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Compensation Management

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Basic Concept of Compensation Introduction;• Money is a crucial incentive and directly or indirectly related with fulfillment of human needs.

• Effective management of compensation becomes critical because of the total operating costs.

• Compensation directly influences key outcomes like job satisfaction, attraction, retention, performance, skill acquisition, co-operation, flexibility etc.

COMPENSATION PLANNING

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• Employer’s objective- ProductivityEmployees’ emphasis- higher comp.to offset their increased cost of living and price his skill in the competitive job market.

• Two objectives of Compensation;a) as a reward for the past services.b) stimulus to increase performance in future.

• Develop, build and maintain “human capital” by following ways;

i) Comps. can serve to attract qualified applicants to the organization.

ii) Comp. helps to retain competent employees (fair internal pay structure & providing attractive benefits.)

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iii) Comp. serves as an incentive to motivate employees to put forth their best efforts.

iv) Minimizing the cost of comp. can also contribute to organizational effectiveness since comp. is a significant cost for most employers.

• Effective Compensation policy should be ;- Adequate governmental union & managerial levels should be met.

- Equitable: fairly paid in line with his effort abilities training so on.

- Balanced: Total reward package.

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- Cost Effective: enterprise should afford to pay.

- Secure: employee security need relative to pay.

- Incentive providing : pay motivators effective & productive work.

- Acceptable to the Employer: Reasonable enterprise for employee & employer.

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CONCEPT OF COMPENSATION

• Fair days pay for fair day work.

• Time is the basis for payment ( hourly, weekly, monthly or yearly.)

• Overtime- for extra work. Under time-works less than stipulated hours.

• Compensation is purely extrinsic-quit pro quo.

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• Compensation refers to all forms of financial returns and tangible services and benefits employees receive as part of employment relationship.

• Compensation may also be viewed as;

a) a system of rewards that motivates employees

to perform.

b) a tool used by organizations to foster the values,culture and the behaviour they require.

c) an instrument that enables organizations to achieve their business objectives.

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Compensation Components

Direct ( Cash) Indirect Basic pay (Wage supplements or DA fringe benefits)Overtime pay PFShift allowance Pension schemeIncentive Medical & health insuranceBonus Sick leaveProfit sharing bonus Other benefits & perksCommissions etc.

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Establishing Pay Rates

Factors determining wage structure;1. Organizations Capability to Pay

2. Supply & Demand for Labour

3. Prevailing Market Rates

4. Cost of Living

5. Productivity

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6. Trade Union Bargaining Power

7. Job Requirements

8. Product Ranges-Present & Potential

9. Requirements of Technology

10. Psychological & Sociological factors

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Salary StructureI -Graded Salary StructuresII-Salary Progression Curves

Graded Salary Structure:• All jobs are allocated into a salary grade within the

structure.

2. Each salary grade should consist of a salary range or grade.

3. Jobs can be regarded within the structure when it is decided that their value has altered.

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4. General increases in the cost of living or in the market rates are taken care of by proportionate increase in the minimum & maximum levels.

5. The salary grades should be wide enough to provide

room to recognize that people graded at the same level can perform differently and should therefore be rewarded according to their performance.

6. A differential should be maintained between the midpoints of each salary grade in order to provide adequate scope for rewarding increased responsibility on promotion to the next higher grade.

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7. The mid point of each grade is the target salary for the grade . Average salary will correspond with the target salary.

8. There can be an overlap between salary grade which acknowledge that an experienced person doing a good job can be of grater value than a new comer to a job in the grade above.

9. All jobs allocated into a salary grade should be broadly of the same level.

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10. Progression within a grade depends on the performance of the individual. It is assumed that all fully competent individuals in any type of job in a grade would eventually reach the normal maximum for a grade if they are not promoted.

11. The number of Salary grades or range will depend on :● Number of distinct levels of jobs in the hierarchy.● The width of each salary grade.● The extent of the overlap if any, between grades.● The salary levels appropriate for the most senior and most junior jobs.

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DESIGNING THE SALARY STRUCTURESTEP -1

Establish by market rate surveys and studies of existing structures and differentials of the most senior and most junior positions/jobs.

