compensation

COMPENSATION

"If you pick the right people and give them the opportunity to spread their wings - and put

compensation and rewards as a carrier behind it - you almost don't have to manage them."

-Jack Welch

Compensation (meaning)

Compensation is a systematic approach to providing monetary value to employees in

exchange for work performed. Compensation may achieve several purposes assisting in

recruitment, job performance, and job satisfaction.

How is compensation used?

Compensation is a tool used by management for a variety of purposes to further the

existence of the company. Compensation may be adjusted according the business needs,

goals, and available resources.

Compensation may be used to:

Recruit and retain qualified employees.

Increase or maintain morale/satisfaction.

Reward and encourage peak performance.

Achieve internal and external equity.

Reduce turnover and encourage company loyalty.

Modify (through negotiations) practices of unions.

Recruitment and retention of qualified employees is a common goal shared by many

employers. To some extent, the availability and cost of qualified applicants for open

positions is determined by market factors beyond the control of the employer. While an

employer may set compensation levels for new hires and advertise those salary ranges, it

does so in the context of other employers seeking to hire from the same applicant pool.

Morale and job satisfaction are affected by compensation. Often there is a balance

(equity) that must be reached between the monetary values, the employer is willing to

pay and the sentiments of worth felt be the employee. In an attempt to save money,

employers may opt to freeze salaries or salary levels at the expense of satisfaction and

morale. Conversely, an employer wishing to reduce employee turnover may seek to

increase salaries and salary levels.

Compensation may also be used as a reward for exceptional job performance. Examples

of such plans include: bonuses, commissions, stock, profit sharing, gain sharing.

What are the components of a compensation system?

Compensation will be perceived by employees as fair if based on systematic components.

Various compensation systems have developed to determine the value of positions. These

systems utilize many similar components including job descriptions, salary

ranges/structures, and written procedures.

The components of a compensation system include:

Job Descriptions A critical component of both compensation and selection

systems, job descriptions define in writing the responsibilities, requirements,

functions, duties, location, environment, conditions, and other aspects of jobs.

Descriptions may be developed for jobs individually or for entire job families.

Job Analysis The process of analyzing jobs from which job descriptions are

developed. Job analysis techniques include the use of interviews, questionnaires,

and observation.

Job Evaluation A system for comparing jobs for the purpose of determining

appropriate compensation levels for individual jobs or job elements. There are

four main techniques: Ranking, Classification, Factor Comparison, and Point

Method.

Pay Structures Useful for standardizing compensation practices. Most pay

structures include several grades with each grade containing a minimum

salary/wage and either step increments or grade range. Step increments are

common with union positions where the pay for each job is pre-determined

through collective bargaining.

Salary Surveys Collections of salary and market data. May include average

salaries, inflation indicators, cost of living indicators, salary budget averages.

Companies may purchase results of surveys conducted by survey vendors or may

conduct their own salary surveys. When purchasing the results of salary surveys

conducted by other vendors, note that surveys may be conducted within a specific

industry or across industries as well as within one geographical region or across

different geographical regions. Know which industry or geographic location the

salary results pertain to before comparing the results to your company.

Policies and Regulations

What are different types of compensation?

Different types of compensation include:

Base Pay

Commissions

Overtime Pay

Bonuses, Profit Sharing, Merit Pay

Stock Options

Travel/Meal/Housing Allowance

Benefits including: dental, insurance, medical, vacation, leaves, retirement,

taxes...

Compensation Tips: Everything is Negotiable

It's all negotiable. Every new job -- every performance review, in fact -- is an opportunity

to negotiate base salary, various kinds of bonuses, benefits, stock options, and other

incentives that add to job satisfaction and provide financial security. Taking control of

your job search and conducting a smart search that takes into account more than just

financial considerations can also lead to that elusive condition called happiness. Are you

prepared to negotiate for happiness?

The negotiation process is an opportunity to define, communicate, and achieve what you

want. But to get the right job that pays what you deserve, you'll need to do your

homework. The first step in the negotiation clinic is to understand the negotiation basics.

