions, processes, operation and elements. Job Description:- Description of a job based on job analysis. Job Specification:- The statement of the content of the skilled required of the job. Job Grading:- Ranking of job as a result of job analysis. Job Classification:- Grouping jobs according to their worth. Job Assessment/ Job Pricing:- The ascription of a monetary value on the basis of job grading.
Job Description
Job evaluation
Job Structure
Rationale
Favoritism by the supervisor/manager Pressures from employee groups/unions Scarcity of Skills Unsystematic approach to pay-structure
Objectives Primary Objectives: To establish wage level of a plant To establish relative wage level in a plant To bring new jobs to their proper relative parity with existing jobs To facilitate wage negotiations
METHODS AND SYSTEMS OF JOB EVALUATION The methods and systems of Job Evaluation are divided in different categories which are as follows: A) Conventional: A variety of job evaluation systems are in use and all of them are modifications of four basic systems. These are the ranking system, the grading system, the factor comparison system, and the point system. All of them are similar to each other in certain respects and are applicable to all types of jobs at all levels. I Non quantitative Ranking method Classification method II Quantitative a. Points Rating method b. Factor Comparison method
Ranking Method All the jobs in an organization are ranked in the order of complexity, responsibility and demands they make on the respective employees. Ranking of all the jobs is made easier by first identifying those that come at two extreme ends of the scale and locating the rest in the middle-region. Advantages: It is simples of all procedures. It is less time consuming. It leaves more room for unions to bargain disadvantages. Sometimes equal differentials are assessed to adjacent ranks None of the committee member is likely to be familiar with all jobs
Classification Method This method is sometimes called as predetermined grading method. A limited number of job grades are established on the basis of knowledge about the existing jobs in the organisation. Each of these grades is defined in terms of general functions and qualifications required. This is followed by development of job descriptions, which briefly state the nature of duties of each job. These job descriptions are matched with the grades, and jobs are classified into one or the other grades. Advantages It is comparatively easier method. It is less time consuming,
Point Rating Method In this method the whole job is analysed through 5-8 factors and over 20-50 sub-factors based on requirements. These factors/subfactors are given points which totals out as the overall position of the jobs. Though it is not scientific it is systematic method. It is the most popular method in use today in judging the relative of worth of jobs factors.
Classification
Class A B C D E F Point ranges 140-190 191-240 241-290 291-340 341-390 391-& OVER
Advantages It is the most sophisticated All the outcome is in hard fact number Factor Comparison Method The first task in applying this method is to select and describe clearly the factors to be used. The choice of factors is generally much more limited than in point rating. For manual workers, the following factors are generally recommended: Mental requirements; Skill requirements; Physical requirements; Responsibilities; Working conditions For clerical, technical and supervisory staff, all the factors mentioned above except working conditions are generally recommended.
The factor comparison method involves the following steps: selecting benchmark jobs; ranking benchmark jobs by factors; allocating money values to factors; ranking the other jobs, and wage fixing
Advantage - Factor comparison method permits a more systematic comparison of jobs than the nonanalytical methods.
B) Innovative/Non-Conventional: These systems are quite innovative and use concepts of management decision making and related aspects as factors for establishing internal equity. These are: Decision Band Method Here, type of decision to be made by the job is considered and placed in the applicable band. The Bands are: Band E - Policy Making decision i.e. Top Management Band D - Programming decisions i.e. by Senior Managers Band C - Interpretive decisions i.e. by middle managers Band B - Routine decisions i.e. by skilled operators on line Band A - Automatic decisions regarding when, how and where i.e. by semi-skilled operators Band O - Defined decision by unskilled workmen
Hay Plan
This is for managerial pay. It emphasizes on three critical factors:
1.
Know-how:
Sum total of all knowledge and skills a) Practical experience, (functional expertise) specialized, expertise and technological depth b) Width of managerial knowledge c) Human relations d) Requirement of skills for motivating people. 2. (Mental Activity) The amount of original, self starting thought required by the job for analysis, evaluation, creation, reasoning and arriving at conclusion a) Thinking environment b) Challenging environment
Problem Solving:
3. Accountability:
The major effect of the job on the company goals accountability for achievement. a) Freedom to act b) Impact on result c) Magnitude of success annually etc.