STEP -2Draw up salary grade structure between the upper and lower limits as established in step 1.

STEP-3Conduct a job evaluation exercise preferably by means of simple scheme ranking although this could be refined by using paired comparisons.

STEP-4Obtain market rate data bearing in mind that there is likely to be a range of market rates rather than a precise figure.

STEP-5Slot the jobs into the Grade structure in accordance with the results of the job evaluations and the market rate surveys.

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Salary Progression Curves(Career Curves or Maturity Curves)

• Increases in salary over a fairly long period to increased maturity or experience.

• Best used for professional/scientific or other highly qualified staff.

• Contribution is almost entirely related to their professional capacity rather than to a more or less fixed set of duties that enable their job to be firmly placed in a rigid hierarchy.

• Starting salary is linked to the market rate for their degree or to a professional qualification.

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• This system assumes that they will develop within their discipline at some standard rate as a result of their experience.

• Aim of SPC is to allow plenty of scope to advancing people according to their contribution.

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COMPENSATION PLAN AND BUSINESS STRATEGY

1. ATTRACTION AND RETENTION• Recruit and retain the best people available.• Organizations should become Pay Masters or Wage leaders.• Unlimited wage disparities cause distortions in the economy.

2. INTERNAL CONSISTENCY• Compensation policies should take into account the

differential in skills and levels both in responsibility and authority.

3. EXTERNAL PARITY• Prevailing rate in the labour market for comparable jobs in

the industry / region.

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• PSU’s / Good orgn’s fix relatively lower wage rates than private sector units because the former affords a greater sense of job security . PSU’s might face problems in attracting right talent.

4. CAPACITY TO PAY• Minimum wages to be paid irrespective of their capacity to

pay.• Depends upon the organizations ability to pay.• More wages are paid depending on the bargaining power of

the Unions.

5. PAY FOR PERFORMANCE• Linking pay to performance makes a good sense.• Design the orgn jobs and work flow in such a manner where

performance linked pay system are able to make difference to the outcomes of their work.

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6. LABOUR COST AND PRODUCTVITYWages and salaries to be linked with the productivity and profitability.

7. COST OF LIVING• DA and CCA forms an integral part of pay structure.• The general principle underlying these allowances is to

neutralize at least a portion of the increase in the cost of living.

• Increase in cost of living leads to additional burden on the employer without corresponding improvement in productivity.

8. MERIT AND SENIORITY PROGRESSION• Merit progression refers to the practice of rewarding a person

according to one’s contribution.• Based on Annual Performance Appraisal.

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• Senior employees may get more pay than juniors as seniors accumulate experience , skills and get sharpened and productive efficiency goes up.

9. MOTIVATION• Money may not be everything but everything else may be way

behind.• Company Compensation policy can be an effective tool to

motivate people for Superior performance.

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The objective of the employee benefits policies and practices of an organization might be:

• to increase the commitment of employees to the organization;

• to provide for the actual or perceived personal needs of employees, including those concerning security, financial assistance and thus, provision of assets in addition to pay, such as company cars and petrol.

• to demonstrate that the company cars for the needs of its employees.

• to provide a tax-efficient method of remuneration which reduces tax liabilities compared with those related to equivalent cash payments.

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Why Fringe Benefits1. Altruistic/ Paternalistic consideration

2. Statutory requirements

3. Concern for well being

4. Damage and hazard of industrial working

5. Tax-planning consideration

6. Competitive consideration

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7. Concern for quality of work-life

8. Mitigate fatigue and monotony

9. Discourage labour unrest

10. Reduce attrition

11. Build companies image

12. Attract, retain and motivate employees

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Benefit Need AnalysisA Benefit Need Analysis to make certain the mix of benefits is

doing what it should, might consider the following issues• How much total compensation, including benefits, should be

provided.• What part should benefits comprise of the total compensation

of individuals.• What expense levels are acceptable for each benefit offered.?• What is being received by the organization in return of each

benefits?• How Do having a comprehensive benefits package aid in

minimizing turnover or maximizing recruiting and retention of employees?

