Compensation Management

PRACHI DESHPANDE
Content:
Compensation Management: Concept, Objectives, Importance of Compensation Management,
Process,
Current Trends in Compensation.
Factors in compensation plan. Wage/ Salary differentials, Components of salary.
Incentives and Benefits – Financial & Nonfinancial Incentive, Fringe Benefits.
 Employees Separation - Retirement, Termination, VRS,
Golden Handshake, Suspension, Concepts & Methods,
Grievance Procedure in Indian Industry.
Compensation:
 “Compensation is what employee receive in exchange for their contribution to the
organization”.
 Compensation management practice is essential for every organization’s performance.
 Employees are provided compensation in three different forms:
1. Pay: Provided in the form of periodic wage & salary.
2. Benefits: Provided in the form of medical facility, insurance facility, recreational benefits etc.
3. Incentives: Provided in the form of bonuses, commissions etc. to award the good performers.
Objectives of compensation
management
To maintain Internal & External Equity
To attract Quality Candidates
T o retain Employees
Cost Control
To comply with Legal Rules
To ease to Understand and Operate
Factors Influencing Compensation Planning

Job Level and Needs

Organizations Ability to Pay
Supply of Labor in the Market
Cost of Living
Productivity
Prevailing Market Rate
Trade Union’s Bargaining Power
Attitude of Management
Importance of Compensation Plan
A well-designed compensation & benefits plan will benefit in the following ways:
Job satisfaction
Motivation
Drive employee performance
Low Absenteeism
Low Turnover
Peace of Mind
Increases self-confidence
Process of Compensation Management
Current Trends
 Restructuring pay mix
 Increased transparency
 Evaluate compensation spending based on ROI
 Work-Life Balance
 Executive Pay Trend
 Strategically rewarding top performer
Salary / wages differentiation
Salary Wages
Salary is typically a yearly figure that is fixed for a Wages are fixed on an hourly basis and an
period of time, with a pre-determined increment individual's earnings will be variable, depending on
trajectory. their work hours.
Salary is usually associated with skilled labor wages are paid for unskilled and semi-skilled labor.
Salary pay-out typically happens on a weekly, bi- Wage payment is usually associated with a daily or
weekly or monthly basis. weekly cycle.
Salary is usually paid to regular employees of a Wage payment may happen outside of legal
company who work within the legal frameworks of contracts.
professional contracts.
Salaried employees typically enjoy several benefits Wage labourers will not have any benefits
Components of Salary
Components of Salary
CTC:
 CTC or Cost to Company refers to the total salary package of
an employee.
 CTC is inclusive of all monthly components like Basic Salary,
Allowances, Perquisites or any other contributions.
 CTC is never the take-home salary of an employee.

Basic Salary:

 Basic Salary is the amount that an employee receives

prior to any extras being added or payments deducted.
 It excludes bonuses, overtime pay or any other
compensation from an employer.
Gross Salary:

 Gross Salary is the amount calculated by adding up your basic salary and
allowances, before deduction of taxes and other deductions.
 It comprises bonuses, overtime pay etc.

Net Salary:

 Net Salary or Take-Home Salary is the amount of money calculated after

deducting income tax at source (TDS) and other deductions as per the
company’s different HR policies.
Allowances:

 Allowances are the monetary benefits provided over and above the
basic salary, which may be partially or fully taxable or are completely
exempted from tax.
 Common ones include House Rent Allowance (HRA), Medical, Leave
Travel Allowance (LTA) etc.

Prerequisite

 Prerequisite refers to fringe benefits. These include mostly the non-

monetary benefits provided on the basis of an employee’s official
position in the organization.
 Common ones include companies providing car, phone, internet
services, and other daily requirements.
 Allowances
Taxable Allowances Partially-Taxable Allowances Non- Taxable Allowances
Dearness Allowance HRA except when it qualified as Payments to government employees
exempt under Section 10 posted abroad
Entertainment Allowance Fixed medical allowance Allowance for UN employees
Overtime Allowance Special allowance Sumptuary allowance paid to judges of
Supreme Court and High Courts

City compensatory allowance Conveyance allowance above Rs. Compensatory allowance paid to
19,200 per annum under section 10 judges of Supreme Court and High
(14) (ii) of income tax act Courts
Project Allowance Education Allowance
Tiffin/meals allowance Leave Travel Allowance
Uniform allowance
Cash allowance
Non-practicing allowance
Servant allowance
Warden allowance
Interim allowance
Bonus:

 Bonus is a reward that is paid to an employee for his good work

towards the organization.
 The basic objective of giving bonus is to share the profit earned by
the organization amongst the employees and other staff members.

Payout:

 Payout is a sum of money, basically a large amount that is paid

to someone for example by an insurance company.
 A payout generally is a sum of money paid to a policyholder
when a claim is accepted.
Arrears:

 Arrears refer to payment given for compensating the salaries left, which
should ideally have been given earlier.
 Employees are paid arrears when they get a salary hike in one month but
receive the amount in some other month.

