A Report on Compensation Management

Submitted by Group Number:4

15-Nov-10

Aditi Singh: 10004 Apoorva : 10009 Sujit Hemadri : 10049

INTRODUCTION: Compensation is what employees receive in exchange for their contribution. Generally, employees offer their services for three types of rewards. Pay refers to the base wages and salaries employees normally receive. Compensation forms such as bonuses, commissions and profit sharing plans are incentives designed to encourage employees to produce results beyond normal expectation. Benefits such as insurance, medical, recreational, retirement, etc., represent a more indirect type of compensation. So, the term compensation is a comprehensive one including pay, incentives, and benefits offered by employers for hiring the services of employees. IN addition to these, managers have to observe legal formalities that offer physical as well as financial security to employees. All these issues play an important role in any HR departments efforts to obtain, maintain and retain an effective workforce.

Basics of compensation management: Compensation is a complex & often confusing topic. Although it costs compromise on average 65-70% in world economy & are likely substantial elsewhere. Generally it defines as facilities & benefits for a employee provided by organization to motivate them for better performance. The increasing competitiveness of the labour market and turnover of employees had resulted in nightmare in compensation planning. Apart from this, the growing demands of the employees and competitive salaries offered by multinational companies had almost resulted in a compensation war in certain industries. Therefore, the human resources managers and tax experts have to evolve proper compensation planning for High end and qualified employees. The components of compensation have to be devised in such a way that, it focuses on the growing demands of employees while retaining the competitiveness and profitability of the company. Importance of compensation management: 1. Sound compensation system brings amicability & peace in the relationship of employer & employees. 2. The system brings out the best out of every employee in the organization. It aims at creating a healthy competition among them. And as such, encourages them to work hard and efficiently. 3. The system provides adequate opportunities to those who wish to perform better. The system provides growth and advancement opportunities to the deserving employees. 4. The system upholds the principle of equal wages. It brings transparency & parity too. 5. The perfect Compensation system provides platform for happy and satisfied workforce. This minimizes the labour turnover. The organization enjoys the stability. 6. The organization is able to retain the best talent by providing them adequate compensation thereby stopping them from switching over to another job. 7. The business organization can of expansion & growth if it has the support of skillful, talented 7 happy workforces. Industry driven factors:There are also certain driven factors that are influencing the compensation planning. The compensation Packages of knowledge workers are different from that of manufacturing sector.

The employees working in call centers are compensated differently (vs) employees of technology driven companies. Some notable examples are, a) Compensation paid in IT/ITES, b) Investment banking/Equity research, c) Software companies, d) High-end industries having high technology content like Bio/Nano technology. e) Private research and related fields. Components of compensation:Basic wages/Salaries:These refer to the cash component of the wage structure based on which other elements of compensation may be structured. It is normally a fixed amount which is subject to changes based on annual increments or subject to periodical pay hikes. It is structured based on the position of an individual in the organization and differs from grades to grades. Dearness allowance:The payment of dearness allowance facilitates employees and workers to face the price increase or inflation of prices of goods and services consumed by him. The onslaught of price increase has a major bearing on the living conditions of the labour. The increasing prices reduce the compensation to nothing and the money's worth is coming 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. Bonus: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 labour. 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 on target based sales. Depending upon the targets achieved, companies may pay a commission on a monthly or periodical basis. 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. Piece rate wages:Piece rate wages are prevalent in the manufacturing wages. The laborers are paid wages for each of the Quantity produced by them. The gross earnings of the labour would be equivalent to number of goods produced by them. Piece rate wages improves productivity and is an absolute measurement of productivity to wage structure. The fairness of compensation is totally based on the productivity and not by other qualitative factors. The GANTT productivity planning and Taylor's plan of wages are examples of piece rate wages and the related consequences. 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 this to attract the scarce talent. 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.