• How flexible should the package of benefits be?

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CLASSIFICATION OF EMPLOYEE BENEFITS1. Disability Income continuation• Short term disability• Long term disability• Workers compensation• Social security• Travel accident insurance• Sick Leave • Supplemental disability insurance• Accidental death and dismemberment• Group Life Insurance -Total Permanent Disability• Retirement Plans2. Loss of Job Income continuation (Layoffs and

termination)• Unemployment Insurance

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• Supplemental Unemployment Benefit Insurance• Guaranteed Annual Income.• Guaranteed Income Stream3. Deferred Income• Social Security• Qualified Retirement Plan – Pension Plan, Profit Sharing

Plan, Stock Bonus plan.• Group Life Insurance Plans• Stock Purchase Plan4. Spouse and Family Income protection • Life Insurance• Retirement Plans• Social Security and Medicare• Travel Accident Insurance• Health Care Coverage

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4. Health and Accident Protection• Diagnostic visits to the Doctor’s office, outpatient X-Rays and

Laboratory coverage, Home visits by the doctor, ambulatory or outpatient surgery, Annual check ups, health insurance plans for the survivors of deceased company employee retirees, non hospital psychiatric care.

CLASSIFICATION OF EMPLOYEE BENEFITS1. Pay for Time Not worked• Holidays, Vacations, Jury Duty Election Official, Witness in

Court, Civic Duty, Military Duty, Funeral Leave, Illness in family leave, Marriage leave, Paternity leave, Maternity leave, Sick Leave, Wellness Leave, Time off to Vote, Blood donation, Grievance and Contract Negotiations, Lunch Rest and Wash up periods, Personal leave, Sabbatical leave.

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2. Time off from Work without pay• Employee has an opportunity to pursue a special interest area. Although

the employee is not paid he or she continue to be covered by the employer’s medical , life Insurance and disability programs.

3. Income Equivalent payments and reimbursement for Incurred Expenses (Non Statutory Benefits)Provides for an opportunity for an improved and more enjoyable lifestyle

• Tax preparation opportunities• Education Subsidies• Child Adoption• Child Care• Elderly Care• Subsidized Food Service• Discounts on Merchandize• Physical Awareness and Fitness Program

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• Social and Recreational• Parking• Transportation to and From work• Travel Expenses- Car Reimbursement, Tolls and Parking, Tool

and Entertainment Reimbursement• Clothing Reimbursement/Allowance• Relocation Expenses• Emergency Loans• Credit Union• Housing

Some popular forms of Non Monetary Rewards• Treats - Free lunches, Festival bashes, Coffee breaks, Dinner

with the Boss, B’day treats.• Knick knacks- Decoratives, Company watches, Tiepins,

Brooches, Diaries, Calendars, Wallets, T-Shirts.

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• Awards – Trophies, Plaques, Certificates, Scrolls, Letters of Appreciation.

• Environment – Renovation, Music, Flexible Hours, E-mail.• Social Acknowledgement – Informal recognition, Recognition

at office get - togethers, Friendly greetings, Solicitation of advice/suggestion, Membership of clubs, Company facilities for personal projects.

• Tokens – Movie tickets, Vacation trips, Coupons redeemable at stores, Early time offs, Anniversary birthday presents.

• On the job rewards – More responsibility, Job rotation, Special assignments, Training, Representing the company at Public forum.

MERITS OF NON – MONETARY REWARDS• Motivates employees to perform better.• Costs the org’n next to nothing.• Build tremendous self esteem among employees

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• Makes employees more loyal to the company.• Creates an atmosphere where change is not resented.

DEMERITS OF NON MONETARY AWARDS• Demotivates people if processes are not transparent.• Could result in unhealthy competition among employee.• May lead to shortsighted and hasty decision making.• Work intrudes on the family life of employees.• Will never work if monetary rewards are inadequate.

GUIDELINES TO MAKE BENEFIT PROGRAM MORE EFFECTIVE

1. Fringe benefits programs should be looked at as a worthwhile corporate instrument in HRM.

2. Future policy planning in this area will have to keep in view some fresh reference points.

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Non – unionization and skills shortage are no more relevant for policy considerations.