Gratuity:

 Gratuity is a part of salary that is received by an employee for the services

offered upon him or her leaving the job.
 Usually the gratuity can be received after 5 years, it is deducted every year
by the employer and is deducted from your CTC.
Incentives:

 Incentives refer to giving employees bonuses or other forms

of compensation for going beyond and above their normal
duties.
 It is a financial reward for performance rather than pay for
the number of hours worked.

Rebate:

 Income Tax Rebate under Section 87a offers some relief to

taxpayers who fall under the tax slab of Rs. 2.5 – Rs. 5 Lakh.
 Any individual whose annual net income is not more than
Rs. 5 lakh is eligible to claim tax rebate under Section 87a
House Rent Allowance:

 HRA is an allowance that is paid by an employer to the employee as a

part of the latter’s salary.
 This is basically given to individuals who live in rented houses with the
intention of making it easier for them to afford a place of
accommodation.

Provident Fund:

 PF is a scheme for providing a monetary benefit to all the

salaried individuals after their retirement.
 As you start working in a firm, both you and the organization
contribute 12% of your basic remuneration into the EPF
account.
Income Tax:

 The tax levied on an individual’s personal income is called income tax.

 Usually, an employee gets his or her salary after the tax deduction by the
employer.
 This process is called Tax Deduction at Source (TDS).
 The deducted tax amount is paid to the government by the company.

Professional Tax:

 It is charged by the state government in order to let an individual practice

a certain profession.
 The maximum amount payable per year is Rs. 2,500.
 It depends on your monthly salary and also on the state in which you
work.
 The professional tax levied varies from state to state in India.
Incentives
Incentives refer to any material tangible or intangible that can pull in the attention of the
employees and motivate them to work more enthusiastically in a constructive manner.
The power of incentives is immense, as they are the powerful hidden forces that can let human
beings feel appreciated, plus can also convince them to shape their behavior to a certain
amount as per the expectations of the incentive provider.
Delving deep into the world of incentives is actually understanding human beings because
incentives are the factors that driven human behavior.
There are two popular ways of incentivizing employees.
These are indirect and direct compensation.
These incentives can be in the form of organizational incentives, individual incentives, or group
incentives.
Types of Incentives
1. Financial incentives
2. Non-financial incentives
Fringe Benefits
 Fringe benefits are additions to compensation that companies give their employees.
Some fringe benefits are given universally to all employees of a company while others may be
offered only to those at executive levels.
Some benefits are awarded to compensate employees for costs related to their work while
others are geared to general job satisfaction.
These include health insurance, life insurance, tuition assistance, childcare reimbursement,
cafeteria subsidies, below-market loans, employee discounts, employee stock options, and
personal use of a company-owned vehicle.
Types of Fringe Benefits
Fringe benefits required by law:
 These include all the benefits that the employer has to offer to all the employees.
 These benefits include health insurance, medical leave, unemployment insurance, worker’s
compensation, etc.
 These fringe benefits are required to be offered to all employees by law.
These give the employees a sense of job security and sense of income stability.
Fringe Benefits not required by law:
 Apart from the benefits required by law, there are some other additional benefits that the
employer offers voluntarily to the employees.
 These may include free breakfast, gym membership, life insurance, paid leaves, education
support, child care, etc.
These benefits are not required by law but the employer offers them to you by choice as an
appreciation for your performance or added service.
Employee Separation
Employee separation needs to be handled with sensitivity, discretion, and speed so that exits
can happen without injuring the sentiment and burning bridges with the employee.
The entire separation process should happen smoothly and the separating employee should
never feel harassed though he/she can become emotional at times.
Employee separation occurs when the employee ceases to be a member of-the organization.
The employment agreement between the employer and the employee comes to an end when
the employee leaves the organization.
Employee Separation
Employees leave the organization for various reasons and some of the reasons are-
(a) compensation and benefits
(b) career prospects
(c) job related issues
(d) organizational functioning
(e) personal factors.
Retirement
Retirement is when a person stops or retires working after the service of a certain period of
time.
The age of retirement set by the government varies from country to country.
It generally varies from 50 to 70 years.
The first country to start this concept was Germany, in 1889.
In India, the pension and retirement fund is more common in Public sector than Private sector.
Employee Separation – 8 Major Forms
1. Downsizing
2. Voluntary Retirement Scheme (VRS), Compulsory Retirement or Iron Handshake
3. Lay-Off
4. Discharge
5. Retrenchment
6. Termination of Key Managers
7. Pink Slip
8. Outplacement and Exit Interview
 1. Downsizing:
The term Downsizing means reducing the excess manpower by suitable measures and adjusting
the manpower as per the requirement of the organization.
 Rationalization of manpower of an industrial organization is an economic necessity.
This is required not only for manufacturing and service undertaking but even for offices of
industrial and commercial establishments.
Some of the factors considered for identifying employees under downsizing plan are:
(i) Age of the employee,
(ii) Educational qualification,
(iii) Knowledge, skills and attitude of the employee,
(iv) Past performance in the job,
(v) Physical fitness of the employee,
(vi) Willing to accept transfer/relocate,
(vii) Willing to undergo training to upgrade knowledge and skills etc.
2. Voluntary Retirement Scheme (VRS):
Voluntary Retirement Scheme popularly known as Golden Handshake is one of the methods of
reducing surplus labor in an organization.
It has gathered momentum since early 1990s. A large number of companies like ITC, ACC, Blue
Star, Hindustan Lever, Crompton Greaves, Atlas Capco, Mahindra and Mahindra, Ciba Geigy,
Kirloskar, Sandoz, Pfizer, Batliboi, Hoechst, Commercial banks have introduced Voluntary
Retirement Schemes.
Compulsory Retirement or Iron Handshake:
HR department with inputs from line managers prepares a list of surplus employees and
discharges them from the service without providing additional financial benefits, other than the
normal retirement benefits due to the employees.
 3. Lay-Off:
Lay-off is a temporary separation of an employee at the instance of an employer under specific
situation.
Causes for lay-off are:
a. Decline in sales,
b. Shortage of raw materials,
c. Market fluctuations,
d. Delays in production,
e. Displacement due to technology and
f. Surplus labor and high labor cost.
4. Discharge:
Discharge is permanent separation of the employee from the payroll of the company frequently
due to some incompetence or offence by the employee.
Dismissal is the termination of the services of an employee as a punitive measure for some
misconduct.
Some of the points to be considered while discharging employees are:
a. Clearly list the reasons for discharge.
b. Inform the individual about the reasons for discharge.
c. The manager concerned should be familiar with the rules and regulations.
d. Discharge has to be administered by line managers.
e. There should be a clear cut procedure to settle the case of a discharged employee.
5. Retrenchment:
Retrenchment is the permanent termination of an employee’s service due to economic reasons
such as surplus staff, poor demand for products, general economic slowdown etc.
Termination of services on disciplinary grounds, illness, winding up of business, etc., does not
constitute retrenchment.
As per Industrial Dispute Act (1947), the employer has to give three months’ notice or pay
equivalent wages before the actual lay-off date.
While retrenching workmen, the employer has to follow the first-in-last-out principle.
6. Termination of Key Managers:
The most difficult job is terminating the services of a person especially if he is holding a senior
position in the organization.
The management may give some time to the person so that he can find out employment
opportunities elsewhere.
Some of the points to be considered are given below:
a. Free and frank discussion with the person whose performance is very poor.
b. Identify areas of weaknesses and prepare a plan for overcoming weaknesses.
c. Clearly indicate in writing that the services will be terminated if he does not make sufficient
progress as per discussions.
d. Closely monitor the progress shown by the person.