1) Hiring & retaining Competent Employees 2) Recognizing Pay Trends in the Marketplace 3) Defending Pay Practices in a Court of Law
Data Collection Techniques
Telephone Mailed questionnaire Face-to-face Interview Conference
Information to be collected
1. General information including: name of the company products manufactured type of ownership number of employees 2. Number of weekly and daily working hours, lunch and teabreaks. 3. Holiday General paid holidays casual leave, earned or privilege leave, sick lave, etc. 4. Basic wages, scales of pay 5. Allowances Dearness allowances, house rent allowance, city allowance, conveyance allowances, shift allowance, etc. 6. Incentives, bonuses, overtime payments. 7. Facilities such as conveyance, housing, childrens education, free services like electricity, water, fuel, uniform, and canteen.
Pricing Jobs
A jobs relative worth is determined by its ranking through the job evaluation process and by what the labor market pays for a similar job.
Banding
It consolidates as many as 4 or 5 traditional grades into single band, with one minimum and another maximum. Because the band encompasses so many jobs of different values, a range midpoint is usually not used.
Salary structure
1) Graded salary structures 2) Salary progression curves
Basic Wage Dearness Allowance (DA) Allowances Overtime Payment Annual Payment Annual Bonus Incentive System Fringe Benefits Relationship between Contribution and Method of Remuneration
Kind of Contribution
1.Time 2. Skill
Basic wage based on job Higher basic evaluation+ allowance allowance promotion
3.Effort
Basic wage based on job Incentive bonus and merit evaluation+ allowance increments Basic wage based on job evaluation+ allowance Basic wage based on job Higher basic evaluation+ allowance allowances Basic wage based on job Higher basic evaluation+ allowance allowances wage +
4 Ideas
5.Responsibility
6.Working condition
wage
Continued payment of basic Incentive bonus wage + allowances Time sale basic wage increment in Promotion benefits. and fringe
Variable pay linked with managers performance Bonuses, profit sharing and stock options Social security benefits Better quality of work life and working life Facilities for entertaining customers Company recreational services Cost of education and training of the managers as well as a scholarship to their children and allowances for professional magazines and goods Free furnished accommodation, conveyance allowance, etc.
Recent Trends
The basic questions throw up a arrange of approaches for designing compensation packages:
(a) Job Content Related Compensation
The most traditional and still the most prevalent approach is to link the annual increment to the performance. The basic pay is a job specific range, which is wide enough to accommodate all levels of performance. The binding restriction is that the basic salary including cumulative annual increments remains within the prescribed jobspecific range.
(b) Performance Related Compensation An advance on the traditional approach has emerged in the form of combination of job specific basic pay, performance based annual increment and periodic incentive linked to individual or group performance. In this approach, the variable component of compensation based on individual or group performance is becoming more significant. The attempt here is to keep a significant part of the compensation package as a variable cost linked to performance and limit the fixed component represented by basic pay. The system allows the risk of business to be shared with employees.
(c) Competency Related Compensation The most recent development in the field of compensation has been to link basic pay to the hob holder competencies and not to the worth of the job or the performance of the employee against some quantitative targets. The approach is based on the premise that the possession of competencies that is critical to the strategic needs of the employer are a significant predictor of superior performance. This approach changes the focus from the compensation being retrospective to having a strong prospective component. In this approach, compensation is used to reinforce acquisition and demonstration of competencies in the performance of work that leads to the achievement of strategically significant results.
Broad Pay Bands The base pay structure that best serves a system of compensation based on competencies comprises a few broad bands. Each band has a sufficient range to accommodate pay steps from entry to a level where the employee acquires and demonstrates competencies for his promotion to the next band. Bands are fewer in number than traditional pay grades. There are two aspects of the linkages between competency levels and pay bands that deserve attention. Traditional Vs. Competency-based System
Reward Component
Basic Pay
Traditional System
Competencybased System
Based on internal job Based on competency levels evaluation and external market demonstrated by the employee survey comparison Represents one more year of Represents greater width and service depth an employee adds to his value to the core business processes Privilege of membership of the Share of the employee as a group partner in the success of the business
Variable Pay
What an employee is entitled to Amount he has actually earned under contact of appointment through contribution
Company decides as a matter . Employees share for of policy undertaking risk and accountability as a business Collaborates
Benefits
Does what an employee is told. Employee is empowered to His labour is important and not make decisions and use his his ideas mind an involvement
Career Opportunity
Employee and the employer are mutually responsible for career. Employer offers opportunity as business demands and employee has to keep his competencies in line with demand. per Share of success as a business partner
Total Reward
Based on contact
entitlements
What of performance
Quantitative measurement
How of performance
More qualitative
Short time frame (usually Longer timeframe (future one year) performance) Result-oriented Development-oriented
the
Same
The straight piece-work and the standard hour systems are the two popular incentive schemes which come under the first category. Straight piece-work method is the simplest, oldest and the most commonly used method. Here, the rate per unit of output is fixed, and the total earnings of a worker are arrived at by multiplying the total output (measure in terms of units) by the rate per unit.
