Compensation and Benefits

NMIMS BlackBoard

Compensation and benefits

Compensation is the process of providing adequate, equitable and fair remuneration to the employees

Benefits are Non-Wage benefits, such as paid vacations, pensions, health and welfare provisions, life insurance, the cost of which is borne in whole or in part by the employer.

Compensation System Components

Source of figure: Fisher, Schoenfeldt, & Shaw (2003), Figure 12.1

Compensation and benefits

Compensation System Components Equity Issues Equity Theory Pay Systems
Market-Based Pay Job Evaluation Pay Systems

Pay Policy Issues

Compensation Overview
Q1: What are the basic goals of any compensation system?
to attract high quality employees to retain high quality employees to stimulate high performance

Q2: What are the basic components of any compensation system?

base pay (wages) incentives benefits

Compensation Overview
Q3: What are the basic tools of any compensation system?
Wage surveys Job analysis/evaluation Performance appraisal

Q4: Why do wages differ?

Differences by industry Differences by occupation Differences based on individual performance, seniority, etc.

Compensation decisions are influenced by both internal and external factors:

Internal:
financial conditions corporate/managerial philosophy corporate strategy/life cycle

External:
labor market factors
area wages/cost of living collective bargaining agreements government regulations
* Fair Labor Standards Act (1938)

* Equal Pay Act (1963)

All organizations face three basic compensation decisions:

A. Pay-Level Decision:
Are we going to lead, meet, or lag the market? Comparison: Employees working on similar jobs in other organizations

B. Pay-Structure Decision:
How do we determine differences in pay for various jobs in our organization? Comparison: Employees working on different jobs within the organization

C. Individual Pay Determination:

How do we determine how much to pay various people in our organization? Comparison: Employees working on the same jobs within the organization

A. Pay-Level Decisions
Wage and salary surveys are one of the major tools used to make external comparisons
Decision points: Which jobs to make comparison for? What is the appropriate labor market? Which organizations to survey?

B. Pay-Structure Decisions:
Pay-structure decisions are typically made in one of two ways:
a. based on attributes of employees: -- knowledge- or skill-based pay
b. based on attributes of the job: -- job evaluation:
the process of determining the relative worth of various jobs within an organization

Q: Why do job evaluation?

Four Types of Job Evaluation Systems

1. 2. 3. 4. Ranking Systems Classification (Job Grade) Systems Point Systems Factor Comparison Systems

Job Evaluation Pay Systems

Source of figure: Fisher, Schoenfeldt, & Shaw (2003), Figure 12.3

Job Evaluation Pay Systems

Job Ranking
Review job descriptions Rank jobs in order of relative worth or importance to the organization Use the rank ordering to set pay for each job
Pay higher ranked jobs more than lower ranked jobs

Job Evaluation Pay Systems

Source of figure: Fisher, Schoenfeldt, & Shaw (2003), Figure 12.3

Job Evaluation Pay Systems

Job Grading (Job Classification)
Create a sequence of job grades For each job grade, define the job grade in words
Nature of the duties performed; Examples:
Importance Difficulty

Nature of supervision; Example:

Close supervision with limited judgment vs. little supervision with extensive judgment

Use the job descriptions to classify each job into a job grade

Job Evaluation Pay Systems

Job Grading (Job Classification) (contd.) Select a set of benchmark (key) jobs Jobs with well-known, stable job content Jobs that are common in many organizations Jobs that represent the range of jobs being evaluated Jobs for which market pay data is available Use the market pay data on the benchmark jobs to set the pay for each job grade All the jobs (including the non-benchmark jobs) in a specific job grade get the pay associated with that job grade

Job Evaluation Pay Systems

Source of figure: Fisher, Schoenfeldt, & Shaw (2003), Figure 12.3

Job Evaluation Pay Systems

Factor Comparison
Select a set of benchmark (key) jobs
Jobs with well-known, stable job content Jobs that are common in many organizations Jobs that represent the range of jobs being evaluated Jobs that represent the range of each compensable factor
Compensable factors: the characteristics about jobs that are used to set pay Example of compensable factors: skill, effort, responsibility, and working conditions

Jobs for which market pay data is available

C. Individual-Pay Determination:
On what do we base our individual pay determination?
performance seniority ??? (politics, non-job relevant issues)

Equity Issues
Individual Equity: comparisons across individuals in the same job in the same organization
Example: In a retail store, is the pay difference between 2 Assistant Store Managers perceived as fair?

