COMPENSATION AND BENEFITS

WHAT IS A COMPENSATION PLAN?

A compensation plan, also referred to as a “total compensation plan,” encompasses all of the compensatory
components of a company’s strategy – employees’ wages, salaries, benefits and total terms of payment. Employee
compensation plans also include raise schedules, all fringe benefits, and any union perks or employer-provided
vendor discounts.

A strategically designed compensation philosophy that is kept current, relevant and in accordance with
employment laws, supports several important components of your business:

Strategic plans
Budgeting and business goals
Industry-competitive challenges
Operating needs
Total reward strategies that support retention of the company’s top talent

The Society for Human Resource Management (SHRM) further outlines the purpose and value of
maintaining a dynamic and strategic compensation program:

 It describes how your organization’s pay and compensation philosophies support your business strategy,
competitiveness within the industry, operating objectives and staff needs.
 It helps attract qualified candidates to join your organization.
 It serves as a strong motivator for employees to perform at high levels and exceed goals.
 It helps keep your business competitive in the marketplace in terms of base pay, incentives, total
compensation and benefits opportunities.
 A compensation program constitutes a company’s total method of remuneration, including payment,
benefits and any other form of compensation for services rendered.

WHY DO COMPANIES NEED A COMPENSATION PLAN?

Companies need a thoughtful compensation program to remain competitive within their industry and to attract
and retain top talent. Employers who just go with whatever they feel they should pay their employees will slowly
lose the talent game they are playing with their competitors. Additionally, managing a workforce without a
predetermined budget is insanity in action. Compensation programs allow for consistent and predictable
budgeting and planning.

According to PayScale’s 2020 Compensation Best Practices report, companies are having a tougher time than
ever finding (and keeping) enough skilled talent to fill all of their needs. To attract and retain the top workers
they desire, more organizations are focusing on building “an employer brand, which includes a more strategic
approach to compensation and career pathing as well as better benefits and more varied and incentivizing ways
to reward performance.”

COMPONENTS OF COMPENSATION INCLUDE THE FOLLOWING FOUR ITEMS:

1. Base pay, either an hourly wage or salary. Base pay is frequently a major decision factor for most
employees in deciding to accept the job.

2. Wage and salary add-ons. These include overtime pay, shift differential, premium pay for working
weekends and holidays, and other add-ons.

3. Incentive pay for performance. Incentives give workers strong reasons to perform above the standard.
4. Benefits. This provides something of value to the employee. Benefits cost the company money even though
they aren’t direct compensation.

Components of Employee Compensation and Compensation Management (in detail)

Components of an Employee Compensation – Base Pay Structure, Variable Pay Programs, Benefits, Rewards &
Recognition
It is important to understand the laws of the land and taxation policy to understand the components of
compensation and compensation strategies. Organizations always pay for the work done (job) and less for the
individuals, job is the nucleus for determining compensation. Each organization will have its own way of defining
jobs and determining hierarchy of jobs.
However for simplicity the components of jobs shall look like:
1. Base Pay Structure (Fixed component);
2. Variable Pay Programs;
3. Benefits;
4. Rewards & Recognition.

Component # 1. Base Pay Structure (Fixed Component):

Salaries and wage are the periodic assured payments made to the employees. Salaries are generally paid to the
permanent employees on the monthly basis, whereas wages are paid to temporary or contractual workers on the
daily basis.
Base Pay is the fixed component and generally consists of the following:
i. Basic Component:
Normally 40 percent of the base pay is basic and rest of the base pay falls under various other, categories. This
breakage is governed by the tax laws of the land. In India, for instance, if everything is given to an employee in
the form of basic the whole shall be taxed, whereas if the base pay is broken into sub-components like HRA
certain tax-exemptions may be obtained.
ii. HRA (House Rent Allowance):
Calculated as a percentage of basic. HRA limits are fixed by the government and are uniformly applicable. If a
company decides to pay more than the limit decided by the company it can however the excess shall be taxed as
is the basic. If a company pays HRA component then it must collect proofs of rent-paid (rental receipts) from the
employee.
iii. DA (Dearness Allowance):
It is calculated as a percentage of basic. The payment of dearness allowance facilitates employees and workers
to face the price increase or inflation of prices of goods and services. The onslaught of price increase has a major
bearing on the living conditions of the labor.
The increasing prices reduce the compensation to nothing and the money’s worth comes down based on the level
of inflation. The payment of dearness allowance, which may be a fixed percentage on the basic wage, enables the
employees to face the increasing prices.
iv. Leave Travel Allowance:
Leave Travel allowance or LTA is paid by certain companies. However again proofs of travel expenses must be
collected by the company from the employees.
v. Mobile Expenses:
Medical Allowance/Reimbursements, etc.