Earning Varying Proportionately less than Output The Halsey System Bonus = of Time Saved X Daily Wage of Time Taken
The Rowan System Under this system also a standard time is allowed for a job, and bonus is similarly paid for any time saved. This plan differs from the Halsey plan only in regard to the determination of the bonus. In all other respects, the two are the same. The premium is calculated on the basis of the proportion which the time saved bears at standard time. Thus, if a worker does work in six hours against 10 hours standard, the wages payable in six hours wages plus 40% of wages as bonus. Bonus = Time Saved x Time Taken x hourly rate Time Allowed
The Bedaux Point System Under this system, the standard time set is divided into a number of points at the rate of one minute per point. The bonus is calculated at 75 percent of the points earned in excess of 60 per hour. Thus if the standard time is 10 hours and if the worker completes the job in 7 hours and if his hourly rate is 0.96 money units the standard number of points for completing the job is 600 points in 7 hours. His bonus, therefore, will be 75 percent of 180 x 0.96/60 which is equal to 2.16 money units. If a worker does not reach the standard, he is paid at his time rate. This system is really more than the incentive system, since it enables the management to record the output of any worker of the department in units which show at one if the production is up to the standard the management desires.
Earnings Varying Proportionately More than Output Earnings Differing at Different Levels of Output Premium and Task Bonuses: It has been devised by H.L. Gantt and is the only one that pays a bonus percentage multiplied by the standard time. Under this system, fixed time rate are guaranteed. Out put standards and time standards are established for the performance of each job. Workers completing the job within the standard time or in less time receive wages for the standard time plus a bonus which ranges from 20 percent to 50 percent of the time allowed and not time saved. When a worker fails to turn out the required quantity of a product, he simply gets his time rate without any bonus. Its fairness and practical value depends on the reasonableness of the standard fixed and the wages which workers of average ability can earn without having to work at excessive speed and becoming unduly fatigued.
The Profit-sharing System: The profit-sharing scheme is based on the same principle as the group system where incentive is related to the collective effort of the group. It is an arrangement freely entered into under which an employer gives to his employees a share in the net profits of the enterprise, fixed in advance, in addition to their wages The Emersons Plan Under the Emersons plan, a standard time is set for each job, and the efficiency of each worker is determined by dividing the time taken by the standard time. Up to 67 percent of efficiency, the worker is paid by time-rate. Thereafter, a graduated bonus, which amounts to a 20 percent bonus at 100 percent efficiency is paid to the worker. Thereafter, an additional bonus of one percent is added for each additional one percent efficiency.
The Scanlon Plan: The basic concept underlying the Scanlon Plan is that efficiency depends upon plant-wide co-operation. It has two main aspects: (a) adopting a measure for increased productivity; and (b) sharing the gain accrued from that increased productivity. Some of the Salient feature of the plan are:(a) it encourages group work; (b) there is high flexibility in the generation of decisions and execution of the plan; (c) it integrates the companys objectives with group activity; (d) it involves all the workers in the exercise and they make their maximum personal contribution to the process of production.
