Compensation, Employee Payroll &

Incentive Management

HRM
 Compensation & Employee Payroll

What is Compensation & Employee

Payroll?
• Compensation is an integral part of
human resource management which
helps in motivating the employees and
improving organizational effectiveness.
 Compensation Management
• Compensation systems
are designed keeping in
minds the strategic
goals and business
objectives.
• Compensation systems
are designed on the
basis of certain factors
after analyzing the job
work and
responsibilities
Compensation Philosophy

HRM
 Compensation Goals
• Attracting good employees
• Retaining good employees
• Motivating employees
• Complying with the law
• Having a cost effective compensation
system
 Compensation Policy Issues
• Pay for performance
• Pay for seniority
• The pay cycle
• Salary increases and promotions
• Overtime and shift pay
• Incentives & Benefits
• Deferred payments
• Paid and unpaid leaves / Paid holidays
• Salary compression
• Geographic costs of living differences
Equity and Its Impact on Pay Rates

Forms of Equity

External Internal Individual Procedural

Equity Equity Equity Equity
Addressing Equity Issues

Salary Surveys

Job Analysis and

Job Evaluation
Methods to
Address Equity
Issues Performance Appraisal
and Incentive Pay

Communications, Grievance
Mechanisms, and Employees’
Participation
 Establishing Pay Rates
Steps in Establishing Pay Rates

Conduct a salary survey of what other employers are

1
paying for comparable jobs (to help ensure external equity).

2 Determine the worth of each job in your organization

through job evaluation (to ensure internal equity).

3 Group similar jobs into pay grades.

4 Price each pay grade by using wage curves.

5 Fine-tune pay rates.

 Compensation and the
Three Equities

• External Equity
– Attracting good employees
• Internal Equity
– Retaining good employees
• Individual or Employee Equity
– Motivating employees
 External Equity

• Attracting good employees

• Labor Market Model
• Market Surveys
• Pay strategy/policies
– Where do you position yourself vis-à-vis the
market
 Internal Equity
• Retaining good employees
• Job Evaluation Techniques
– Ranking
• Jobs are compared to each other based on their overall worth
to the company. The ‘worth’ of a job is usually measured by
judgments of skill, effort, responsibility, and working
conditions.
• The advantage of the ranking method is that it is simple.
• The disadvantages, similar to the ranking method of
performance appraisal, are that the intervals between the
ranks are assumed to be equal, the judgments are global, and
as the number of jobs for evaluation increases it becomes
increasingly difficult. Also, the evaluators must have
knowledge of all jobs.
– Classification method
• Jobs are classified into a grade/category structure. Each tier of the
structure has a description and associated job titles. For example,
the Westinghouse system had:
– Grade 1 Unskilled ex. File clerk
– Grade 2 Skilled ex. Typist, lathe operator
– Grade 3 Interpretive ex. Chief clerk
– Grade 4 Creative ex. Engineers, sales reps
– Grade 5 Executive ex. Department heads
– Grade 6 Administrative ex. Chief engineer, Director of R&D
– Grade 7 Policy ex. Vice-president of Marketing
• Each job is assigned to the grade/category providing the closest
match to the job. Standards are developed mainly along
occupational lines. The standards help identify and describe key
characteristics of occupations that are important for distinguishing
different levels of work.
• Pay ranges are then assigned to grades.
• The advantages of this method are that it is simple and has been in
use for many years.
• Its disadvantages include the fact that classification judgments are
subjective, and the standard used for comparison may have built-in
biases. Also, some jobs may fit into more than one grade/category or
their descriptions are so broad that they do not relate to specific
jobs.
– Factor Comparison
• Select benchmark jobs.
• Sets of compensable factors are identified as determining the
worth of jobs. The number of factors is usually four or five
and typically relate to skill, responsibility, effort and working
conditions.
• Jobs are then ranked on each factor.
• Wages are then allocated to the factors. The organization’s
other jobs are then compared to the benchmark jobs and
rates of pay for each of the other jobs.
• Factor comparison has the advantage that the value of the job
is expressed in monetary terms, and the method is applicable
to a wide range of jobs.
• The method’s disadvantages are that the pay points for each
factor is based on subjective judgments.
– Point Method
• The point method is an extension of the factor
comparison method. Usually between eight and
fourteen compensable factors (typically related to
skill, effort, responsibility, and working conditions)
are identified as determining the worth of jobs.
• Factors are divided into degrees
• Points are assigned the degrees
• Benchmark jobs are compared to market rates
 Establishing Pay Rates

