mu0015 assignment

Sikkim Manipal University-DE

Student Name: Manisha Verma Course: MBA (HR)

Registration Number: 521112626 LC Code: 3034

Subject Name: Compensation and Benefits Subject Code: MU0015

Q 1- Discuss the elements of compensation package?

Answer 1- A compensation package is the combination of benefits that an employer offers to employees. This may include wages, insurance, vacation days, guaranteed raises, and other perks. Strong compensation packages are often used to attract and keep good employees, and to promote certain company values. For Example a business that does not pay the highest wages may still be competitive by offering free or inexpensive childcare to employees. Compensation refers to all forms of financial returns and tangible services and benefits that employees of an organisation receive as part of the employment relationship. The term ‘compensation’ is used to mean employees’ gross earnings in the form of financial rewards and benefits as part of employment relationship.Compensation refers to money and money-related extras. Thus, in addition to a person’s base pay, compensation can include bonuses, merit increases, variable pay, and long-term Incentives. Benefits include the remaining things, such as healthcare, pension plans, stock options, and legal services. An organisation’s compensation program sends a message to employees about its commitment to encouraging, recognising, and rewarding employee performance.Elements of an Effective Employee Compensation Plan are: Base pay: Base pay is the fixed rate of compensation that an employee receives for performing the standard duties and assignment of a job. It is defined as an amount or a rate of compensation for a specified position of employment or activity excluding any other payments or allowances.Employers need to ensure that base-pay programs are designed to reveal market practices within their identified competitor group. To achieve this, organisations must first identify their competitive market, by considering different factors, including the nature of the industry, geographic location, total employment and annual revenue. Also an assessment of market pay practices for similar jobs within the recognised competitor group is done. This assessment should involve the duties, skills, and impact levels of each job of similar size and scope. Then a pay structure for managing the competitive base-pay levels for the jobs throughout the organisation should be developed.

Variable pay: It is defined as compensation such as commission which, unlike monthly pay, must be earned every time to be obtained. Also called pay at risk. Variable pay is employee compensation that changes as compared to salary which is paid in equal proportions throughout the year. Variable pay is used generally to recognize and reward employee contribution toward company productivity, profitability, team work, safety, quality, or some other metric deemed important. Variable pay is popular in today’s corporate world. By including a percentage of variable pay in the compensation plan, organisations ensure that two people with different efficiency levels do not get the same benefits. By doing this, the company rewards productivity and hard work and motivates the under-performers to work hard. Once limited to senior management levels, these incentive or bonus plans are being redesigned to reward the achievement of specific company or employee performance objectives.


In a variable pay plan, the size of the award varies among employees and from one performance period to another, based on levels of achievement measured, as well as against pre established company and employee performance targets. Variable pay is awarded in a variety of formats including profit sharing, bonuses, holiday bonus, deferred compensation, cash, and goods and services such as a company-paid trip.

Skill and competency-based pay: It is defined as Remuneration system in which employees are paid wages on the basis of number of job skills they have acquired. Skill-based pay is also called competency-based or knowledge-based pay. Skill-based pay offers employees extra compensation when they have new skills specially recognised by the company as essential to achieve a competitive advantage. Skill-based pay can be particularly useful for employees who like their current jobs but are looking for new challenges. Competency-based pay is more widespread than skill-based pay because the criteria cover not only measurable skills but also knowledge, performance behaviours and personal attributes. It helps out employees to grow in the company and helps them to close the knowledge gaps needed for creative moves

Long-term incentive compensation: A reward system designed to improve employees' long-term performance by providing rewards that may not be tied to the company's share price. In a typical LTIP, the employee fulfils various conditions or requirements that prove that he or she has contributed to increasing shareholder value. The incentives for doing this are usually conditional company shares, which are distributed in two parts. The first part represents an immediate distribution of half of the shares, while the remaining half of the shares will only be presented to the executive if he or she stays with the company for a predefined number of years. Long-term incentive compensation vehicles, such as stock-option plans and other deferred-compensation plans, which are not usually used to reward performance, are achieving desirability among employees. These long term incentive compensation plans appreciate employees based on company performance over a long term that is typically three to five years. Stock-option plans are a common form of long-term compensation at public organisations. In most private companies, incentives that reflect stock plans are used for key employees.