Internal Equity: comparisons across jobs in the same organization

Example: In a retail store, is the pay difference between the Store Manager and an Assistant Store Manager perceived as fair?

Equity Issues (contd.)

External Equity: comparisons of similar jobs in different organizations
Match the market (match the competition)
No advantage or disadvantage in costs or in attracting and retaining employees

Lead the market: higher costs offset by:

Easier to attract and retain employees More applicants skim the cream (if valid)

Lag the market: lower costs offset by:

Harder to attract and retain employees Are there other goodies? (e.g., promotions)

Equity Theory

Source of figure: Fisher, Schoenfeldt, & Shaw (2003), Figure 12.2

Pay Systems: Market-Based Pay

Alternative names: Market-Based Pay = Market Pricing = Rank to Market Steps for each job title:
Identify the relevant labor market:
Local Regional National International

Pay Systems: Market-Based Pay

Steps for each job title (contd.):
Obtain market pay data (contd.):
Or perform a market pay (wage & salary) survey:
Identify a sample of organizations in the relevant labor market that have the job title Contact each organization and ask how much they pay the job title (minimum, average, maximum) Avoid anti-trust (pay-fixing) concerns: Use an independent consultant to collect data Collect data several months old (e.g., 3 months) Include at least 5 employers for each job title Have consultant report summary statistics only

Use the market pay data to set pay

Pay Systems: Market-Based Pay Strengths:

Not too complicated Can adjust actual pay for each job to match, lead, or lag the market

Weaknesses:
Assumes all jobs with the same job title across different organizations are the same Hard to use for unique jobs Assumes market differences in pay correctly captures internal equity issues

Job Evaluation Pay Systems

Factor Comparison (contd.)
Rank the benchmark jobs on the basis of each compensable factor Collect market pay data for the benchmark jobs For each benchmark job, allocate benchmark pay across the compensable factors For each benchmark job, compare the factor rankings to the pay rankings and make adjustments as needed to bring the rankings into agreement

Job Evaluation Pay Systems

Factor Comparison (contd.)
Construct a job comparison scale, and slot the benchmark jobs into the pay scale for each compensable factor Apply the scale: slot all the non-benchmark jobs into their proper places on the pay scale for each compensable factor Determine the pay for each job by adding up the pay from each compensable factor

Job Evaluation Pay Systems

Source of figure: Fisher, Schoenfeldt, & Shaw (2003), Figure 12.3

Job Evaluation Pay Systems

Point Method
Define a set of compensable factors
Compensable factors: the characteristics of jobs that are used to set pay
Example: (1) education (2) experience (3) knowledge (4) physical demands (5) mental demands (6) responsibility for equipment & processes (7) responsibility for materials & products (8) responsibility for safety (9) responsibility for the work of others (10) working conditions (11) job hazards

Job Evaluation Pay Systems

Point Method (contd.)
Define a factor scale for each compensable factor
Factor scale: define in words different levels (or degrees) of the compensable factor
Example: Factor scale for knowledge: 1st Degree: reading & writing; adding & subtracting of whole numbers; following instructions; no interpretation 2nd Degree: arithmetic with decimals & fractions; using measuring instruments; interpretation required 3rd Degree: mathematics; precision measuring instruments; 13 years applied trades training 4th Degree: advanced mathematics; 2 year technical college 5th Degree: higher mathematics; engineering degree

Job Evaluation Pay Systems

Point Method (contd.)
Assign points to each degree of each Compensable factor
Example:

Source of table: Fisher, Schoenfeldt, & Shaw (2003), Table 12.4

Job Evaluation Pay Systems

Point Method (contd.)
Job evaluation: evaluate each job to determine the number of points to assign to that job on each compensable factor
Frequently done by a job evaluation committee Use the job descriptions as the source of job information For each job, add up the number of points on each compensable factor to get the total job evaluation points for the job
Jobs with more total points have more of the things we value in setting pay

Job Evaluation Pay Systems

Point Method (contd.)
Select a set of benchmark (key) jobs
Jobs with stable job content Jobs that are common in many organizations Jobs that can be defined with precision Jobs that are performed similarly across organizations Jobs that represent the range of jobs being evaluated Jobs for which market pay data is available

Identify the relevant labor market for each benchmark job

Job Evaluation Pay Systems

Point Method (contd.)
For each benchmark job, collect pay information in the relevant labor market
Use pay data collected by others Or perform a market pay (wage & salary) survey:
Identify a sample of organizations in the relevant labor market that have the benchmark job title Contact each organization and ask how much they pay the job title (minimum, average, maximum) Avoid anti-trust (pay-fixing) concerns: Use an independent consultant to collect data Collect data several months old (e.g., 3 months) Include at least 5 employers for each job title Have consultant report summary statistics only