Point Method

Group Similar
Jobs into Pay Ranking Method
Grades

Classification Methods
 Establishing Pay Rates
• Price Each Pay Grade—Wage Curve
– Shows the pay rates paid for jobs in each pay
grade, relative to the points or rankings assigned
to each job or grade by the job evaluation.
– Shows the relationships between the value of the
job as determined by one of the job evaluation
methods and the current average pay rates for
your grades.
Plotting a Wage
Curve
 Establishing Pay Rates
• Fine-Tune Pay Rates
– Developing pay ranges
• Flexibility in meeting external job market rates.
• Easier for employees to move into higher pay grades.
• Allows for rewarding performance differences and seniority.
– Correcting out-of-line rates
• Raising underpaid jobs to the minimum of the rate range
for their pay grade.
• Freezing rates or cutting pay rates for overpaid (“red circle”)
jobs to maximum in the pay range for their pay grade.
Wage Structure
 Levels in IT major
E0 Non Engg based S/W executives
E1.1 - Software Engineer

E1 E1.2 - Sr. S/W Engineer , Module Leader

E2.1 - Project Leader

E2 E2.2 - Asst. Manager
E3.1 - Project Manager
E3 E3.2 - Sr. Project Manager
E4.1 - Group Manager
E4 E4.2 - Associate General Manager
E5.1 - Dy. General Manager
E5 E5.2 - General Manager
E6.1 - Operations Director
E6 E6.2 - Global Operations Director
E7 E7 - Associate Vice President
E8.1 - Vice President
E8 E8.2 - Sr. Vice President
E9 E9 - Executive Vice President
C C1 to C4 - Corporate Vice President
Compensation Management

HRM
 Compensation Management
• Compensation provided to employees can
be direct in the form of monetary benefits
and/or indirect in the form of non-monetary
benefits known as perks, time off, etc.
• Compensation does not include only salary
but it is the sum total of all rewards and
allowances provided to the employees in
return for their services.
 Types of Compensation Management

• Direct Compensation 

• Indirect Compensation 
Direct Compensation
 Direct Compensation

• Direct compensation refers to monetary

benefits offered and provided to
employees in return of the services they
provide to the organization.
• The monetary benefits include basic
salary, house rent allowance, conveyance,
leave travel allowance, medical
reimbursements, special allowances,
bonus, PF/Gratuity, etc.
Components Of Direct Compensation
• Basic Salary
• HRA (House Rent Allowance)
• CA (Conveyance Allowance)
• LTA (Leave Travel Allowance)
• Medical Reimbursement
• Bonus (Salary Bonus)
• SA (Special Allowance)
• Other Allowances
 Components of Direct Compensation
1) HRA (House Rent Allowance):
• Organizations either provide accommodations
to its employees or they provide house rent
allowances to its employees
• There are certain IT benefits associated with
HRA
Components of Direct Compensation

2) Conveyance :
• Organizations provide for cab facilities to
their employees.
• Few organizations also provide vehicles and
petrol allowances to their employees
• IT Act allows a Conveyance Allowance of
upto Rs. 1600/- p.m. as non-taxable
allowance.
 Components of Direct Compensation

3) Leave Travel Allowance:

• The employees are given allowances to visit
any place they wish with their families.
• The IT Act allows 2 trips in a block of 4 years as
tax free, once to the home town and once
anywhere else in the country
• The allowances are scaled as per the position
of employee in the organization.
Components of Direct Compensation

4) Medical Reimbursement :
• Organizations also look after the health
conditions of their employees.
• The employees are provided with medi-
claim insurance for them and their family
members.
• IT Act allows upto a reimbursement of Rs.
15,000/- p.a. as non-taxable
 Components in Direct Compensation
5) Bonus:
• Bonus is paid to the employees during festive
seasons to motivate them and provide them
the social security .
• The bonus amount usually amounts to one
month’s salary of the employee.
• The statutory bonus is for employees whose
basic pay is below a certain specified amount
Components in Direct Compensation