Long-term compensation plans can be valuable preservation tools for the success of an organisation. They help to focus on driving and improving the key employees to achieve the financial performance of the company over a longer term.

Q-2 List and explain various theories of economic wages?

Answer 2- Many things influence the compensation decisions made in organisations and one of them is economics. Economists view compensation as a labour market determinant. Economic theories specify the economic factors that determine employee compensation, the manner in which they do so, and the importance of each. Theories of economic wages refer to portion of economic theory that attempts to explain the determination of the payment of labour.The subsistence theory of wages, also known as the “Iron Law of Wages” advanced by David Ricardo and other classical economists, was based on the population theory of Thomas Malthus. It held that the market price of labour would always tend toward the minimum required for subsistence. If the supply of labour increased, wages would fall, eventually


causing a decrease in the labour supply. If the wage rose above the subsistence level, population would increase until the larger labour force would again force wages down.In other words, wages cannot fall below subsistence level because without subsistence, labourers will be unable to work. On the contrary, if the compensation increases beyond the subsistence level, then the number of employees would also increase, because the employees will be in a better position to support larger families. This would then cause the compensation to fall due to the increased supply of labour than demand. When the compensation falls below the subsistence level, employees would die of hunger, malnutrition and diseases. Hence, the number of employees available for employment will come down, which, in turn, would push up the demand for labour. This increase in demand will push up the compensation beyond subsistence level.Malthus, basing his theory of wages on his theory of population, followed the supply and demand theory, advocating the restraint of marriages as a means of decreasing the supply of employees and thus raising the standard of wages. Malthus stated it as "that amount of those necessaries and conveniences, without which they would not consent to keep up their numbers."The wage-fund theory held that wages depended on the relative amounts of capital available for the payment of workers and the size of the labour force. Wages increase only with an increase in capital or a decrease in the number of workers. Although the size of the wage fund could change over time, at any given moment it was fixed. Thus, legislation to raise wages would be unsuccessful, since there was only a fixed fund to draw on.This theory was proposed by Smith. This theory assumes that every organisation has a fixed fund of capital to pay wages. The inventory of goods or capital is termed as the wages fund, and its source is the savings of the industrialists.Given the size of the labour force and the wages fund, the wage rate is determined as:Wage rate= wages fund/labour force.Residual Claimant Theory by Francis A. Walker may be thought of as an American version of the wages-fund theory. It states that, after all other factors of production have received compensation for their contribution to the process; the amount of money left over will go to the remaining factors like wages. Smith suggested this theory for wages, since he assumed that rent would be deducted first and profits next. Walker worked on a residual theory of wages and suggested that the shares of the landlord, capital owner, and industrialist were determined independently and subtracted, thus leaving the remainder for an employee in the form of wages. However, it should be noted that any of the factors of production may be selected as the residual claimant assuming that independent determinations may be made for the shares of the other factors. The workers' demand for wages represents the residual claimant on output after rent, interest, and profit have been independently determined and deducted. Assigning wages rather than profits as the residual seems curious, but it does suggest that distribution of income is a matter of decision. It also permitted Walker to suggest that if labour increased its productivity without the use of more capital or land, its residual would increase - the germ of a productivity theory.Marginal productivity theory formulated in the late 19th century, holds that employers will hire workers of a particular type until the addition to total output made by the last, or marginal, worker to be hired equals the cost of hiring one more worker. The wage rate will equal the value of the marginal product of the last-hired worker. This theory assumes that all units of the factors are homogeneous. The factors used can be continuously varied. This theory is based on the law of falling marginal returns. The theory shows that when the employment increases, the wages decreases. It is difficult to calculate the marginal productivity of a factor in most of the areas. It also assumes that the supply of factors is fixed. This theory is applicable only under perfect competition.