Profit sharing can also be in the form of deferred compensation at the time of retirement. At the time of retirement the employees may be paid a lump sum or retiring benefits. Fringe benefits:The provision of fringe benefits does not attract any explanation. These includes., a) Company cars b) Paid vacations c) Membership of social/cultural clubs d) Entertainment tickets/allowances. e) Discounted travel tickets. f) Family vacation packages. Reimbursements:Employees, depending upon their gradations in the organization may get reimbursements based on the Expenses incurred and substantiated. Certain expenses are also paid based on expenses incurred during the course of business. In many cases, employers provides advances to the employees for incurring certain expenses that are incurred during the course of the business. Some examples are, a) Travel expenses. b) Entertainment expenses c) Out of pocket expenses d) Refreshments expenses during office routine outside office premises. Sickness benefits/pregnancy:The increasing social consciousness of corporate had resulted in the payment of sickness benefit to the Employees of companies. This also includes payments during pregnancy of women employees. The expenses incurred due to injury or illness are compensated or reimbursed to the employees. In certain companies, the death of an employee is compensated financially. Companies are also providing supporting financial benefits to the family of the bereaved employees. However, companies covering these cost through appropriate insurance policies like, Medical and life insurance.

External competitiveness: Refers to the pay relationships among organizations - the organizations pay relative to its competitors. External Competitiveness is expressed in practice by 1> Setting a pay level that is above, below, or equal to that of competitors Pay level- refers to the average of the array of rates paid by an employer. (base+ bonuses+ benefits+ options) number of employees. 2> Determining the mix of pay forms relative to those of competitors Pay Forms-are the various types of payments, or pay mix, that make up total compensation. Pay level and mix focus attention on two objectives: Control Labor costs and Attract and retain employees What Shapes External Competitiveness? LABOR MARKET FACTORS -Nature of Demand, Nature of Supply PRODUCT MARKET FACTORS -Degree of Competition, Level of Product Demand ORGANIZATION FACTORS -Industry, Strategy, Size, Individual Manager Labor Demand The marginal product of labor is the additional output associated with the employment of one additional human resource unit, with other production factors held constant. The marginal revenue of labor is the additional revenue generated when the firm employs one additional unit of human resources, with other production factors held constant. Supply and Demand at the Market and Individual Employer Level

Some Consequences of Pay Levels Contain operating expenses (labor costs) Increase pool of qualified applicants Increase quality and experience Reduce voluntary turnover Increase probability of union-free status Reduce pay-related work stoppages

External Competitiveness: Pay relationships among organizations

External Competitiveness

Set Policy

Define Market

Conduct Survey

Draw Policy Lines

Merge Internal and external pressures

Competitive pay levels , mix and structures

Some major decisions in Pay Level Determination: Determine Pay level policy Define purpose of survey Define relevant labor market Design and conduct survey

Interpret and apply results Design grades and ranges or bands

Salary Survey A survey is a systematic process of collecting and making judgments about compensation paid by other employers. Survey provides the data for setting the pay policy relative to competition and translating that policy into pay levels and structures. Set Competitive Pay Policy Adjust pay level How much to pay? Adjust pay mix-what forms? Adjust pay structure Special situation Estimate competitors labor costs

Define relevant market competitors Employers who compete for the same occupations or skill required Employers who compete for employees within the same geographic area Employers who compete with the same product or services

Developing a pay policy line It is basically Line of best fit prepared analyzing survey data

Balancing Internal and External Pressures: Adjusting the Pay Structure Market Pricing Issues Validity of market data Use of competitors pay decisions as primary determinant of pay structure Lack of value added via internal alignment Difficult-to-imitate aspects of pay structure are deemphasized Fairness Market pricing: pay strategies that emphasize external competitiveness and deemphasize internal alignment .Sets pay structures almost exclusively on external market rates Objective: Is to base most of the internal pay structure on external rates, breaking down the boundaries between the internal organization and the external market forces

EVALUATING WORK: JOB EVALUATION

Job evaluation is the process of systematically determining the relative worth of jobs to create a job structure for the organization. The evaluation is based on a combination of job content, skills required, value to the organization, organizational culture, and the external market. This potential to blend organizational forces and external market forces is both a strength and challenge of job evaluation. MEASURE FOR MEASURE VERSUS MUCH ADO ABOUT NOTHING Some say that if job evaluation takes on the trappings of measurement (objective, numerical, generalizable, documented, and reliable), then it can be judged according to technical standards. Just as with employment tests, the reliability, validity, and usefulness of job evaluation plans can be computed. Those making pay decisions hold a different view. They see job evaluation as a process that help gain acceptance of pay differences among jobs an administrative procedure through which the parties become involved and committed. Its statistical validity is not an issue. Its usefulness is that it provides framework for give-and-take an exchange of views. This interpretation is consistent with the history of job evaluation, which began as a way to bring labor peace and order to an often-chaotic and dispute-driven wage-setting process. DETERMINING AN INTERNALLY ALIGNED JOB STRUCTURE: INTERNAL ALIGNMENT: WORK RELATIONS WITHIN THE ORGANIZATION