The Scanlon Plan Today Today the Scanlon Plan is recognized as a system of total organisation development, which consists of assumptions about human behaviour, a set of principles for the management of organizations, and a participative process of implementation. It is a misconception to view the Scanlon Plan narrowly as an incentive system, quality of work life program, suggestion plan, paternalistic employee relations activity, or anti-union strategy. In fact, it is not a plan at all in the sense that it does not specify a mechanistic procedure to be followed in standardized fashion; no two Scanlon Plans are alike. Rather, it is a demanding process to achieve organizational productivity and human self-fulfilment. Through research and experience, four principles have been validated that define the Scanlon Plan and serve as conditions of Scanlon Plan success. .
the organisations mandate (i.e. requirements to serve customers, owners/share-holders and employee). This process includes recognition and affirmation by the majority of employees of the need to change in order to manage physical and human. Participation: Acceptance by all employees of the responsibility for the mandate and the opportunity to responsibly influence the decision-making process. Participation includes accountability for ones job and to all who have a vested interest in the enterprise. Equity : the assurance of a fair and balanced return to customers (Product value, quality, delivery, fair price), owners (profitability, return on investment, growth), and employees (job security, competitive wages and benefits, sharing in productivity gains). Managerial Competence: the unequivocal requirement of leadership to define the right job to be open to influence, and to create a climate for productivity improvement. The identity, participation, and equity processes are demanding tests of managerial attitudes, abilities, and performance
The Rucker Plan The philosophy of the Rucker Plan is similar to the Scanlon Plan, but the bonus computed is based on a more sophisticated basis. There are two major differences between the two plans. The standard under the Rucker Plan is based upon a careful study of accounting records and is not considered bargainable. While the Scanlon Plan rewards only savings in labour costs, the Rucker Plan offers incentives for savings in other areas as well.
A major difference between the Scanlon, Plan and the Rucker Plan is the norm or base used to establish a measure of productivity. The Rucker Plans measure of productivity is called economic productivity. It is the output of value added by manufacture for each dollar of input of payroll costs. Value added by manufacture is the difference between the sales income from goods produced and the cost of the materials, supplies, and outside services consumed in the production and delivery of that output. Payroll costs are all employment costs paid to, because of, or on behalf or the employee group measured. Accounting procedures similar to those used for developing the ratio in the Scanlon Plan are used to develop the economic productivity measures of the Rucker Plan. Incentives for indirect workers
Individual
Piece rate
Group/Team
Gain sharing
Organizationwide
Profit sharing
Sales commissions
Quality improvement
Bonuses
Cost reduction
Deferred compensation
Attendance bonuses
Benefits It encourage team work because evaluation and reward systems are team based, participants reap immediate incentive benefits from team orientated performance; which in turn provides measurable improvements to company performance over the medium long term. It promotes open lines of communication by focusing on the sharing of information, a variable pay ensures that all employees are able to make informed decisions, which streamlines operation and reduces cost. Its all about involvement employees are regularly updated about progress, expectations, feedback and changes/deviations from the moment program design begins. Result employees feel valued for their contributions; and organisation benefits from their motivation and enthusiasm. It shows the company is committed to positive change shared vision and goals replace us and them mentality.
Variable Pay
ongoing Special objectives and results
Gainsharing Gainsharing is a formula based organisation or factory wide bonus plan which provides for employees to share in the financial gains made by a company as a result of its improved performance. The Scanlon Plan The Scanlon formula measures employment cost as a proportion of total sales. Standard ratio, say 50%, is determined and if labour costs fall below the proportion, the savings are distributed between employees and the companies on the basis of a pre-established formula. In other words, this plan calculates gains based on standard cost reduction. It relies on employees participation through a system of committee, to solicit, develop, evaluate and implement suggestions of work unit.
The Rucker Plan The Rucker plan is also based on employment costs. But they are calculated as a proportion of sales less the costs of materials and supplies (i.e. value added). Allen Rucker contended that the pay proportion of value added remains a near constant share unless the organisation suffers from severe mismanagement or a drastic change of policy. On the basis of this assumption, the Rucker plan determines a constant share of whatever added value is created by the joint efforts of management and employees. Improshare Improshare is a proprietary plan, which is based on an established standard, which defines the expected hours required to produce and acceptable level of output. The standard is derived from work measurement. Any savings resulting from an increase in output in fewer than expected hours are shared between the organisation and employees by means of a pre-established formula.