Bargaining theory of wages was developed by Davidson. According to this theory, wages are determined by the relative bargaining power of workers, the trade unions and employers. In the bargaining theory of wages, there is no single economic principle or force governing wages. Instead, wages and other working conditions are determined by workers, employers, and unions, who determine these conditions by negotiation. When a trade union is involved, basic wages, benefits, job differentials and employee differences tend to be determined by the relative strength of the organisation and the trade union.The neoclassic economic theory argues that it will be good if employees can choose their own wage benefits among various alternatives. Further, if employees are sufficiently compensated, then the economic welfare of society as a whole is increased. The basic idea for this argument is that employees can decide what is best for them. However, in matters of employee benefits, wages or compensation, there are several rules which define the range of choices.

Q 3- What is pay structure? Explain why it is necessary to develop a proper pay structure. Explain the method to develop pay structure.

Answer-3 Pay structure is the grouping of pay grades or pay bands. There can be more than one pay structure in a compensation plan. For instance, there may be one pay structure for service and maintenance positions, one for sales positions and one for managerial positions. Or, the organization may have just one structure for all positions. The main goal of developing a pay structure is to manage and demonstrate an organization’s compensation philosophy and to reflect and support the advancement of the company’s culture. An effective pay structure also helps to attract and retain the efficient employees.A company's pay structure is the method of administering its pay philosophy. Pay structure is a tool, which is developed logically and communicated effectively to make the employees more motivated towards the job. A company needs job descriptions for all its positions so that people know where they fall within the organization. A pay structure helps answer questions about who's who, what each person's role is, and why people are compensated differently. It also helps human resources personnel to fairly administer any given pay philosophy. For example, a company might want to pay everyone at market; or pay some people at market and some above it. Opportunities for incentives are also dealt with in the pay structure. For example, people with strategic roles will likely have opportunities for higher incentives. The process of developing the pay structure deals with internal and external analysis to assess the compensation package for the specific job profile. If the organization is paying very less to employees, then it may lose valuable employees. If the organization is paying high, then it may be unwisely spending company resources.The following three factors have to be determined while developing a pay structure:

1. The proper data for establishing the relative value of a particular job to the organization.

2. The proper pay range for a job with the defined value to the organization.3. The value of each job position within the specified pay range.

An organization’s compensation philosophy and pay strategy determines the approach that should be taken to allocate pay across job ranges. Factors to be considered are:

1. Number of years of experience.2. Number of reporting staff members.3. Performance evaluation results.4. Hazardous working conditions.5. Undesirable shifts.6. Education and degrees.


7. Professional certifications.8. Management opinions.

A successfully developed pay structure identifies career development in addition to promotion. It demonstrates and pays for the business results on which an organization places value. An effective pay structure is worth the time and attention. It pays to get it right.Pay structures are used to help organizations:

1. maintain pay levels that are competitive with the external labor market,2. maintain internal pay relationships among jobs,3. recognize and reward differences in level of responsibility, skill, and performance,

and4. Manage pay expenditures.5. Structure setting and adjustment provides a systematic way to manage pay structures.

Question 4- Explain components of wages?

Answer 4- Wage payment in India consists of basic wage, Dearness Allowance (DA), bonus and fringe benefits. While the basic wage has some relation to the economics of the firm, the other wage components are much less influenced by internal than by external variables, such as government regulations and inflationary trends in the economics. As a result, managements do not possess a complete control over wage costs. The interference of external variable introduces a certain degree of uncertainty in creating an internal wage policy.Components of wages are as follows:Basic Wage: It can be defined as payment for labor or services to an employee, especially payment on an hourly, daily, or weekly basis. The basic wage provides the foundation of pay pocket. It is a price for services rendered. It varies according to mental and physical requirements of the job as measured through job evaluation. In India, basic wage has been influenced by statutory minimum wage, wage settlements, and awards of wage boards, tribunals, pay commissions, etc. The wages of an employee are fixed depending on the following:

1. A basic rate of wages in addition to special allowance (that is cost of living allowance).

2. A basic rate of wages which may include either cost of living allowance or cash value of concessions for supplies of essential products.

