Compensation Management in corporates &

components of compensation

Introduction:-

Human Resource is the most vital resource for any organization. It is responsible for each and
every decision taken, each and every work done and each and every result. Employees should be
managed properly and motivated by providing best remuneration and compensation as per the
industry standards. The lucrative compensation will also serve the need for attracting and
retaining the best employees. 

Compensation is the remuneration received by an employee in return for his/her contribution to

the organization. It is an organized practice that involves balancing the work-employee relation
by providing monetary and non-monetary benefits to employees.

Compensation is an integral part of human resource management which helps in motivating the
employees and improving organizational effectiveness. 

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. 

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.
Compensation Oval:

Components of compensation:-

Compensation systems are designed keeping in minds the strategic goals and business objectives.
Compensation system is designed on the basis of certain factors after analyzing the job work and
responsibilities. Components of a compensation system are as follows:

                      

Types of Compensation

Compensation provided to employees can direct in the form of monetary benefits and/or indirect
in the form of non-monetary benefits known as perks, time off, etc. Compensation does not
include only salary but it is the sum total of all rewards and allowances provided to the
employees in return for their services. If the compensation offered is effectively managed, it
contributes to high organizational productivity.

Direct Compensation
Direct compensation refers to monetary benefits offered and provided to employees in return of
the services they provide to the organization. The monetary benefits include basic salary, house
rent allowance, conveyance, leave travel allowance, medical reimbursements, special
allowances, bonus, Pf/Gratuity, etc. They are given at a regular interval at a definite time. 

Basic wages/Salaries:-

This refers 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 practised 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 prevelant 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 retiral benefits.

House Rent Allowance 

Organizations either provide accommodations to its employees who are from different state or
country or they provide house rent allowances to its employees. This is done to provide them
social security and motivate them to work. 

Conveyance

Organizations provide for cab facilities to their employees. Few organizations also provide
vehicles and petrol allowances to their employees to motivate them. 

Leave Travel Allowance 

These allowances are provided to retain the best talent in the organization. The employees are
given allowances to visit any place they wish with their families. The allowances are scaled as
per the position of employee in the organization. 

Medical Reimbursement 

Organizations also look after the health conditions of their employees. The employees are
provided with medi-claims for them and their family members. These medi-claims include
health-insurances and treatment bills reimbursements. 

INDIRECT COMPENSATION
Indirect compensation refers to non-monetary benefits offered and provided to employees in lieu
of the services provided by them to the organization. They include Leave Policy, Overtime
Policy, Car policy, Hospitalization, Insurance, Leave travel Assistance Limits, Retirement
Benefits, Holiday Homes.
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.
Leave Policy

It is the right of employee to get adequate number of leave while working with the organization.
The organizations provide for paid leaves such as, casual leaves, medical leaves (sick leave), and
maternity leaves, statutory pay, etc.
Overtime Policy

Employees should be provided with the adequate allowances and facilities during their
overtime, if they happened to do so, such as transport facilities, overtime pay, etc.

Hospitalization

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

Insurance

Organizations also provide for accidental insurance and life insurance for employees. This
gives them the emotional security and they feel themselves valued in the organization. 

Leave Travel 

The employees are provided with leaves and travel allowances to go for holiday with their
families. Some organizations arrange for a tour for the employees of the organization.
This is usually done to make the employees stress free. 

Retirement Benefits

Organizations provide for pension plans and other benefits for their employees which
benefits them after they retire from the organization at the prescribed age.

Holiday Homes

Organizations provide for holiday homes and guest house for their employees at different
locations. These holiday homes are usually located in hill station and other most wanted
holiday spots. The organizations make sure that the employees do not face any kind of
difficulties during their stay in the guest house.

Flexible Timings

Organizations provide for flexible timings to the employees who cannot come to work
during normal shifts due to their personal problems and valid reasons.
 
Sickness benefits/pregnancy:-

The increasing  social consciousness of corporates 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.

Need of Compensation Management

 A good compensation package is important to motivate the employees to increase the

organizational productivity.
 Unless compensation is provided no one will come and work for the organization. Thus,
compensation helps in running an organization effectively and accomplishing its goals.
 Salary is just a part of the compensation system, the employees have other psychological
and self-actualization needs to fulfill. Thus, compensation serves the purpose.
 The most competitive compensation will help the organization to attract and sustain the
best talent. The compensation package should be as per industry standards.

Conclusion:-

The whole idea of compensation management can be better understood through the following
Pyramid structure.