3. Any meaningful package of benefits must reflect some perspective planning. Inflexibility brings stagnation.

4. Separate programs directly beneficial to workers from those that are directed towards community welfare. Clubbing them together adds to their cost. This may not be liked by workers.

5. It is advisable not to have a facility rather than neglecting it in its administration

6. Poor internal communication hurts the programme in at least three ways i) more money is spent for officers’ welfare

ii) Excess money spent on corporate image building at the cost of more bonus iii) priority of officers’ children in admission to schools. Therefore, make the internal communication system effective.

7. Devise new ways to involve workers and their representatives at all levels of planning and implementation.

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Pay for Performance & Financial Incentives Incentives are monetary benefits paid to workmen in recognition

of their improved performance.An incentive scheme is a plan or program to motivate individual or group performance.An incentive program is most frequently built on monetary rewards but also include a variety of non monetary rewards or prizes.Classification of IncentivesIncentives can be classified into 1) Direct Compensation2) Indirect CompensationDirect Compensation includes the basic salary or wage that the individual is entitled to for his job.Indirect Compensation includes protection programs, pay for time not worked, services and prerequisites.

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Incentives are also classified into Monetary and Non MonetaryMonetary Incentives – They provide extra financial motivation, by rewarding the worker over and above his regular remuneration for performing more than the targeted work.

Financial motivation are overtime wages, higher basic wages, incentive bonus, merit increments, suggestion rewards, various allowances, promotion and fringe benefits.

Non Monetary incentives are good human relations, self respect, recognition, status, sense of belonging, appreciation, higher responsibility, greater authority, job satisfaction, improved working conditions, great leisure etc. All these motivate workers to raise their productivity.

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CLASSIFICATION OF INCENTIVESIndividual Incentives – An extra compensation paid to an individual over a specified amount for his production effort. If an individual can increase the quantity and quality of his output by his own individual efforts and where his output can be measured.Group IncentivesGroup incentives provide for the payment of a bonus either equally or proportionately to individuals within a group or area. The bonus is related to the output achieved over an agreed standard or to the time saved on the job –the difference between allowed time and actual time.Group bonuses are calculated on the basis of the output of the team and are divided among the members either equally or in specified proportions.Organization wide Incentives Involves cooperation and

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Collective effort of the employees and management , in order to accomplish broader organizational objectives such as i) To reduce labour, material and supply costsii) To decrease turnover and absenteeismiii) To strengthen employee loyalty to the companyiv) To promote harmonious labour management relations.

PREREQUISITES OF EFFECTIVE INCENTIVE SCHEME1. The cooperation of workers in the implementation of an

incentive scheme is essential.2. The scheme must be based on scientific work measurement.

The standards set must be realistic and must motivate workers to put in better performance. Workers must be provided with necessary tools, equipment and materials so as to enable them to reach their standards.

3. Indirect workers should also be covered by the incentive schemes.

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4. There should be management commitment to the cost and time necessary to administer incentive schemes properly, and these must be carefully assessed before embarking on an incentive program.

5. There is a greater need for planning. Many incentive schemes, started hurriedly, planned carelessly, and implemented indifferently have failed and have created more problems for the organization than they have tried to solve.

Types of Incentive SchemesCategories1. Schemes where the workers’ earnings vary in the same

proportion as output.2. Schemes where earnings vary less proportionately than

output.3. Schemes where earnings vary proportionately more than

output.

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4.Schemes where earnings differ at different levels of output.Scheme 1: Earnings vary in the same proportion as output

• Straight piece work• Standard hour system

Rate per unit of output is fixed and the total earnings of a worker are arrived at by multiplying the total output by the rate per unit. Earnings depend directly on performance.Production difficulties -- Low earningsScheme 2: Earnings vary less proportionately than output -Gain Sharing schemesHalsey, Rowan, and Bedaux systemsThe common feature is that time is used as the measure of output and bonus is paid on the time saved, that is, the difference between the standard time set for the job and the time actually taken. Both the employer as well as the employee share the gains resulting from the saved time.