JOB ANALYSIS

JOB DESCRIPTION

JOB EVALUATION

JOB STRUCTURE

MAJOR DECISIONS IN JOB EVALUATION: Establish purpose of evaluation Decide whether to use single or multiple plans Choose among alternative approaches Obtain involvement of relevant stakeholder Evaluate plans usefulness

CHOOSE AMONG ALTERNATIVE METHODS: Ranking, classification, and point method are the most common job evaluation methods. Different job evaluation plans generate different pay structures. ADVANTAGE Fast, simple, easy to explain DISADVANTAGE Cumbersome as number of jobs increases. Basis for comparisons is not called out. Descriptions may leave too much room for manipulation Can become bureaucratic and rule-bound.

RANKING

CLASSIFICATION POINT

Can group a wide range of work together in one system Compensable factors call out basis for comparisons, compensable factors communicate what is valued.

1. RANKING: Ranking simply orders the job description from highest to lowest based on a global definition of relative value or contribution to the organizations success. The two ways of ranking include: Alternation Ranking and Paired Comparison. Alternation ranking orders job descriptions alternately at each extreme. The paired comparison method uses a matrix to compare all possible pairs of jobs. The job most frequently judged more valuable becomes the highest ranking job. 2. CLASSIFICATION: Picture a bookcase with many shelves. Each shelf is labeled with a paragraph describing the kinds of books on that shelf and, perhaps, one or two representative titles. This same approach describes the classification system of job evaluation. A series of classes covers the range of jobs. Class descriptions are the labels. A job description is compared to the class descriptions to decide which class is the best fit for the jib. Each class is described in such a way that the label captures sufficient work detail yet is general enough to cause little difficulty in slotting a job description onto its appropriate shelf or class. Writing class descriptions can be troublesome when jobs from several job families are covered by a single plan. Although a greater

specificity of the class definition improves the reliability of evaluation, it also limits the variety of jobs that can be easily classified. 3. POINT METHOD: point methods have three common characteristics (1) compensable factors (2) factors degrees numerically scaled and (3) weighta reflecting the relative importance of each factor. Each jobs relative value, and hence its location in the pay structure, is determined by total points assigned to it. Point plans are the most commonly used job evaluation approach in the United States and Europe. Compensable factors are based on the strategic direction of the business and how work contributes to these objectives and strategy. The factors are scaled to reflect their overall importance to the organization. Points are then attached to each factor 4. There are six steps in the design of point plan. I. Conduct a job analysis II. Determine compensable factors III. Scale the factors IV. Weight the factors according to importance V. Communicate the plan and train users; prepare manual VI. Apply to no benchmark jobs

THE FINAL RESULT: STRUCTURE

MANAGERIAL GROUP TECHNICAL GROUP MANUFACTURING GROUP ADMINISTRATIVE GROUP Vice Presidents Division General Managers Managers Project Leaders Supervisors Head/Chief Scientist Senior Associate Scientist Associate Scientist Scientist Technician Assembler I Inspector I Packer Materials Handler Inspector II Assembler II Drill Press Operator Rough Grinder Machinist I Core maker Administrative assistant Principal Administrative Secretary Administrative Secretary Word Processor Clerk/Messenger

JOB EVALUATION JOB EVALUATION

COMPETENCY

BASED

SKILL PLANS Skill-based structures link pay to the depth or breadth of the skills, abilities, and knowledge a person acquires that are relevant to the work. Structures based on skill pay individuals for all the skills for which they have been certified regardless of whether the work they are doing requires all or just a few of those particular skills. In contrast, a job-based plan pays employees for the job to which they are assigned, regardless of the skills they possess. DETERMINING THE INTERNAL SKILL-BASED STRUCTURE Work relationships within the organization

Skill analysis

Skill blocks

Skill certification

Skill-based structure Skill based structure begins with an analysis of skills, which is similar to the task statements in a job analysis. Related skills can be grouped into a skill block; skill blocks can be arranged by levels into a skill structure. To build the structure, a process is needed to describe, certify, and value the skills. Skill analysis is a systematic process of identifying and collecting information about skills required to perform work in an organization. The major skill analysis decisions are: What is the objective of the plan? What information should be collected? What methods should be used? Who should be involved? How useful are the results for the pay purposes?