Component # 2. Variable Pay Programs:

Variable pay programs are generally classified differently for sales and non-sales.
i. Variable Pay Plans for Sales:
Variable pay plans for sales represents a pay-mix that may be a 70-30 or 60-40 or 50-50 plan. Here the 30, 40 or
50 represents the variable portion of the pay and is linked to the targets. Targets could be product-based, territory-
based, revenue-based, and profitability-based or based on new business creation.
ii. Variable Pay Plans for Non-Sales:
Such pay plans are for those employees who either are those who need incentives to propel their work or are
those whose performance can be improved by giving them incentives like insurance plans, credit cards, mutual
funds etc. Generally the variable portion in non-sales is lesser than in case of sales.
The variable pay is based on jobs and levels of job. Sometimes such plans may be covered under company-wide
plans and the entire variable portion may be broken under employee performance, functional performance (i.e.
performance of the function in which that employee works) and organizational performance.
The various variable-pay components can be:
a. Bonus:
Bonus is generally post-facto. The bonus can be paid in different ways. It can be fixed percentage on the basic
wage paid annually or in proportion to the profitability. The Government also prescribes a minimum statutory
bonus for all employees and workers.
There is also a bonus plan which compensates the Managers and employees based on the sales revenue or Profit
margin achieved. Bonus plans can also be based on piece wages but depends upon the productivity of labor.
b. Commissions:
Commission to Managers and employees may be based on the sales revenue or profits of the company. It is
always a fixed percentage on the target achieved. For taxation purposes, commission is again a taxable component
of compensation. The payment of commission as a component of commission is practiced heavily in target based
sales. Depending upon the targets achieved, companies may pay a commission on a monthly or periodical basis.
c. Mixed Plans:
Companies may also pay employees and others a combination of pay as well as commissions. This plan is called
combination or mixed plan. Apart from the salaries paid, the employees may be eligible for a fixed percentage of
commission upon achievement of fixed target of sales or profits or Performance objectives. Nowadays, most of
the corporate sector is following this practice. This is also termed as variable component of compensation.
d. Incentives:
Incentive is clearly defined, target-related and upfront. Piece rate wages are prevalent in the manufacturing wages.
The labourers are paid wages for each of the quantity produced by them. The gross earnings of the labor would
be equivalent to number of goods produced by them.
Piece rate wages improve productivity and is an absolute measurement of productivity to wage structure. The
fairness of compensation is totally based on the productivity and not by any subjective factor. The CANTT
productivity planning and Taylor’s plan of wages are examples of piece rate wages and the related consequences.
e. Sign on Bonuses:
The latest trend in the compensation planning is the lump sum bonus for the incoming employee. A person, who
accepts the offer, is paid a lump sum as a bonus. Even though this practice is not prevalent in most of the
industries, Equity research and investment banking companies are paying sign-on-bonuses to attract scarce talent.
f. Profit Sharing Payments:
Profit sharing is again a novel concept nowadays. This can be paid through payment of cash or through ESOPS.
The structuring of wages may be done in such a way that, it attracts competitiveness and improved productivity.
g. Stock Options:
Stock options are given to employees for two primary purposes – one to have long-term interest of the employee
and second to link individual performance to organizational performance.

Component # 3. Benefits:
The benefits may be monetary or non-monetary, long-term or short-term, free or at concessional rates and may
include education, housing, medical, or recreational facilities, provided individually or collectively, inside or
outside the organizational premises.
Companies are increasingly taking the employees to a ‘total rewards perspective’ that involves considering base
pay, variable pay, employment benefits and work-life balance together. Despite this the benefits that a company
provides to its employees have remained threadbare or minimum owing to the prevailing tough economic
conditions. However in future there is chance of the revival of benefits.
WHAT IS DIRECT AND INDIRECT COMPENSATION?