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1. The Halsey System : Fixation of a standard time for the completion of the task.

• Work done in correct time or more, the actual time rate is paid.

• Minimum wages is guaranteed even if the output falls below the standard.

• If the job is completed is less than the standard time, the worker receives a bonus payment at his time rate for a specific percentage of the time saved.

• 50% of Bonus to employee and 50% of bonus to employer.Bonus = ½ of Time Saved x Daily wages

of Time Taken2. The Rowan System - Standard time is allowed for a job and

bonus is paid for the time saved.• The premium is calculated on the basis of the proportion

which the time saved bears at a standard time.

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Bonus = Time Saved x Time taken x Hourly rate Time AllowedIf a worker does work in six hours against 10 hrs standard, the

wages payable in six hours wages plus 40%of wages as bonus.

3. The Bedaux Point System: The standard time set is divided into number of points at the rate of one minute per point.

• The bonus is calculated at 75% of the points earned in excess of 60 per hour.

• Thus if the standard time is 10 hrs and the worker completes his job in 7 hrs 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% of 180 x 0.96/60 which is equal to 2.16 money units. If the worker doesn’t reach the standard ,he is paid at his time rate.

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Scheme 3: Earnings vary proportionately more than output1. High piece Rate2. High standard hour system• The earnings of the worker are in proportion to his or her

output but the increment in earnings for each unit of output above the standard is greater.

• The higher rates start applying after the standards have been reached. Similar logic applies to high standard hour system.

• The main feature of these two schemes is that since direct labour costs per unit increase for levels of output above the standard, the worker also shares the earnings in overhead costs which results from an increased output.

• The amount of this share depends on the size of the increments in earnings which are payable at different levels of output.

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Scheme 4: Earnings differing at different levels of outputThe Taylor Differential Piece Rate System Two objectives• To give sufficient incentive to workmen to induce them to

produce up to their full capacity.• To remove the fear of wage cut.1. Under this system – There is one rate for those who reach

the standard ,they are given a higher rate to enable them to get the bonus.

2. Lower rate for those who are below the standard so that the hope of receiving the higher rate may serve as an incentive to come up to the standard.

3. This system is designed to encourage the specially efficient worker with a higher rate of payment and to penalize the inefficient by a lower rate of payment.

The Merrick Differential piece rate system.• One large step is broken into two as to encourage new and

average workers.

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• Straight piece rates are paid upto 83% of standard output, at which a bonus of 10% of the time rate is payable, with a further 105 bonus on reaching the standard output. For output above the standard ,high piece rate are paid.

THE ACCELERATED PREMIUM SYSTEMTHE SCANLON PLAN is a system of Total Organization

development which consists of assumptions about human behaviour , a set of principles for the management of organizations and a participative process of implementation.

The purpose of this incentive plan is to develop team work. It has two main aspects

a) Adopting a measure for increased productivity.b) Sharing the gain accrued from that increased productivity.Salient features of the plan• It encourages group work.

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• There is high flexibility in the generation of decisions and execution of the plan

• It integrates the company’s objectives with group activity.• It involves all the workers in the exercise and they make

their maximum personal contribution to the process of production.

THE SCANLON PLAN TODAYThrough research and experience, four principles have been validated that define the Scanlon plan and serve as conditions of Scanlon Plan successIdentity : The continual process of clarifying and understanding the organization’s “mandate” (i.e. requirements to serve customers, owners/ shareholders and employee. This process includes recognition and reaffirmation by the majority of employees of the need to change in order to manage physical and human.

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• 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 one’s 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 process are demanding tests of managerial attitudes, abilities, and performance.

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GROUP INCENTIVE PLANSIf the group consists of members with equal skills, the earnings are divided equally among them. When the members are of unequal skills, the earnings of the group may be divided among the members in proportion to their individual time rates, or according to specified percentages, or in some cases among only a certain number of members of the group.