3. A rate that includes basic rate cost of living allowance and cash value of concessions.Dearness allowance: The dearness allowance is a part of the total compensation employees receive for having performed their job. It is a part of the original salary. The percentage is re-evaluated and may be changed every six months. This allowance is given to protect the real wages of workers during inflation. Under Section 3 of the Minimum Wages Act it is described as cost of living allowance. Dearness allowance has now become an integral part of the wage system in India.Bonus: Bonus is a deferred wage aimed at bridging the gap between actual wage and the need based wage. Bonus is a share of the workers in the prosperity of an enterprise. Bonus may also be regarded as an incentive to higher productivity. According to the Bonus Commission (1961), bonus is “sharing by the workers in the prosperity of the concern in which they are employed. It is an extra pay given to employees in appreciation to their performance. The advantage of bonus is that in case of low paid workers, such sharing increases their earnings and therefore, helps in bridging the gap between the actual wage and the need-based wage.Fringe benefits: The term fringe benefit refers to the extra benefits provided to employees, apart from the compensation paid in the form of wages or salary. It is a collection of various


benefits provided by an employer, which are exempt from taxation as long as certain conditions are met. Any employee who receives taxable fringe benefits will have to include the fair market value of the benefit in their taxable income for the year, which will be subject to tax withholdings, and social security benefits payments.The AWS (Annual Wage Supplement) is also known as 13th Month Payment, and represents a single annual payment to an employee that is supplementary to the total amount of annual wage they earned. The AWS (Annual Wage Supplement) is also known as 13th Month Payment, and represents a single annual payment to an employee that is supplementary to the total amount of annual wage they earned. The Annual Wage Supplement (AWS) is treated similarly to a bonus payment dependent on an employee's basic salary.

Q 5- Describe cost to company and its components?

Answer 5- Cost to Company (CTC) is the amount that you cost your company. That is, it is the amount that the company directly or indirectly spends on an employee. Cost to company is a term which essentially implies the amount of expenses the company will spend on an employee in a particular year? What may be an expense for the company need not necessarily be salary for the employee? From an employee’s perspective Cost to company is an amount projected by the company as salary but is never what is actually received by the employee in cash. For the Finance Manager: It is the total cost incurred to hire, maintain, retain the employees and may also include a part of overhead cost allocation.CTC includes the salary directly paid to the employees, the benefits directly attributable to the employees such as company’s contribution to the provident fund, pension funds, medical insurance premium, life insurance premium, cost of loans offered to the employees, telephone expenses for mobile phone connections and land-line connections, benefits offered for visiting the home country or hometown and so on. Most companies usually talk in terms of CTC as the figures look more impressive. However, they are often misleading. Sometimes, even a lower take home pay may be beneficial if the other payments are made against vouchers/bills (for example, telephones, cars, refreshment, and so on). The total compensation includes the value of all the perks and benefits the employee is offered by the company in addition to the employee’s salary. Calculating the annual CTC is important from the employees’ and the organization’s perspective. This helps the organization ascertain the HR cost and the employees understand what they are being offered, as they can benchmark their CTC with other comparable organizations. Employees can decide on other job offers depending on the CTC. For employees to decide on other job offers, it is very important that they understand how the CTC is calculated. However, it is difficult to arrive at the CTC as many components of the CTC considered by the company may not be considered as a part of total compensation package. Therefore, to arrive at a comprehensive CTC value, organizations need to be careful and add all the components of compensation or their equivalent cash value.CTC includes various components like:

1. Salary : It includes Basic, Dearness Allowance (DA), House Rent Allowance( HRA) Allowances

2. Reimbursements : It includes bonus, incentives, reimbursement of conveyance/ medical/ telephone/ benefits extended through various schemes like housing/ furniture/ Air-conditioners/ Conveyance allowance/ Special Allowance/ Vehicle Allowance


3. Contributions: I t includes the benefits offered by the company like PF, Super Annotation, Gratuity, Medical Insurance, etc. Some companies also offer Leave Encashment, Stock Option Plans and Non cash concessions.