Skill based plans are generally well accepted by employees because it is easy to see the connection between the plan, the work, the paycheck. Consequently, the plans provide strong

motivation for individuals to increase their skills. Learn to earn is a popular slogan used with these plans. PERSON-BASED STRUCTURES: COMPETENCIES All approaches to creating a structure begin by looking at the work performed in the organization. While skill- and job-based systems hone in on information about specific tasks, competencies take the opposite approach. They look at the organization and try to abstract the underlying, broadly applicable knowledge, skills, and behaviors that form the foundation for successful work performance at any level or job in the organization. These are the core competencies. Core competencies are often linked to mission statements that express an organizations philosophy, values, business strategies, and plans DEFINING COMPETENCIES Because competencies are trying to get at what underlies work behaviors, there is a lot of fuzziness in defining them. Early competencies focused on five areas: Skills (demonstration of expertise) Knowledge (accumulated information) Self-concepts (attitudes, values, self-image) Traits (general disposition to behave in a certain way) Motives (recurrent thoughts that drive behaviors)

The first two areas skills and knowledge were considered the essential characteristics that everyone needs to be effective in a job. Examples might include effective listening or team problem solving. Such competencies are observable and measurable and can be acquired through training and development. The other three competency categories self-concepts, traits and motives are not directly measurable; rather they must be inferred from actions. And it is these inferred characteristics that were judged to be the differentiating competencies critical factors that distinguish superior performance from average performance. In team settings, differentiating characteristics might include a strong identification with the team (self-concept), personal flexibility (trait), and the drive to produce results (motive). As experience with competencies has grown, organizations seem to be moving away from the vagueness of self-concepts, traits, and motives, placing a greater emphasis on business-related descriptions of behaviors that excellent performers exhibit much more consistently than average performers and less on underlying inferences. Competencies are becoming a collection of observable behaviors that require no inference, assumption or interpretation.

THE PERFECT STRUCTURE Job based skill based Compensable factors Skill blocks Factor degree weights Skill levels Assign points that reflect criterion pay structure Based on job performed/market Promotion Link employees to work Promotion and placement Cost control via pay for job and budget increase Certification and price skills in external market Based on skills certified/market Skill acquisition Competency based Competencies Competency levels

What is valued Quantify the value Mechanisms to translate into pay Pay structure Pay increases Managers focus

Employee focus

Seek promotions to earn more pay Job analysis Job evaluation Clear expectations Sense of progress Pay based on value of work performed Potential bureaucracy Potential inflexibility

Certification and price competencies in external market Based on competency developed/market Competency development Utilize skills efficiently Be sure competencies Provide training add value Control costs via Provide competencytraining, certification, developing and work assignments opportunities Control costs via certification and assignments Seek competencies Seek skills Seek competencies

Procedures

Skill analysis Skill certification Comtinuous learning Flexibility Reduced work force

Advantages

Competency analysis Competency certification Continuous learning Flexibility Lateral movement

Limitations

Potential bureaucracy Potential bureaucracy Requires costs control Requires cost controls

Managers whose employers use job-based plans focus on placing the right people in the right job. A switch to skill/competency based plans reverses this procedure. Now, managers must assign the right work to the right people, that is, those with the right skills and competencies. A job-based approach controls costs by paying only as much as the work performed is worth, regardless of any greater skills the employee may possess.