The most foundational of compensation components are either “direct” forms such as salary, hourly pay,
commission, or bonus monies, or “indirect” forms, which are benefits of various kinds.
The 4 types of direct compensation
Although you can use any of the four types to compensate employees for their work, employers typically choose
one and stick with it. The exception is bonus pay, which is meant to be an addition to regular pay based on
employee or company performance.
Salary
The most traditional form of salary is a monetary amount scheduled over a one-year period. How often salaried
employees are paid is another part of the compensation strategy, but businesses typically pay their employees
every two weeks.
Salary is the most common method of direct compensation for exempt employees. An exempt employee is not
eligible for overtime pay. They receive a base salary for the work they perform rather than an hourly rate, so
employers pay exempt employees for the job they do instead of the number of hours they work.
Hourly pay
Non-exempt employees are typically paid an hourly rate, eligible for overtime pay and guaranteed at least
minimum wage. When an employee works over 40 hours in a workweek, their employer must pay them overtime.
Hourly rate of pay is typically a predetermined dollar amount per hour of work. Typically, nonexempt employees
are paid an hourly rate rather than a salary. They employees generally keep a timecard or clock in and out to
begin and end their work shift. During times of slow or reduced work, or a change in a company’s budget, non-
exempt employees may not work as many hours as they did in previous weeks. Thus, there is no guarantee of a
routine number of hours worked per pay period.
Commission
When compensation is based on volume, production or a predefined level of performance, this is a commission.
Other expressions of this type of remuneration are “piecework” and “piecemeal.”
Most commonly, there are two methods utilized and referred to as paid commission. One calculus is based on
volume of services performed or products made. The second form is structured around sales volume. An example
of a worker with this type of compensation is a real estate broker: They sell a house and will be compensated off
of that sale. It doesn’t matter how long or what work activities it took to sell the house, only that the house was
sold.
Bonus pay
Bonuses are used to motivate employees or increase their overall performance. This is a variable method of
compensation that is commonly associated with sales professionals, who tend to be salaried or exempt personnel.
For example, if a sales professional exceeds her quarterly target by a certain dollar amount, based on a
predetermined matrix, she receives a commensurate bonus.
Bonuses can also be paid for company performance, as well as when difficult-to-fill positions are filled with
employees with unique or highly sought-after skills or experience.

Types of indirect compensation

Indirect compensation can be any fringe benefit that employers offer. Most commonly, it refers to the various
types of insurance offered by employers, including medical, dental, life, short- and long-term disability, and
vision. Employee retirement programs, like 401(k) plans, are another common form of indirect compensation.
Equity-based programs are another compensation offering, though these aren’t typically offered within the small
business realm. Equity-based compensation is generally some sort of share or stock in the company.
These are some other examples of indirect compensation:
 Disability income protection
 Vacation days or paid time off (PTO)
 Paid holidays
 Flexible working hours or scheduling
 Other forms of retirement benefits
 Opportunities for advancement
 Student loan assistance
  Educational benefits
 Assistance with child care expenses
 Relocation benefits
 Company car
 Company equipment (laptops, mobile phones, etc.)

• Profit-sharing plans- Under a profit-sharing plan, profits shared with employees (typically, all employees)
often based on meeting a predetermined financial goal. Awards may be made in cash or contributed to a
qualified or non-qualified retirement plan.
• Gainsharing is best described as a system of management in which an organization seeks higher levels of
performance through the involvement and participation of its people. As performance improves, employees
share financially in the gain. It is a team approach; generally all the employees at a site or operation are
included.
• An employee stock ownership plan (ESOP) is an employee-owner program that provides a company's
workforce with an ownership interest in the company. In an ESOP, companies provide their
employees with stock ownership, often at no upfront cost to the employees.
• An executive stock option is a contract that grants the right to buy a specified number of shares of the
company's stock at a guaranteed "strike price" for a period of time, usually several years.
• Deferred compensation is an arrangement in which a portion of an employee's income is paid out at a later
date after which the income was earned. Examples of deferred compensation include pensions, retirement
plans, and employee stock options.
• Piece rate system is the method of remunerating the workers according to the number of unit produced or
job completed. It is also known as payment by result or output. Piece rate system pays wages at a fixed piece
rate for each unit of output produced.