6) Special Allowance :
• Special allowance such as overtime,
mobile allowances, meals, commissions,
travel expenses, reduced interest loans;
insurance, club memberships, etc are
provided to employees for motivation
and company’s Productivity.
Indirect Compensation
 Indirect Compensation
• Indirect compensation refers to non-monetary
benefits offered and provided to employees in
lieu of the services provided by them to the
organization.
• They include Leave Policy, Overtime Policy, Car
policy, Hospitalization, Insurance, Leave travel
Assistance Limits, Retirement Benefits, Holiday
Homes.
 Components of Indirect Compensation

• Leave Policy
• Overtime Policy
• Hospitalization
• Insurance
• Leave Travel
• Retirement Benefits
• Holiday Homes
• Flexible Timings
 Components of Indirect Compensation
1) Leave Policy:
• It is the right of employee to get adequate
number of leaves while working with the
organization.
• The Leave Policy differs from organization to
organization.
• The organizations provide for paid leaves such as
casual leave, earned leave, medical leave (sick
leave), and maternity leave, paternity leave etc.
 Components of Indirect Compensation

2) Overtime Policy :
• Employees should be provided with
the adequate allowances and
facilities during their overtime, if
they happened to do so, such as
transport facilities, overtime pay, etc.
 Components of Indirect Compensation

3) Hospitalization :
• The employees should be provided
allowances to get their regular check-
ups, say at an interval of one year.
• Even their dependents should be eligible
for the medi-claims that provide them
emotional and social security.
 Components of Indirect Compensation

4) Insurance :
• Organizations also provide for accidental
insurance and life insurance for
employees.
• This gives them the emotional security
and they feel themselves valued in the
organization.
 Components of Indirect Compensation

5) Leave Travel :
• The employees are provided with leaves
and travel allowances to go for holiday with
their families. Some organizations arrange
for a tour for the employees of the
organization.
• This is usually done to make the employees
stress free.
 Components of Indirect Compensation

6) Retirement Benefits :
• Organizations provide for pension plans
and other benefits for their employees
which benefits them after they retire
from the organization at the prescribed
age.
 Components of Indirect Compensation

7) Holiday Homes :
• Organizations provide for holiday homes and
guest house for their employees at different
locations.
• These holiday homes are usually located in hill
stations and other most wanted holiday spots.
• The organizations make sure that the employees
do not face any kind of difficulties during their
stay in the guest house.
 Components of Indirect Compensation

8) Flexible Timings :
• Organizations provide for flexible timings
to the employees who cannot come to
work during normal shifts due to their
personal problems and valid reasons.
Payroll Management

HRM
 Payroll Management

• Payroll refers to the administration of employees'

salaries, wages, bonuses, net pay, and deductions.
• It consist of the employee ID, employee name,
date of joining, daily attendance record, basic
salary, allowances, overtime pay, bonus,
commissions, incentives, pay for holidays,
vacations and sickness, value of meals and lodging
etc.
• There are some deductions such as PF, taxes, loan
installments or advances taken by employee.
Components of Monthly Payroll of an
Employee
 Payroll Management
• Deductions such as tax and loan/advances taken by
the employee from organizations are deducted only
where applicable.
• Dearness Allowance and House rent allowance is
provided at a fixed rate stated by the employment
law.
• Provident fund is deducted from the gross salary of
employee on the monthly basis as per the
employment law, which is provided later to the
employee.
• Organizations also contribute the same amount to
the provident fund of the employee.
 Annual Payroll Management
What is Annual Payroll?
• Annual payroll consists of leave
travel allowances, incentives, annual
bonuses, meal vouchers/
reimbursements, and medical
reimbursements.
Components of Annual Payroll
Incentive Management

HRM
 Incentive Management

• In today’s strategic compensation systems,

incentives forms an integral part of the
performance based compensation packages.
• It is a challenge for organizations to formulate
strategies to maintain the internal equity and
external equity and provide the most
competitive compensation packages to attract
and retain the talented workforce
 Incentive Management
• For the purpose effective incentives
programs are undertaken. Employees are
involved in the process so as to deliver un-
biased packages to all the employees.
• The compensation strategies should be
effective.
• All the employees should be aware of the
organizational goals and objectives.
Benefits of Incentives
 Benefits of Incentives
• Deserving employees should receive significant
rewards .
• Incentives accounts for employees’ high
productivity.
• Today youngsters believe in performance based
pay, thus incentives will help to motivate them
to produce more.
• In the hospitality and retail industry it is the
incentive that accounts for the overall package of
the employee.
Variable Pay
Plans

