compensation and benefits- revised
TRANSCRIPT
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Compensation and Benefits
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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 isborne in whole or in part by the employer.
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Compensation System
Components
Source of figure: Fisher, Schoenfeldt, & Shaw (2003), Figure 12.1
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Compensation and Benefits
Compensation System Components
Equity Issues
Equity Theory Pay Systems
Market-Based Pay
Job Evaluation Pay Systems Pay Policy Issues
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Compensation Overview
Q1: What are the basic goals of anycompensation 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
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Compensation Overview
Q3: What are the basic tools of anycompensation 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.
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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)
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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 otherorganizations
B. Pay-Structure Decision:
How do we determine differences in pay for various jobs in ourorganization?
Comparison: Employees working on different jobs within the
organization
C. Individual Pay Determination:
How do we determine how much to pay various people in ourorganization?
Comparison: Employees working on the same jobs within theorganization
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A. Pay-Level Decisions
Wage and salary surveys are one of themajor tools used to make externalcomparisons
Decision points:
Which jobs to make comparison for?
What is the appropriate labor market?
Which organizations to survey?
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B. Pay-Structure Decisions:
Pay-structure decisions are typicallymade 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 worthof various jobs within an organization
Q: Why do job evaluation?
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Four Types of Job Evaluation Systems
1. Ranking Systems
2. Classification (Job Grade) Systems
3. Point Systems4. Factor Comparison Systems
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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 rankedjobs
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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
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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
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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 jobsthat are used to set pay
Example of compensable factors: skill, effort,
responsibility, and working conditions
Jobs for which market pay data is available
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C. Individual-Pay Determination:
On what do we base our individual
pay determination?
performance
seniority
??? (politics, non-job relevant issues)
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Equity Issues
Individual Equity: comparisons acrossindividuals in the same job in the same
organization
Example: In a retail store, is the paydifference 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?
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Equity Issues (contd.)
External Equity: comparisons of similarjobs 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)
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Equity Theory
Source of figure: Fisher, Schoenfeldt, & Shaw (2003), Figure 12.2
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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
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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 relevantlabor 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
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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
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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
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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 addingup the pay from each compensable factor
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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
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Job Evaluation Pay Systems
Point Method (contd.)
Define a factor scale for each
compensable factor
Factor scale: define in words different levels (ordegrees) of the compensable factor Example: Factor scale for knowledge:
1st Degree: reading & writing; adding & subtracting of
whole numbers; following instructions; no interpretation
2
nd
Degree: arithmetic with decimals & fractions; usingmeasuring 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
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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
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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 oneach 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
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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 beingevaluated
Jobs for which market pay data is available
Identify the relevant labor market for each
benchmark job
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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 relevantlabor 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
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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 todetermine the pay ranges for each job
(benchmark and non-benchmark jobs)
Optional: create pay grades
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Broad banding
Definition:
Broad banding (or 'broad grades') is theconsolidation of traditional pay structures,
consisting of many, narrow pay rangesinto a few, wider ranges or bands.
Purpose:
Broad banding is intended to supportagile, flatter, faster-paced, de-bureaucratized organizational cultures.
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Use of Broad-banding
Broad-bands are imperative for companies with competency-based payprograms, but are also used in companies with longevity- andperformance-based pay programs.
Companies employ broad banding to:
facilitate change
avoid multiple pay structures drive pay decision-making downward (empowering managers)
provide greater latitude in management pay decisions
promote lateral moves or in-grade promotions
reduce use of promotions to increase pay
promote career development / learning
reduce the need for precise job analysis/evaluation
promote fewer, broadly-defined jobs
focus on the person instead of the job
facilitate quick responses to changing goals
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Structure of Broad- banding
Companies adopting a broadband structure
generally reduce the number of salary
ranges by one-half to two-thirds.