Trade Union: A group of employees in a particular sector, whose aim is to negotiate with employees over pay, job security, working hours, etc, using the collective power of the members. They are funded by subscriptions from members, and often offer legal advice and strike pay during disputes when members refuse to work. In general, the union is there to represent the interests of its members, and may even engage in political activity where legislation affects their members. In the UK, most unions belong to the TUC (Trades Union Congress), which represents many unions, and hence has more power over issues effecting workers nationally. An association of workers united as a single, representative entity for the purpose of improving the workers' economic status and working conditions through collective bargaining with employers. Also known as "unions". There are two types: the horizontal union, in which all members share a common skill, and the vertical union, composed of workers from across the same industry. ================================================= LEGAL STATUS The union formation process in most countries is regulated by a government agency such as the National Labor Relations Board in the United States. The group of employees wanting to form a union usually needs a set amount of signatures, this amount is dependent on the jurisdiction it wants to form in. If enough signatures are obtained there is a vote by all employees and if passed the union will negotiate on their behalf with the employers. Organization whose membership consists of workers and union leaders, and whose principal purposes are to - (1) negotiate wages and working condition terms, -(2) regulate relations between workers (its members) and the employer, -(3) take collective action to enforce the terms of collective bargaining, -(4) raise new demands on behalf of its members, and -(5) help settle their grievances. Trade unions are generally classified as: (a) Company union that represents interests of only one firm and may not have any connection with the trade union movement. Also called house union, a company union is often a bogus one and generally illegal. (b) General union that represents workers from several firms from the same industry. Also

called industrial union. (c) Craft union that represents skilled workers in a particular field such as carpentry or welding. Unions may organize a particular section of skilled workers (craft unionism), a cross-section of workers from various trades (general unionism), or attempt to organize all workers within a particular industry (industrial unionism). These unions are often divided into "locals", and united in national federations. These federations themselves will affiliate with Internationals, such as the International Trade Union Confederation. In many countries, a union may acquire the status of a "juristic person" (an artificial legal entity), with a mandate to negotiate with employers for the workers it represents. In such cases, unions have certain legal rights, most importantly the right to engage in collective bargaining with the employer (or employers) over wages, working hours, and other terms and conditions of employment. The inability of the parties to reach an agreement may lead to industrial action, culminating in either strike action or management lockout, or binding arbitration. In extreme cases, violent or illegal activities may develop around these events. In other circumstances, unions may not have the legal right to represent workers, or the right may be in question. This lack of status can range from non-recognition of a union to political or criminal prosecution of union activists and members, with many cases of violence and deaths having been recorded both historically and contemporarily. Unions may also engage in broader political or social struggle. Social Unionism encompasses many unions that use their organizational strength to advocate for social policies and legislation favorable to their members or to workers in general. As well, unions in some countries are closely aligned with political parties. Unions are also delineated by the service model and the organizing model. The service model union focuses more on maintaining worker rights, providing services, and resolving disputes. Alternately, the organizing model typically involves full-time union organizers, who work by building up confidence, strong networks, and leaders within the workforce; and confrontational campaigns involving large numbers of union members. Many unions are a blend of these two philosophies, and the definitions of the models themselves are still debated. Although their political structure and autonomy varies widely, union leaderships are usually formed through democratic elections. Diversity of international unions: As labor law varies from country to country, so is the function of unions. For example, in Germany only open shops are legal; that is, all discrimination based on union membership is forbidden. This affects the function and services of the union. In addition, German unions have played a greater role in management decisions through participation in corporate boards and co-determination than have unions in the United States.

In Britain a series of laws introduced during the 1980s by Margaret Thatcher's government restricted closed and union shops. All agreements requiring a worker to join a union are now illegal. In the United States, the Taft-Hartley Act of 1947 outlawed the closed shop, but permitted the union shop unless the state government chose to prohibit it. In addition, unions' relations with political parties vary. In many countries unions are tightly bonded, or even share leadership, with a political party intended to represent the interests of working people. Typically this is a left-wing, socialist, or social democratic party, but many exceptions exist. In the United States, by contrast, although it is historically aligned with the Democratic Party, the labor movement is by no means monolithic on that point; this is especially true among the individual "rank and file" members. Finally, the structure of employment laws affects unions' roles and how they carry out their business. In many western European countries wages and benefits are largely set by governmental action. The United States takes a more laissez-faire approach, setting some minimum standards but leaving most workers' wages and benefits to collective bargaining and market forces. Historically, the Republic of Korea has regulated collective bargaining by requiring employers to participate but collective bargaining has been legal only if held in sessions before the lunar New Year. Government and legal issues in compensation: Government is a key stakeholder in compensation decision making. Governments usual interests are whether: Procedures for determining pay are fair (pay discrimination) Safety nets for the unemployed and disadvantaged are sufficient (minimum wage, unemployment insurance) Employees are protected from exploitation (overtime pay, child labor). Minimum Wage Minimum wage legislation is intended to provide an income floor for workers in societys least productive jobs. Federal minimum wage is 5.15 an hour (set in 1997) Almost all states have their own minimum wage to cover jobs omitted from federal legislation. If state and federal legislation cover the same job, the higher one prevails.