Advantages of Group Incentive plans• Better cooperation among workers.• Less Supervision.• Reduced incidence of absenteeism• Reduced clerical work• Shorter training time.Disadvantages of Group Incentive Plans• An efficient worker may be penalized for the inefficiency of

other members in the group.

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• The incentive may not be strong enough to serve its purpose.• Rivalry among the members of the group defeats the very

purpose of teamwork and cooperation.

INCENTIVE PLANS FOR INDIRECT WORKERS• Indirect workers such as crane operators, helpers, charge

hands, canteen staff, security staff, maintenance staff also deserve incentives at par with direct workers.

• Incentives should be paid to such workers either on the ground that they contribute to the increased production which the direct workers may achieve or on the ground that their work has increased because of increased production, or both.

• Whether the output of indirect staff can be measured or not, a single system of bonus payment is made applicable to all of them.

• In some cases, the bonus is calculated according to some agreed percentage on the output of the plant or of a

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Department.• In others the bonus is a specified percentage of the incentives

of all or some of direct workers.• Many managements, however prefer to apply a merit rating

system to indirect workers which rewards these workers for other qualities, in addition to their output.

WAGE INCENTIVE PLANS Incentive plans for Blue Collar Workers - Short term incentive

plans for blue collar workers• Plans under which the rate of extra incentive is in proportion to

the extra output.• Plans under which the extra incentive is proportionately at a

lower rate than the increase in output• Plans under which the rate of incentives is proportionately

higher than the rate of increase in output.

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• Every employer wants his workmen to do the maximum work they are capable of doing.

• On the other hand, there is a feeling among the workers that an increasing effort benefits only the employer even when they are employed on a piece rate basis.

• The result is that they never produce to their full capacity and in most cases, put in the minimum necessary work.

• This feeling on the part of the workers may be removed either through fear or through expectation of gain.

• Fear can never produce the desired effect, but a hope of earning a bonus does induce them to work harder and produce more.

• Incentive plans are therefore known as premium plans because they offer premium for outstanding performance.

• The payment of bonus for indirect workers poses a serious problem because the output of many of them cannot be accurately measured. Merit rating system is followed.

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Incentive plans for White collar Employees / SalespersonsThe sales persons are given incentives in the form of sales commission.

Straight salary method for sales person Advantages• The sales person knows in advance what their income will be• The expenditure on sales person is known beforehandDisadvantages• This method tends to shift salesman’s emphasis in just making

the sale rather than prospecting and cultivating long term career.

• Pay is not related to results. This lack of relationship reduces salesmen performance.

Straight Commission Method• They are paid only and only for results.• High performance salesmen are generally attracted.

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Disadvantages• Salesmen focus on making a sale on high volume items and as

a result cultivating dedicated customers and working to push hard -to- sell items are often neglected.

• Salesmen tend to be less company oriented and more money oriented and the company has less control over them.

• Salesmen’s income generally fluctuates widely.

Combination method of salary and CommissionSalesmen not only get a fixed salary but also a commission in proportion to the sale effected.

Advantages• Since salesmen are assured of minimum earnings, they are

relieved of financial worries.• The company has more control over its salesmen, as there is

sizable salary component in most combination plans.

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DisadvantageSalary is not related to performance only; only incentive value of money is being traded off for its security value.

Incentives for Management• Managers are paid bonus.• Two types of bonus plans – one determined by formula( like

increased sales) and other determined by some discretion used in allocation of bonus.

• Bonus plans are reviewed annually.• Bonus is generally linked with overall corporate results.• The bulk of bonus is higher for top level executives and lower

for the lower level executives.• Bonuses are paid in cash. Company may use stock plans that

offer the executive, the company’s stock at a fixed purchase price.

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Such plans are designed to encourage ownership in the company and indirectly serve as an incentive for good work and represent a form of saving.

• In the manufacturing and retailing fields it is common for executive and managerial personnel to be compensated partly in the form of a base salary and partly in the form of year end bonus.

TOTAL COMPENSATION PROGRAMTotal Compensation and Reward strategy is a statement of an organization’s compensation and rewards philosophy. It defines the objectives of the rewards programs, the individual elements of these programs, and the ways in which those elements relate with each other to fulfill reward objectives.The formulation of a total compensation program should incorporate 1) A comprehensive audit or assessment of current programs 2) Internal business factors 3) external environment and market factors.