Most broad-banding companies use 10
bands:
2 for the executive level
4 for the managerial and professional level
4 for the non-managerial or hourly
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Prevalence:
Broad-bands (and career bands) are stillviewed as a novel approach to pay, yet to
be proven workable. While companiescontinue to move to broadband payprograms, anecdotal reports indicate thatmany early-adopters are returning to moretraditional (albeit relatively wide) paystructures.
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Broad- banding
Success:
Successful use of broad-banding requires that:
top management has a clear goals, understands the pros and cons,commitment
all managers are mature and highly trained in HRM and compensation
Pitfalls:Before moving to broad-banding, companies should consider the following:
Broad-banding demands that managers are aware of, and can interpret,market pay data
Broadband control points are not precise for individual jobs
Broad-banding increases the potential for employees to float to the top ofthe band, way out of sync with the market
Broad-bands lack the automatic cost-control mechanism inherent in narrowpay ranges
Broad-banding eliminates the possibility for precise job analysis/evaluation
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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)
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ESOP
Employee Stock Ownership Plans
(ESOPs) involve granting some ownership
stake in the company to employees (some
or all) with a view to creating ownership
attitudes and aligning their interests with
that of the company and its shareholders.
ESOPs can be in the form of Stock OptionPlans, Phantom Equity Plans and Stock
Purchase Plans.
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Stock Options
Under a Stock Option Plan a company grants to an employee theright (option) to buy a certain number of shares in the company at afixed price for a certain number of years (option period). The fixedprice is called the 'grant' or 'strike' or 'exercise' price and is typicallythe market value / fair value of the shares on the date of grant. Sincethe grant price remains fixed over the term of the option, the
employee expects that the share price would increase and he wouldgain by exercising his option at a lower price.
Before the employee can exercise the option he is usually requiredto complete the vesting period (or fulfill other vesting restrictions)which typically require that he continue to work for the Company fora minimum number of years (three to five years) before part or all of
the options can be exercised. Many a times, certain performancetargets are set before the options can be exercised
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Phantom Equity Plans (PEPs)
Phantom Equity Plans (PEPs) or Stock AppreciationRights (SARs) provide employees with one or morebenefits of stock ownership without actually making theman actual owner. It is a performance based incentive thatis linked to the performance of the company as a wholeas reflected in its Share Value. An employee who hasPhantom Equity Stock can receive the upside benefits ofstock ownership, without having to invest any money andthereby eliminating an owner's risk of losing invested
capital. PEPs/SARs are used where the existing owners,say in a closely held company, do not intend partingownership control, but nevertheless intend to derivebenefits of an ESOP.
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Stock Purchase Plans
Stock Purchase Plans are generally usedin listed Companies, wherein theemployees are given the right to acquire
shares of the company at a price lowerthan the prevailing market price. Thediscount could vary from 5% to 25% and isexpected to act as a sufficient incentive for
the employee to acquire the stock, therebycreating ownership attitudes and a focustowards corporate performance
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The current legal framework setting up ESOPs in India
The entire legal framework for setting up ESOPsis now in place. Indian Companies Act permitsgrant of shares and sweat equity to employees.SEBI has also announced detailed guidelines for
grant of Stock Options and Stock PurchasePlans by listed companies. The taxability ofgains arising out of exercise of stock options etc.has been clarified through necessaryamendments to the Indian Income Tax Act. The
Reserve Bank of India also permits employeesof Indian subsidiaries of foreign companies toacquire shares of the foreign holding company.
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Basis of ESOPs to various
employeesSome companies grant
the same number of options etc. across theboard to all employees.
Most grant it on the basis of salary and gradelevels. It is possible to set /fine tune the grantlevels on performance criteria which may be setat an individual level, group a division level or forthe company as a whole.