In addition to the above, there are few other plans, which come under the purview of gain sharing. Value Added Many versions of gainsharing are based on value added as the key performance measure. Value added is calculated by deducing expenditures on material and other purchased services from the income derived from sales of product. It is in fact the wealth created by people in business.
c) Goalsharing Goalsharing plans are becoming increasingly popular. Even though goalsharing plans did not start becoming popular until recently, they many now be more common than gainsharing plans. In some ways they are similar to gainsharing plans; indeed, sometimes they are actually called gainsharing plans. However, they are significantly different in important ways and thus warrant a different name and separate consideration.
d) Profit Sharing Profit sharing means paying employees a share of the net profit in addition to their wages or salary. It is payment of a dividend or a sum based on basic wage or salary, grade or seniority. It is supposed to be a stimulus for higher performance. Profit sharing is a plan under which an employer pays to eligible employees, as an additional to their normal remuneration, a special sum in forms of cash or shares in the company related to profits of the business. The amount shared is determined either by an established formula, which may be published, or entirely at the discretion of management. Profit sharing schemes are generally extended to all employees of the company.
e) Stock Options Stock options are opportunities to buy stock at a set price immediately or sometime in future for a stated period. Stock options plan is one of the two forms of variable pay compensation package, other being profit sharing bonus. ESOP are becoming popular in view of the following factors: 1. The shift from industrial to information revolution. Knowledge workers expect say and stake in the organisation in which they work. 2. Public policy in many countries favour giving employees a share in equity and profits. This is pursued in few countries through legislation and in some others; it is encouraged through voluntary persuasion. 3. In the wake of disinvestments and privatization of public enterprises, employees are offered shares with view to ease their opposition. It is apparently to give them a stake. This is also considered as an effort as redistribution of wealth.
Principle of compensation
Equitable compensation systems
Internal equity through job evaluation methods External parity market survey methods Job pricing Pay ranges Broad banding
Wage structure
Wage Differential Fair Wages Committee The degree of skill The strain of work The experience involved The training required The responsibilities undertaken The mental & physical requirements The disagreeableness of the task The hazard attendant on the work, and The fatigue involved. Wage component Basic/ DA + variable pay + fringe benefits
General
Annual Bonus or ex-gratia LTC/ LLTC Medical self, wife, children, parents, unmarried sister, widow sister Leave Encashment Basic (fixed + variable ) HRA 35 % of basic 45% Education & Hotel Allowance CCA Servant Wages Cost of living Allowance Special pay Annual Bonus Executive commission Medical LTC
Private sector
Wages for Fair Days work, for More Workwage incentive Linking pay to performance Variable pay
Individual Piece rate Sales commissions Bonuses Special recognitions (trips, merchandise) Safety awards Attendance bonuses
Organization- wide Profit sharing Employee stock options Executive stock options Deferred compensation
Clearly communicated
Measurable performance
Life Insurance Medical Paid rest period Payment for time not worked Miscellaneous + trends
Discounts on goods/services Employees Education Employees meals Child care Elder care Early retirement windows golden offerings Consulting Services EAP Personal Services Picnic, Club Job related services help employees to prefer their jobs better Subsidized transport Food service Education Family friendly benefits
Awards
Tokens
Free
Movie tickets Vacation trips Coupon s redeem able at stores Early time-offs
Executive Compensation
Perquisites
Supplemental Benefits
Annual Bonuses
Executive Salaries
Transportation Company car or car allowance First class air travel Company airplane usage
Financial/Legal Financial planning Tax planning/ tax preparation No or low interest loans Legal counseling
Infrastructure To Get Highest Pay hike in India moved up from 14.4% in 2006 to 15.1% in 2007. And despite global concerns of an economic slowdown in the US, 2008 is expected to be better with a 15.2% average pay hike in India. For real estate and infrastructure sector, average pay hike was 25.2% in 2007 and expected to remain at a similar level this year. The average salary increase rate in India is expected to slow down to 9-10% by 2012. The top five attrition prone sectors were insurance (35.2%), ITeS (28.9%), hospitality (27.1%), retail (24.7%) and telecom (23.6%). The sectors that recorded the least attrition include automotive, energy, chemicals, electronics and FMCG.
Tax Planning
The basic purpose of tax planning exercise is to
minimize the incidence of tax to both the employer and the employee. All constituent parts of employees remuneration are deductible as business expense to the extent possible. Remuneration received by the employees should qualify for concessional rate of taxation so that their post tax income is maximized. Tax planning and tax avoidance are two distinct legal concepts.