e. Document all the discussions for ready reference.

f. If the person does not show progress, resignation letter should be requested.

g. The affected person will be upset and may become verbally explosive. The manager has to remain cool and
calm.

h. The specific reason for terminating the services of the person should not be released to protect the rights of
the released person.
7. Pink Slip:
Pink Slip is an American term that refers to being fired or laid off from one’s job.
Receiving a Pink Slip has become a ‘Metaphor’ for termination of employment in general.
It is a slang term and refers to the notice issued for employment termination or fired from the
job.
8. Outplacement and Exit Interview:
(a) Outplacement – Under this programme, career guidance is provided to displaced employees
to help them in their search for a new job.
Guidance is given on resume writing, answering questions during interviews and job searching.
(b) Exit Interview – Many companies conduct exit interviews with employees who are leaving
the organization for whatever may the reason.
The interview is conducted normally by HR manager to get feedback from employee regarding
the job, the boss, company policies and procedures etc.
Suspension
suspension is the practice in which an employee is not allowed to attend official work and will
also not be receiving any compensation during the period.
The employee against which such disciplinary action has been taken will be notified in writing.
The employer is also liable to provide suitable reason to the suspended employee as to the
reason for suspension and has wait with the final decision until the case looks strong enough.
The main reasons behind suspending an employee include

i) stopping any recurrence of similar events

ii) conducting investigation of the incident

iii) letting the employee know that they can lose job on repeating the incident.
Process of suspension
Step 1: Notify employee
Step 2: Be Timely and Consistent with Decisions
Step 3: Document the Decision
How To End an Employee Suspension
Scenario 1: Employee is Terminated
Scenario 2: Employee Stays Employed
Scenario 3: Employee is Innocent
 “A grievance is any discontent or dissatisfaction whether expressed or not, whether valid or not,
arising out of anything connected with the company which an employee thinks, believes or even
feels to be unfair, unjust or inequitable”.
A grievance may arise due to following factors:
1. violation of management’s responsibility such as poor working condition
2. violation of company’s rules and regulation
3. violation of labor laws
4. Violation of natural rules of justice such as unfair treatment in promotion
Sources of Grievance
 Management policies
Working conditions
Inter personal factors
Grievance Procedure
Open Door Policy
Step ladder policy
Grievance Procedure
Settlement of Grievance