FreeHRM
Powerpoint Templates
 Need for variable pay
• Encourage certain behavior
• Differentiate best and the rest
• Reward achievement
• Hedge financial risk
Target Audience
• Individual
– Target to strive for
– Sense of fulfillment
– Sense of differentiation
• Team
– Healthy competition
– Sharing success
– Super ordinate goals
• Entire Company
 Types
• Long Term • Sales
– Shared ownership – Target Realization
– Wealth creation – Direct Contribution to
• Short Term Top & Bottom lines
– Risk sharing • Non Sales
– Promoting a certain – Alignment to goals
behavior/ pattern – Track and Measure
performance
 Framework Design
• Life cycle & culture of the company
• Operating Industry
• Product/Service/Solution stage
• Operating Geographies
• Incentive ROI
Industry Trend
Sales Incentive Plans
 Guiding Principles
• KISS (but realistic)
• Communicate clearly
• Align with strategy &
job role
• Integrate with the total
rewards package
• Reward for results, not
activities
• Link to quantifiable
measures
 Understanding Linkages

Busines
Busines Selling
Selling
ss
roles
roles
strategy
strategy

Inputs
Output
 Performance Process
measures and
weights  Payout
 Incentive form mechanics TARGET TOTAL
 Pay mix COMPENSATION
 Payout frequency
Sales Roles by salesmen
“Hunter” • New business acquisition
• Cold calling or prospecting
• Little post-sale effort

• Retain and grow accounts

• Identifying and addressing customer needs
• Significant post-sale effort
“Farmer”
 Selling roles by customers
Transactional Consultative

• Product or services have • Customers need help making

known value to customers the purchase decision
• Sales cycle is short • The sales cycle is moderate
to long
• Price is a key component of • Value is a key component of
the purchase decision the purchase decision
• Customers want an efficient • Customers want a solution
buying process
• Sales focus on generating • Sales focus on creating long-
maximum revenue at term, profitable customer
minimum cost relationships
 2D Framework
Transactional Consultative

“Hunter”

Traditional “Small
“Big Game Hunter”
Game Hunter”
closing fewer, larger
closing many small
deals
deals

Service reps who Relationship

“tend the crop” to managers who “grow
keep from losing the business” with
customers long-term customers

“Farmer”
 Contd…
Transactional Consultative

“Hunter” Mastery of sales process Mastery of sales process

execution execution
Minimal to modest sales Deep technical knowledge
experience Significant “hunter” model
selling experience

Excellent problem-solving Excellent relationship-

skills building skills
Able to use technology to Deep customer/industry
facilitate the process knowledge
Minimal experience Functional management
required experience
Deep industry experience
(may have been a
customer)

“Farmer”
 Typical examples
Transactional Consultative

“Hunter”

Major
Insurance
Account
Agent
Development

Key Account
Service Rep
Manager

“Farmer”
 Life cycle position
Sales
Volume

Introduction Growth Maturity

“Hunter” role is “Farmer” role is

more common more common

Time
 Elements-Sales Incentive

$
Commission
Commission
Bonus
Bonus Incentive form Pay levels

2011
2011
Fixed
Fixed%
%
versus
versusvariable
variable
Mix Payout Jan
Jan Feb
Feb Mar
Mar Apr
Apr
frequency May
May Jun
Jun Jul
Jul Aug
Aug
Sep Oct Nov Dec
Sep Oct Nov Dec
Payout

Mechanics Performance Revenue

Revenue
measures: Volume
// Volume
0% 80% 100% 120% 140%
definition Profit
Profit
Performance Market
Marketshare
share
Performance Growth
Growth
measures: relative Baseline
Baseline
importance
%%Weight
Weight
 Communication
• From CXO desk
• Clarity on outcomes
• Consistent
communication
• Reiterate at regular
intervals
 Measurement Parameters
• Gross Margins
• Incremental Margins
• Sales Product Mix
• Distribution effectiveness
• CSAT
• DSO
• ROI
 Quick Check
• If I get a House Rent Allowance of Rs.
10000/- per month and my Basic Pay
is Rs. 60000/- per month and the
actual rent that I pay is Rs. 20000/-
per month for a flat in Baroda, what
amount of my HRA is non taxable?
• What will it be in Chennai?