There are direct and indirect effects of this Direct Effect of a minimum wage increase refers to the increase in wages for jobs at the bottom of the wage curve that have been below the minimum wage. Indirect Effect of a minimum wage increase refers to the changes in the remainder of the wage curve to maintain appropriate differentials for jobs that deserve higher pay. When someone is classified as an employee, the organization must: Withhold federal/state/local income taxes Match Social Security/Medicare withholding Include the person in the company benefit programs Pay for unemployment insurance and workers compensation Allow up to 12 weeks of unpaid leave for family emergencies Provide any other state or federally mandated benefits FLSA Basic Overtime Provisions All non-exempt workers must be paid one and one-half times their regular rate of pay for hours worked in excess of 40 in any workweek. Regular rate of pay includes basic pay plus non-discretionary bonuses, shift premiums, production bonuses, and commissions Overtime is paid on time worked, not time compensated. A workweek is any fixed, recurring period of 168 consecutive hours. Governments around the world play varying roles in the workplace. Legislation in any society reflects peoples expectations about the role of government. Beyond direct regulation, government affects compensation through policies and purchases that affect supply and demand for labor.

In the United States, legislation reflects the changing nature of work and the workforce.

1930s legislation was concerned with the social safety net 1960s legislation turned to the issue of civil rights

Pay discrimination laws require special attention for several reasons. First, these laws regulate the design and administration of pay systems. Second, the definition of pay discrimination, and thus the approaches used to defend pay practices, is in a state of flux. Many of the provisions of these laws simply require sound practices that should have been employed in the first place.

Sound practices are those with three basic features: They are work related. They are related to the mission of the enterprise. They include an appeals process for employees who disagree with the results.

Budgeting Purpose You can use the budgeting tool to allocate both monetary and non-monetary fund to a particular organizational unit within your organization. Whether you want to plan your entire budget or use a more detailed budget structure and perform budgeting using the organizational structure, this component is flexible enough to encompass a variety of budget planning methods which you can process graphically. This component provides the basis for Compensation Administration. The Compensation Administration component accesses the budget values created for organizational units. The Compensation administrator uses these values to determine compensation adjustments (pay Increases, bonuses, etc.) for the employees whose compensation is under review. In brief, you can use this component to perform: _ Create budget units and structures _ Finance organizational units _ Change budget structures and values _ Copy budget structures and organizational structures _ Release budgets Implementation Considerations

Install this component if you want to perform compensation budget planning and administration. Integration To perform budgeting over the organizational structure, that is, to assign organizational units to Budgets units, install the Organizational Management component. If you want to use the budget values as the basis of administering and planning compensation Packages for employees, you must install the Organizational Management component so that You have the necessary employee, job, position and organizational unit data. Integration with the Organizational Management component also acts as a control mechanism to make sure you stay within budget when administering compensation awards via the organizational unit. Budgeting The budget units in the Compensation Management component are solely used to distribute amounts and quantities when you plan and administer adjustments for a group of employees. You cannot use these budget units to track changes that occurred as a result of a new indirect valuation or a change in the employee's capacity utilization level. Features Budgeting has a roll-up feature that allows you to use a bottom-up process to submit the budget, and a top-down process to approve the budget. Budget units are displayed in a hierarchical structure. The Budgeting component has two display options you can use when changing and displaying budgets: _ The Budget distribution view Displays the budget structure. In this view, you can only work with the budget units. _ The Financing view Displays the budget structure and the corresponding organizational structure. In this view, you can assign financed objects to the budget units and determine what the budget unit finances. Compensation Administration Purpose Use this component to establish compensation methods that not only support the employees Corporate thinking and sense of responsibility, but also reward them. The Compensation Administration component provides you with the necessary tools for strategic remuneration Planning that reflects both your corporate culture and your salary policies. User-defined Calculation rules and eligibility criteria mean that you can create compensation adjustments that meet your individual requirements and comply with your compensation policy. In brief, you can use this component to perform: _ Distribute and change employee compensation adjustments _ Display employee compensation adjustments