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1. A comprehensive audit or assessment of current programs- to determine which programs have achieved their objectives.

2. Review the competitive posture of the current total compensation package in relation to the market by determining the value of each element or component of cash and non cash compensation such as basic, incentives, benefits, perquisites, pension etc.

3. Rate each element of the program on the degree to which it supports key objectives. This audit examines the combined effect of the total package and identifies gap between programs and objectives.

2) Internal business factors – Possible internal factors are business strategy , management philosophies and values, workforce demographics (turnover rate, age profile and family status profile), life cycle position of the organization, organization’s vision, mission, values and culture, management philosophy

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3) External environment and market factors - Economic environment (globalization, unemployment rate, supply-demand situation in labour market), market compensation trends, tax regulatory environment etc.Internal and external factors need to be balanced when designing the compensation package.

A total compensation package and rewards strategy helps the organization

1. Align its compensation and reward strategy with its HR and business strategy.

2. Develop new compensation and reward program or update existing ones by serving as a guide for HR practitioners.

3. Compete better when recruiting new talent.4. Moderate its labour cost by trading off some components 5. Enhance performance.

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WAGE POLICYWage means any economic compensation paid by the employer to his workers for the service rendered by them.Economic objectives of Wage PolicyThis is for the achievement of maximum economic welfare of the people. This requires

• National income should be maximized• National income should be divided equally among all the

members of the economy• There should be a fair amount of stability in the national

income.Economic welfare will be maximized if the highest and the most stable standard of living is attained by all sections of the community.

In order to secure this, it is necessary to achieve• Full employment and optimum allocation of all resources.

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• The highest degree of economic stability consistent with an optimum rate of economic progress.

• Maximum income security for all sections of the community.

Social Objectives• The elimination of exceptionally low wages.• The establishment of “fair” labor standards.• The protection of wage earners from the effects of rising

prices.• The incentive for workers to improve their productive

performance.Key considerations for Wage Determination

1. To end exploitation and provide remuneration to capital and labour.

2. To fix statutory minimum wages in selected industries and promote fair wage agreements in the more organized industries.

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3. To ensure equal pay for equal work.4. To provide for wage differentials.5. To regulate wages and salaries to eliminate/ reduce undue

disparities.6. To link remuneration to productivity.7. To compensate for the rise in cost of living.8. To determine fair wage over and above minimum wages with

due regard to 1) productivity of labour 2) the prevailing level of wages 3) the level of national income and distribution 4) the place of industry in the economy of the country.

9. The capacity to pay.10. The basic needs of labour.11. To secure a living wage for workers.

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DETERMINANTS OF WAGE POLICY1. Compliance of Statutory and Government Requirements: Labour laws

relating to wages have an important influence on wages and salaries paid by employers.

2. Fair external comparison / alignment of wages – Wage paid for similar jobs in the industry.

3. Capacity to pay and corporate philosophy to pay wage rates.4. Inflation and cost of living.5. Job requirements and Cost of living.6. Job Requirements and Internal consistency.7. Influence of Trade unions in collective bargaining on Wages.8. Productivity of Employees and its Linked Incentive systems.9. Provide Wage differentials in Salary structure.10. Individual Wage determination.11. Fringe Benefits.12. Demand and Supply of Labour.13. Good Will of the company ,its Org’n culture and Managerial style.

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TAX IMPLICATION OF EMPLOYEE COMPENSATION BY THE EMPLOYER

Income Tax makes provisions for the following deductions in respect of employee remuneration

1. Payment of salary/ allowances and perquisites.2. Insurance premium on health employees.3. Bonus and commission4. Employer’s contribution to the staff welfare fund.5. Family planning expenditure.6. Entertainment Expenditure.

Tax Efficient Compensation PackageTAX PLANNINGTax planning is an arrangement of one’s financial affairs in such a way that without violating any legal provision, full advantage is taken of the tax exemptions , deductions, concessions, rebates, allowances and other relief or benefits permitted under IT Act.