DEVELOPMENT OF A PAY SYSTEM

Developing a pay structure involves evaluating jobs and establishing associated salary ranges and grades based
on market data and the company’s compensation policy. The relative value of different roles is based on factors
including responsibility, experience and education, key skills, effort/impact, and working conditions. A well-
designed and transparent pay structure should help an organization attract and retain talent be perceived as fair
andequitable.
The steps involved in the process are outlined below:
1. Conduct a job analysis/ Job Description- A job analysis involves identifying the essential tasks and
responsibilities of a job, including knowledge skills and abilities.

A. Conduct a job evaluation. Determine the relevance and value of the job to the organization. This involves
comparing or evaluating roles based on criteria such as the required education and experience, skills, effort,
level of responsibility or authority and potential revenue impact. In order to avoid introducing bias, the role
should be evaluated based on the job criteria, not a specific employee in that role.
B. Gather data for your pay structure. Use one or both of the following methods to do so:

1. Market Pricing (or benchmarking). Setting a salary range based on market data. Note that job
titles and descriptions aren’t necessarily consistent across companies and industries. When
conducting research, consider job details or descriptions to select appropriate salary benchmarks.
2. Pay grades. Establishing salary ranges for job groups. Pay grades are salary ranges established
for groups of jobs with a similar value to the organization. For example, multiple sales roles may
be included in the same grade if they require the same education, experience, skills and
responsibility. In practice, then, the salaries of every sales person in the same grade would fall
between the minimum and maximum of the range.
Pay grades can be based on market prices, as mentioned above, or actual salaries or a combination of the two
methods. For example, you could use market data to establish the salary range for a specific pay grade and use
actual salaries to determine the midpoint in the range. To establish pay grades based solely on actual salaries,
create groups based on levels in the organizational hierarchy. For example, managers and vice presidents would
be two separate pay grades. Multiple roles with similar organizational value, requirements and salaries can be
included in the same group. The midpoint of the average of the salaries in a group can form the midpoint of the
range. The minimum and maximum of a range can be calculated from the midpoint or relative to a lower and
higher grade to form a logical progression.
FACTORS AFFECTING WAGE / SALARY LEVELS
1. The organization’s ability to pay- organization decisions on job and wage structures represent a -balancing of
the aforementioned forces. But the strength of these forces varies by organization type and within organizations
by job clusters. Banks, insurance companies, department stores, and restaurants are organizations with primarily
market-oriented wage structures. Professionals are groups of employees whose jobs have been designed largely
by the educational process they have been through. This makes for a commonality between organizations in the
design of professional jobs. Organizations having many specialized jobs, dealing in labor markets too
disorganized to provide adequate grading and pricing, and lacking unionization have primarily internally
determined wage structures. Product markets may influence such wage structures, but only if labor cost is high
relative to total cost. Internally determined wage structures result from management decisions and may range
from highly rational structures flowing from job evaluation to a system of personal rates. Most large, unionized
organizations have what might be called union-and-product-oriented wage structures. In these organizations,
wage structures represent management decisions -shaped and restrained by technology, unions, and cost-price
relationships, and the product market. Technology provides some uniformity in job structures in organizations
engaged in common lines of production. Unions, through their insistence on traditional relationships, Establish
some key jobs and job clusters and provide an upward thrust to the entire structure. Cost-price relationships and
the product market compel the organization to resist this upward push and to make changes in jobs and job
relationships in line with such resistance. Low ratios of labor cost to total cost and inelastic product demand,
however, reduce competitive pressures on organizations. Professional employees (such as engineers) have salary
structures that combine market orientation and internal determination, regardless of the major activity of the
organization. Managerial salary structures are primarily internally determined except in very tight labor markets,
without regard to organization type.
2. Supply and demand of labor
The labor market conditions or supply and demand forces operate at the national, regional and local levels, and
determine organizational wage structure and level. if the demand for certain skills is high and the supply is low,
the result is a rise in the price to be paid for these skills. When prolonged and acute, these labor-market pressures