Implementation Considerations You can use this component to: _ Assign compensation adjustments to employees based on eligibility criteria _ Plan and administer adjustments over the organizational structure _ Plan and administer adjustments for individuals or groups of employees _ Roll up remuneration distribution Integration To use this component, you must install: _ The Personnel Administration component so that you can access employee data and update Employee records _ The Organizational Management component so that you can define an organizational Structure for selecting employees _ The Budgeting component if you want to administer compensation within budget guidelines Features This component also comprises the following components: _ Compensation Packaging Use this component to make the distinction between different types of compensation and to categorize the compensation types. _ Eligibility Use this component to identify who qualifies for compensation adjustments based on a series of eligibility criteria. _ Guidelines Use this component to determine how compensation adjustments are calculated or to set limits on the calculation results. SAP AG Compensation Management (PA-CM) Compensation Administration _ Adjustments Use this component in conjunction with the Compensation Administration component to determine how and when you want to distribute your compensation adjustments. You can also use this component to select which employees should participate, either at the organizational unit level or at the employee level. To simplify compensation administration, this component: Allows you to perform compensation tasks, for example, increase salaries, and distribute a bonus over the organizational structure Provides mechanisms for multi-level approval Allows you to store and track compensation adjustments changes using the Compensation Adjustment Info type record Applies compensation adjustments for groups of employees over the organizational structure

Examples of Executive Compensation Strategies at Various Companies:

Coca-Cola: The company emphasizes total compensation opportunities and focuses less attention on the posture of each component of compensation. The development of at-risk pay policies is driven more by Company strategy than by competitive practice. Over time, the level of the Companys competitiveness in compensation opportunities is based heavily on the companys stock price performance relative to other large companies. In line with this principle, current total compensation competitiveness is targeted in the top quartile of the range of total compensation of a comparator group of companies. Ford: The compensation committee wants the compensation of Ford executives to be competitive in the worldwide auto industry and with major U.S. companies. Each year, the committee reviews a report from an outside consultant on Fords compensation program for executives. The report discusses all aspects of compensation as well as how Fords program compares with those of other large companies. Based on this report, its own review of various parts of the program, and its assessment of the skills, experience, and achievements of individual executives, the committee decides the compensation of executives. Overview of Goldman Sachs Compensation Principles Attract and Retain Talent Our compensation framework is designed to attract and retain the most talented human capital, which has been a key contributor to generating excess returns relative to peers Align Compensation with Results, Particularly for Senior Management To avoid misaligning compensation and performance, we do not award multi-year, guaranteed employment contracts Senior and more highly paid employees experience more variability in their compensation based on year-to-year changes in our firm's results Evaluate Performance over Time Compensation, in most cases, includes discretionary compensation, as appropriate, awarded at year-end The percentage of compensation awarded in equity increases as an employees total compensation increases

Equity awards are subject to vesting, transfer and other restrictions over a extended period of time, including recapture provisions Discourage Excessive or Concentrated Risk Taking The risk/return profile of ones business is taken into account in individual compensation determination Revenue producers do not determine the compensation of risk managers No employees compensated based on a fixed percentage of earnings

Align Employee and Shareholder Interests Our compensation policies encourage employees to think and act like long-term shareholders. Being significantly invested in our stock over time, as part of an individuals compensation, advances our partnership culture of stewardship for our firm Pay practices & Average Salaries in some of the Indian Industries:

Conclusion:
Compensation administration intends to develop the lowest-cost pay structure that will not only attract, inspire and motivate capable employees but also be perceived as fair by these employees. The pay structure of a company depends on several factors such as labour market conditions, companys paying capacity, legal provisions, prevailing wage rates, demand and supply of labour, degree of unionization etc. While designing a compensation system, every company needs to pay attention to: Internal as well as external equity Fixed versus variable pay Payments based on performance or membership Job based pay or knowledge-based pay Payment as per market rates

Literature Review:
Human Resource Management Text and Cases V S P Rao Compensation Theory, evidence and Strategic Implications Barry Gerhart Variable Pay Rules Business World T. Patten, Pay: Employee Compensation and Incentive Plans www.acaonline.org www.pbgc.com www.ioma.com www.idc.org