COMPENSATION MANAGEMENT

Anand SharmaAmarjeet DuttaSoumyajit SarkarPreeti Narwani

MEANING OF COMPENSATION

Compensation is what employees receive in exchange for their contribution to the organization.

Total compensation =Direct + Indirect Compensation

MEANS OF COMPENSATION

• There are four basic tools executive compensation packages in organization. These are:

• Base salary.• Allowances.• Incentives.• Perquisites.

INDIAN PRACTICES

Executive compensation in India is built around three important factors.

• Job complexity.• Employers ability to pay.• Executive human capital.

Compensation System Components

COMPENSATION GIVEN IN DIFFERENT COMPANIES

Base salary Conveyance Special allowancesGratuity HRA Travelling allowances

Provident fund Medical claim Bank facilityBonus Providing cars Stocks and share

Legal aspect of Compensation

• Minimum wages act• – Payment of wages act• – Equal remuneration act• – Payment of bonus act• – Income tax act• • Principle of compensation• Equitable compensation systems• – Internal equity – through job evaluation methods• – External parity – market survey methods• – Job pricing• – Pay ranges

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

Variable payWhat is performance related pay?

“Financially measurable reward to an individual which is linked directly to individual team, or co’s performance.”

– PRP links pay progression to performance and/or comp rating– Merit Pay, individual incentive bonuses, individual discretionary

bonuses, team / to prefer bonuses, skilled based payment etc.– Merit pay – basic salary increase by …..Performance alone (i) incremental system (ii) percentage increase– Individual bonuses– Senior executives, sales managers production managers - reward

for performance subject to assessment after the event.– Team /group bonus- designed for group performance

Principles of Reward Strategy

• Pay for performance• Links to other levers of organisational change such as providing recognition when deserved• Reward measurable competencies• Match incentives to the company culture• Keep incentives clear and simple• Over-communicate the reward strategy for the best results• The greatest incentive is the work itself as employees want

to be recognised for the work they do and the contributions they make

Model for compensation system

Analyse present compensation structure

Formulate salary policies

Select compensation system

Develop implementation plan

Evaluate and monitor

Job- Based compensation plan route

Conduct job analysis

Identify compensable factors

Develop a job hierarchy

Construct job grades

Carry out compensation survey

Establish final pay policy

Traditional Pay Systems

• Traditionally people were paid primarily through base salaries determined by specific job, the need to maintain a certain level of internal pay equity an the need to pay externally competitive salaries.

• Employees were not encouraged to develop skills.• This had to change

Emerging Pay Systems

• Pay for knowledge and skills• Pay for competencies• Performance based pay• Incentive pay systems• Broadbanding = rather than climb up through a series of

grades, employees might spend most of their careers in a single band moving laterally and acquiring new knowledge and competence. Useful in ‘boundaryless’ organisation.

Employee Benefits

• Items in the total package offered to employees over and above salary which increase their wealth or well-being at some cost to the employer

Mandatory Benefits

• UIF• Compensation for injuries and diseases

Voluntary Benefits

• Most of these benefits have certain legislative minimums.• Vacation leave• Paid public holidays• Time for personal matters• Sick leave• Maternity leave• Health and life insurance• Medical Aid Schemes• Pension Funds• Employee Services e.g.. Canteens, social and recreational

services

• Is this the trend being followed by the graduate student community all over India?

“It is a well-known fact that private companies pay much higher salaries than the public sector or Govt jobs. But in private companies, it is like one mad rush to compete against each other to reach the top, unlike the public sector where usually promotion is based on seniority basis and competition is not so intense,” says Chiranjeet Vohra,* a 2009 pass-out from Indian Institute of Foreign Trade (IIFT), Delhi.

“I opted for a PSU job as I wanted to build a solid foundation to my career – which I feel one can learn only from a job in the public sector, as you encounter all kinds of people here – the good, the bad, the game changers and the lazy lot. Basically, one learns a lot in this process”, continues Chiranjeet.

A small survey

• Mindsets seem to have changed for a few who would not always vie for a foreign job via a private company or a job that has perks and benefits all its way.

• Chetna Singh*, a graduate from Faculty of Management Studies, Delhi, who is working for a public-sector undertaking says, “Undoubtedly, a public-sector job brings in job-security, but, there is also a need in the younger generation to do their bit in this sector. We can incorporate elements of efficiency and effectiveness, which we learn in our B-schools, to turn around systems for better results.”

• There is another set of opinion who is not in favour of public sector jobs and would also opt for private companies.

Chandan Mitra, who started his career in a Govt job, a year back, says, “The Govt sector in India is yet to change. I was disappointed with the sluggish work culture and low salary packets in the Govt sector. So, I have switched over to a private sector job, where my compensation is slightly better. There is a vast difference in the work cultures in both the sectors.”

Like the Cola wars, there shall always be an ongoing debate as to which sector is a favourable place to work for: pubic or private? The answer it seems lies in perceptions of the democratic voices of young Indians – some who would like to be agents of change in a traditional system and some who would like to be change-makers in their own personal way and be satisfied with their professional lives

LET US COMPARE TWO PAY SLIPS

Both started their career at the same time in the same profession, one in a PSU and the other in the private.

The PSU employee gets a higher pay in the same time span, as the promotion is time bound and job specific.

Whereas, the private employee sees an increment according to performance.

Engineer at punjlloyd

Engineer at BHEL

Difference..

• Arjun Erry, managing partner, Hunt Partners, an executive search firm: "The difference between the public and private sector lies in the risk-reward ratio. In the private sector, top management has to constantly strive to reach higher operational targets, which will involve a certain degree of risk and an employee has to be rewarded suitably. This often is not the case in PSUs."

• The 6th Pay Commission, in its report of March '08, had highlighted that the high salaries in the private sector are often granted only to a miniscule number of employees who hail from the top-end management schools, and their remuneration, at times, are not reflective of the industry average.

• For instance a typical employee in NTPC takes home a salary of around Rs 12 lakh per year, around 36% higher than his/her counterpart in Tata Power, the country's largest private sector power utility. The gap is even higher between National Aluminium (NALCO) and its private sector peer, Hindalco. Only in cases like ICICI Bank, it seems a private sector employee makes more money than his/her PSU counterpart, on average

• The PSUs remuneration and human resource policies have to fit into India's socio-economic reality, which is a country that is still pre-dominantly poor with lot of social and economic inequities. To give equal opportunities and uplift people from certain sections, the government has reserved posts in PSUs for scheduled castes and scheduled tribes. Most PSUs also have mandated to develop broader infrastructure facilities in areas adjoining their facilities. In contrast, in private sector companies, profit maximisation is the key objective.

• Employees in public sector enterprises have enjoyed job security, which is often not the case in private sector. Also, there is no denial that they have traditionally enjoyed a range of benefits and perquisites that cannot be easily monetised.

• For instance, PSU employees are entitled to accommodation at subsidised rates, which may not be the case for employees in the private sector. But the sum of these perquisites can never equal the 8-9 figure salaries drawn by their private sector peers. The junior and middle management employees are, however, better off in PSUs than those in the private sector because of these fringe benefits and more equal distribution of compensation in PSUs

• Take the case of BHEL, where the average salary per employee was Rs 6.55 lakh in FY 09, as compared to Rs 5.19 lakh for Larsen & Toubro. A similar situation was observed when comparing the average employee salary levels of SAIL and Tata Steel, coupled with NTPC and Tata Power

Conclusion

• Hence keeping in mind the work culture, the healthy, competition, the motivation and the incentives… we can say the compensation structure of private sectors is more efficient.

Thank you