probably force most organizations to “reclassify hard-to-fill jobs at a higher level” than that suggested by the job
evaluation. The other alternative is to pay higher wages if the labor supply is scarce; and lower wages when it is
excessive. Similarly, if there is great demand for labor expertise, wages rise; but if the demand for manpower
skill is minimal, the wages will be relatively low. “The supply and demand compensation criterion is very closely
related to the prevailing pay, comparable wage and on-going wage concepts since, in essence, all of these
remuneration standards are determined by immediate market forces and factors.”
3. Prevailing market rate- This is also known as the ‘comparable wage’ or ‘gain wage rate’, and is the most widely
used criterion. An organization’s compensation policies generally tend to conform to the wage rates payable by
the industry and the community.
This is done for several reasons:
· first, competition demands that competitors adhere to the same relative wage level.
· second, various government laws and judicial decisions make the adoption of uniform wage rates an attractive
proposition.
· third, trade unions encourage this practice so that their members can have equal pay, equal work and
geographical differences may be eliminated.
· fourth, functionally related firms in the same industry require essentially the same quality of employees, with
the same skills and experience. This results in a considerable uniformity in wage and salary rates.
· finally, if the same or about the same general rates of wages are not paid to the employees as are paid by the
organization’s competitors, it will not be able to attract and maintain a sufficient quantity and quality of
manpower.
4. The cost of living- The cost-of living pay criterion is usually regarded as an auto minimum equity pay criterion.
This criterion calls for pay adjustments based on increases or decreases in an acceptable cost of living index. In
recognition of the influence of the cost of living, “escalator clauses” are written into labor contracts. When the
cost of living increases, workers and trade unions demand adjusted wages to offset the erosion of real wages.
However, when living costs are stable or decline the management does not resort to this argument as a reason for
wage reductions.
5. Productivity- it is a criterion, and is measured in terms of output per man hour. it is not due to labor efforts
alone. Technological improvements, better organization and management, the development of better methods of
production by labor and management, greater ingenuity and skill by labor are all responsible for the increase in
productivity. Actually, productivity measures the contribution. Of all the resource factors - men, machines,
methods, materials and management. No productivity index can be devised which will measure only the
productivity of a specific factor of production.
6. Trade union’s bargaining power- trade unions do affect rate of wages. Generally, the stronger and more
powerful the trade union, the higher the wages. A trade union’s bargaining power is often measured in terms of
its membership, its financial strength and the nature of its leadership. A strike or a threat of a strike is the most
powerful weapon used by it. Sometimes trade unions force wages up faster than increases in productivity would
allow and become responsible for unemployment or higher prices and inflation. However, for those remaining
on the pay roll, a real gain is often achieved as a consequence of a trade union’s stronger bargaining power.
Unions affect wage structure, but the differential effects of craft and industrial unionism and the type of
bargaining relationship are considerable. Craft unions tend to determine craft rates as well as the design of craft
jobs for all organizations employing members of the craft.
7. Job requirements- generally, the more difficult a job, the higher are the wages measures of job difficulty are
frequently used when the relative value of one job to another in an organization is to be ascertained. Jobs are
graded according to the relative skill, effort, responsibility, and job conditions required.
8. Managerial attitudes- these have a decisive influence on the wage structure and wage level since judgment is
exercised in many areas of wage and salary administration - including whether the firm should pay below average,
or above average rates, what job factors should be’ used to reflect job worth, the weight to be given for
performance or length of service, and so forth, both the structure and level- of wages are bound to bound to be
affected accordingly. These matters require the approval of the top executives. lester observes, “top
management’s desire to maintain or enhance the company’s prestige has been a major factor in the wage policy
of a number of firms. Desires to improve or maintain morale, to attract high-caliber employees, to reduce
turnover, and to provide a high living standard for employees as possible also appear to be factors in
management’s wage-policy decisions.
9. Skill levels available in the market- with the rapid growth of industries, business trade, there is shortage of
skilled resources. The technological development, automation has been affecting the skill levels at faster rates.
Thus the wage levels of skilled employees are constantly changing and an organization has to keep its level up to
suit the market needs.

Wellness programs- refer articles in the reference material section