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Tax planning is to maximize “take home pay” by availing tax exemptions, deductions and relief available. Also, avoiding some of the taxable items by alternative arrangements.

I .SALARYThe term salary defined for the purpose of Income Tax include within its scope

1. Wages2. Any Annuity or pension3. Any gratuity4. Any fee, commission, perquisite or profits in lieu of or in

addition to any salary or wages5. Any advance of salary 6. The annual accretion to the balance at the credit of an

employee participating in a recognized provident fund to the extent to which is chargeable to tax

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7. Aggregate of all sums that are comprised in the transferred balance to the credit of an employee participating in a recognized PF to the extent to which is chargeable to income tax.All payments made by the employer by whatever name these are called, which are attributable to the services rendered by the employee would fall within the meaning of salaries and would as a consequence be taxable.

II . ALLOWANCES All Allowances granted by the employer for the personal benefit of the employee will form a part of his salary for the purpose of assessment of income tax.i) HRA – Tax exemption for HRA is available only if the same is received as reimbursement for payment of rent in respect of accommodation occupied by the employee as a tenant.

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ii) Conveyance allowance – exempted to the extent that it is actually utilized for the performance of duties of an office.

iii) Traveling allowance and expenses – Any such allowance whether granted on tour or for the period of journey in connection with transfer to meet the traveling or the ordinary daily expenses incurred by the employee on account of absence from his normal place of duty is exempted from Income tax.

III) PERQUISITES – (Non taxable) Take care to distinguish whether a particular perquisite is taxable or not.

1. Rent free accommodation – rent of accommodation does not exceed 60% of salary.

2. Provision of company owned car – perquisite value is nil if the car is used wholly for official purposes.

3. Furniture- 10% per annum of original cost of furniture.4. Leave travel concession- immediate dependents.

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5. Medical facilities – does not constitute a part of salary.6.Other non taxable perquisites• Refreshment provided by the employer during working hours in

office premises.• Subsidized lunch or dinner.• Recreational facilities.• Goods manufactured by the company sold to the employee.• Subsidized transport• Employee’s contribution to Group Insurance scheme.• Payment of premium for personal accident policy.• Education allowance and hostel allowance subject to a

maximum of two children.IV) EXEMPTIONS • LTC• Transport Allowance• Foreign Allowance• Gratuity upto 3.5 lakhs.

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• Leave salary or unavailed leave on retirement• Pension is fully exempted• Retirement compensation is exempted• Retrenchment compensation• Payment from statutory PF• HRA is exempted• Awards are exempted• Salary paid by UNO or its bodies is exempted.• VRS payment upto 5 lakh is exempted• Senior citizens are exempted upto 1.53 lakh.

V) TAX REBATE• Payment of Insurance premium• Any contribution to PF.• Any deposit with the PO savings bank• National saving certificates.

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• Unit linked insurance plan• Unit linked insurance plan of LIC• Any subscriptions made to any pension fund.

VI STANDARD DEDUCTIONSStandard deduction is permissible to salaried employees at the rate of 33% of the salary subject to a maximum of Rs.30,000 if the salary does not exceed Rs.1.5 lakh. It will be 25,000 for exceeding Rs.1.5 lakh but up to Rs.3 lakh. It would be 20,000 for salary in excess of Rs.3 lakh but within Rs.5 lakh. Those who draw salary in excess of 5 lakh do not enjoy any standard deduction.

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Performance Linked PayPerformance linked pay is a financially measurable reward paid to an individual based on his or her overall performance. This measure includes the cumulative performance of the individual, his strategic business unit and of course , the organization.

KEY OBJECTIVES AND BENEFITS1. Induces a performance oriented culture. PLP contributes to

business objectives.2. Links overall compensation strategy with the organization’s

business strategy.3. Is employed to differentiate between an average and a star

performer.4. PLP is a motivational technique and improves productivity.

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5. PLP helps team members understand their job expectations better.

6. PLP is valuable as a retention tool.7. PLP helps upgrade skills of team members by inducing a

competitive environment.