4. Tax Benefit: It includes only Stock Options.Often, government employees complain that their salary is quite less. However, Government salaries would not seem too less if we look at it from the CTC perspective. The following are some features enjoyed by government employees at different levels as per their eligibility corresponding to their designation/ grade:

1. The 12% of basic that the government deposits in their Provident Fund accounts just like private companies.

2. Membership of government clubs or gymkhanas.3. Free stay at various hotels and government guest houses.4. Free telephone connection at home.5. Free car with driver.6. Reimbursement of newspaper bills.7. Free use of many libraries.

In case of defense personnel (Army / Navy / Air Force), a large financial support on items bought from their “canteens” (like groceries, appliances, and so on.)

Q 6- What is Executive Compensation? Mention the different components ofExecutive compensation.Answer 6- Executive compensation is the financial compensation that a top executive receives within a corporation. This includes basic salary, any and all bonuses, shares, options, and any other company benefits. Executive employees, such as chief executive officers (CEOs), chief financial officers (CFOs), company presidents, and other upper level managers are often compensated differently than those at lower levels of an organization. There are issues of pay equity and ethics associated with pay for these types of employees. Executive compensation often includes short term incentives and a share in the equity of the company. The process of selecting and hiring senior executives capable of motivating people and leading a company to its goal can be challenging. With concerned investors closely monitoring company performance, today’s businesses are under tremendous pressure to retain qualified executives once they hire them. Executive Compensation is negotiated between the potential executive and the employer. In today’s business world, executives enjoy more negotiating power than ever, as they can command a high salary and compensation plan owing to the tremendous need for capable candidates. A sound executive compensation program begins and ends with good governance and a well-established compensation philosophy, policies, and practices in line with the institutions overall goals and objectives.Three major elements in the executive compensation program:

1. Base salary: This is the basic salary paid to the executives excluding the bonuses. This is paid at the end of the month. It Includes Cash salary, Flexible benefits, Statutory benefits. While job evaluation is typically used to set employee pay in organizations, executive base salary levels are often more influenced by the opinion of the compensation committee

2. Annual incentive opportunities: Includes delivery in cash, deferral, value-added measures

3. Long-term incentive: These are performance-oriented and are taxable as per the federal law. LTIPs can be offered in the form of stock grants or options; it includes cash, shareholder value focus, referenced against peer group.

Other components of Executive compensation in detail are:


Bonuses- These are standardized in executive compensation plans, where there's often more pay for good performance. This is tied to the performance of the business area that the executive manages.Incentives such as stock options-Executives would prefer a share in the equity of the company instead of cash. The amount of stock options given to senior-level employees will depend on the type of the industry and the valuation of the company’s stock. Some companies offer executives a higher percentage of equity each year, based on company performance or shareholder return. This is issued as a form of non cash compensation, and a call option on the common stock of a company. This is offered to management as part of their executive compensation package.Deferred compensation plan-This refers to a plan established by an employer to provide benefits to an employee at a later date, such as after the employee's retirement. This is highly beneficial for the employees, with respect to tax burden. Severance package-This is an executive benefit which includes sick leave, an additional pay for the month of service and medical, dental or life insurance.Signing bonus-Signing bonus is a sum of money paid to an employee to join the company. This is paid exclusively to full time employees of a company.Flexible work schedules-This includes compressed working hours, communication facilities through any part of the world, part-time work, job sharing, and time off. This is very important in encouraging the top level employees of the organization.Prepaid compensation-This is a compensation given to the employees three or five years earlier than it actually gets payable. For example, this is similar to the prepaid balance in the mobile. It is paid in advance to retain the employees in the organization.Perquisites-This includes home entertainment allowance, club memberships, travel clubs, extra vacation, personal expense account, credit cards, and medical expense and holiday gifts and so on. Some common executive perks paid in India are: Transportation: company car or car allowance, first class air travel or company airplane usage. Financial/legal assistance: financial planning, low interest loans, tax planning and tax preparation and legal counseling Club memberships: membership in Country Club or a Health Club, Luncheon Club and so on.

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