Job Evaluation Pay Systems

Point Method (contd.)
Estimate the market pay lines:
Run simple regressions using the benchmark jobs as the data points:
Min pay line: regress minimum pay (dependent variable) on points (independent variable) Max pay line: regress maximum pay (dependent variable) on points (independent variable)

Use the estimated market pay lines to determine the pay ranges for each job (benchmark and non-benchmark jobs) Optional: create pay grades

Various Types of Incentives

1. Profit-sharing plans
2. Gain-sharing plans 3. Lump-sum bonuses

4. Individual plans (e.g., piece-rate plans, merit pay)

Minimum Wages Act

The enactment of the Minimum Wages Act in 1948 is a landmark in the labor history of India. The Act provides for fixation of minimum wages for notified scheduled employment As per Government of India, for all the States, the minimum wages have been fixed at about Rs 40 to 60 per day per person, average about Rs 50 per day for 25 days per month.

Minimum wage Act

http://labour.nic.in/wagecell/welcome.html http://lisd.delhi.nic.in/AnnualReport200203/lab05.pdf

Income Tax - Income Tax Rates/ Slab 2007-08

PERSONAL TAX RATES For individuals, HUF, Association of Persons (AOP) and Body of

individuals (BOI):

Up to 1,10,000 Up to 1,45,000 (for women) Up to 1,95,000 (for resident individual of 65 years or above) 1,10,000 1,50,000 1,50,001 2,50,000 2,50,001 1,000,000 1,000,001 upwards

NIL

10% 20% 30% 30*%

A surcharge of 10% of the total tax liability is applicable where the total income exceeds Rs 1,000,000.

Profession Tax
Who is liable to pay Profession Tax (a) Every person getting salary or earning wages about Rs.5000/- per month (b) All legal practitioners including solicitors and Notary public standing in profession for more than 5 years in Municipal Area and more than 10 years in other areas (c) Medical practitioners standing in profession for more than two years. (d) Dealers whose Gross Turnover exceeds Rs.1,00,000/-. (e) Agents having annual gross income of Rs.15,001/- or above (f) Estate agents, brokers, promoters, commission agents, and contractors whose business exceeds Rs.1 lakh. (g) clearing agents, customs agents, licensed shipping brokers (h) Owners and lessee of beauty parlors, health resorts, slimming centers, air conditioned hair dressing saloon. (i) Technical and professional consultants, tax consultants, chartered accounts, cost accountants.

Profession Tax
Profession tax is different from state to state. Maharashtra it is: if the salary is less than Rs. 2500 2500- 3500 3500- 5000 5000-10000 10000 & above nil 60/120/175/200/-

Ref: Maharashtra state tax on trade, callings and employment act, 1975

Fringe Benefits Tax

FBT Provisions in Brief Levi able on Employer. Levi able on Fringe benefits provided or deemed to have been provided to employees @ 30% on value of fringe benefits. Fringe Benefits divided in two categories Fringe Benefits directly provided to employees consisting of benefit, amenity, facility, free/concessional tickets & contribution to approved superannuation fund section 115WB(1). Deemed fringe benefits to employees on certain expenditure incurred by employer as specified in section 115WB(2).

Fringe Benefits Tax

Deemed Fringe Benefits Section 115WB(2) Value of Fringe Benefits 20 %

Free/concession ticket to employees Contribution to Superannuation Fund Entertainment Expenditure Provision of Hospitality of every kind to any person Conference Expenditure Sales promotion expenditure Employees' Welfare expenditure Conveyance, Tour & Travel (incld. Foreign Travel) Hotel, Boarding, Lodging facilities Motor Car expenses (including depreciation) Telephone (including mobile phone) Guest House expenses
Festival celebrations Health club & similar facilities Any other Club facilities Gifts Scholarships 50 %

CTC or 'cost to company

Cost to Company can also be used to refer to the total cost that an organization is spending towards their employee including the Salary, Perks, Cost related to benefits, Cost related to hiring, Training, Statutory Contributions etc.

A salary quoted as CTC may include some/ all of the following: ~ Cash component of salary ~ The rental value of the ( Individual/shared) accommodation provided ~ Interest on the deposit paid for your flat ~ Allocated cost of furnishings ~ Company's contribution towards your provident fund ~ Your contribution towards PF ~ And, of course, the taxes that you have to pay