Essentially ESOPs are a pay-for-performancerewards - the level of grants should be calibratedon the extent of performance and responsibilityhandled
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Leverage the power ofESOPs
Successive research in the USA and elsewherehas shown that employee ownership can bringphenomenal results, if sharing ownership isaccompanied by a committed effort to create a
culture in which employees are trained andencouraged to think and perform like owners.Educating employees about the plan, thebroader aspects of business, providing relevantinformation and encouraging employees to
make informed decisions are some of the keyelements in deriving the best mileage from anESOP.
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Why do companies set up
ESOPs forEmployees ?
It is a tremendous motivator and can get employees highly involvedin their jobs and focused on corporate performance.
It is vital tool to attract and retain quality employees, fostering inthem long term attitudes.
As a compensation tool, ESOPs offer rewards that can exceed theexpectations of employees but are still affordable to the company asthey are highly performance driven.
Internationally, ESOPs are used for granting retirement benefits toemployees and as succession plan for owners.
Increasingly, sheer competition dictates setting up ESOPs foremployees.
Strategically, economically, financially or philosophicallyESOPs are a win-win combination.
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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.
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Accident / Health care Benefits
The employee benefits realized through these
services include:
Enhancing workplace safety
Decreasing the risk of employee injuries Improving employee health and morale
Decreasing turnover
Minimizing workers comp and healthcare costs
Increasing productivity
Saving money
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Accident / Health care Benefits
Corporate health promotion programs can bring a positivereturn on investment
The company needs to build their investment strategies byanalyzing :
What type of return on our wellness Rupee investmentdo we expect?
What degree of investment are we willing to place ondeveloping our employee health asset?
Are we willing to invest in the long or short-term based onexpected returns?
Requirements of the Business to adhere to regulations/compliances
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Some Accident /Health care
benefits
Health education & awareness
Dieticians for their canteen menu
Medical room / sick bay manned by qualified
staff Importance of work life balance
Healthy life style changes
Medical insurance for spouse, children &
parents ( dental / vision coverage) Accident insurance( disability / death) covers for
groups/ individual and families of employees
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I T I T R t / Sl b 2007 08
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Income Tax - Income Tax Rates/ Slab 2007-08
PERSONALTAX RATES
For individuals, HUF, Association of Persons (AOP) and Body of
individuals (BOI):
Up to 1,10,000 NIL
Up to 1,45,000 (for women)
Up to 1,95,000 (for resident individual of65 years or above)
1,10,000 1,50,000 10%
1,50,001 2,50,000 20%
2,50,001 1,000,000 30%
1,000,001 upwards 30*%
A surcharge of 10% of the total tax liability is applicable where the total income exceeds Rs 1,000,000.
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Profession Tax
Who is liable to pay Profession Tax
(a) Every person getting salary or earning wages about Rs.5000/- permonth
(b) All legal practitioners including solicitors and Notary public standingin profession for more than 5 years in Municipal Area and more than10 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, andcontractors whose business exceeds Rs.1 lakh.
(g) clearing agents, customs agents, licensed shipping brokers
(h) Owners and lessee of beauty parlors, health resorts, slimmingcenters, air conditioned hair dressing saloon.
(i) Technical and professional consultants, tax consultants, charteredaccounts, cost accountants.
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Profession Tax
Profession tax is different from state to state.
Maharashtra it is:
if the salary is less than Rs. 2500 nil
2500- 3500 60/-3500- 5000 120/-
5000-10000 175/-
10000 & above 200/-
Ref: Maharashtra state tax on trade, callings and employment act, 1975
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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 directlyprovided to employees
consisting of benefit, amenity, facility, free/concessionaltickets & contribution to approved superannuation fund
section 115WB(1). Deemedfringe benefits to employees on certain
expenditure incurred by employer as specified insection 115WB(2).
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Fringe Benefits Tax
Deemed Fringe BenefitsSection 115WB(2) Value of FringeBenefits
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 50 %
Health club & similar facilities
Any other Club facilities
Gifts
Scholarships
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CTC or cost to company
Cost to Company can also be used to refer to the total cost that anorganization is spending towards their employee including theSalary, 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