Negotiation requires gathering information, planning your approach, considering

different alternatives and viewpoints, communicating clearly and specifically, and

making decisions to reach your goal. “The author Maryanne L. Wegerbauer” In her book,

describes how each party in a negotiation can fulfill specific needs and wants of the other

party, a concept called "relative power." According to Wegerbauer, understanding your

strengths and resources; being able to respond to the needs of the other party; and

knowing your competition enable you to assess your bargaining position more accurately.

Learn the power factors

What is your power over the other side of the table? Relative power, Wegerbauer says, is

a function of the following.

Business climate factors

Overall state of the economy and the industry in which you compete

Overall unemployment rate and the general employment picture

Demand for industry- and profession-specific knowledge and skills

Company factors

Profitability

Position in the business cycle (startup, growing, stable, turnaround)

Hiring manager factors

Urgency of the company's need to fill the position

Decision-making authority

Staffing budget

Applicant factors

Other opportunities

Technical expertise, unique knowledge/skill set

Resources (financial depth, networks, etc.)

Level of competition/availability of other candidates

Career risk

Plan and communicate

A negotiation is composed of two major steps: planning (research and strategy) and

communication (information exchange and agreement. In the planning step, get as much

information as you can up front and, using both the company's written and unwritten

signals, map your skills against what the company values.

Give it time

Timing is also important. Remember that the best time to negotiate is after a serious job

offer has been made and before you have accepted it. Once you are clear about the initial

offer, you can express interest and even enthusiasm, but ask for more time to consider the

job offer. Wegerbauer suggests that this request is made "in light of the importance of the

decision." Sometimes you can split up the negotiating session into two meetings: one to

firm up the job design and responsibilities and the second to go over compensation and

benefits. The key message here is not to make an impulsive decision. If they really want

you, there's time.

Consider the alternatives

You should be prepared with a rationale for everything to strengthen your position.

Counteroffers are an expected part of many negotiations, so be sure to remain flexible.

Keep in mind that different companies can give negotiations more or less latitude.

Smaller companies may be more flexible than large, bureaucratic companies. Unionized

companies usually have very little room for individual negotiations.

Negotiate for a win-win

Remember that the negotiation is not about strong-arm tactics or win/lose. It is a two-way

process where you and your prospective employer are each trying to get something you

need. In a negotiation, you're both designing the terms of a transaction so that each of you

will receive the maximum benefit from the final agreement.

Above Source: By Linda Jenkins, Salary.com

Compensation trends in India

India’s transition to a market driven economy began in 1991 with the introduction of

liberalization (pro-market economic reforms). Prior to 1991, the Government was (and

still is) the biggest employer and job creator, accounting for over 85% of post-

matriculation (High School) jobs. Pay was largely determined by high-level agreements

between employee unions and the Government and was largely guaranteed in nature. A

similar situation was prevalent in the private sector, where Government pay scales were

often used as a benchmark in fixing and revising pay. Compensation packages were low

on cash and high on fringe benefits such as accommodation, cars, and subsidized loans.

Variable pay was largely restricted to top and senior management in few private sector

enterprises. Grading systems were largely industry-wide and salary progression was

purely determined by length of service.

Current trends

Productivity gains (4% in 2003-04), fast growth in real wages (40% over the last 5 years),

a booming but extremely competitive economy (GDP growth of 6%), simplification of

tax rules and emergence of knowledge-based industries such as Information Technology

& Outsourcing Services, Healthcare etc are key factors that have influenced

compensation in India post liberalization. Compensation is now characterized by a Total

Cost of Employment approach, a rapid movement to flexible benefits, and increasing

levels of variable pay (variable pay now forms about 7% - 35% of fixed pay). Grade

structures have become organization specific and salary progression is driven by market

forces and individual performance. Average salary increases over 2003-04 ranged from

5% - 20%. The average increase was 11%. While most organizations benchmark

compensation nationally within a select group of competitors, a few organizations are

beginning to benchmark themselves internationally at senior management levels. India

has the fastest compensation increase rate in the Asian region at 11.7% and it also has the

highest labour turnover in the region.

Different compensation plans - how do they affect your financial results

With the introduction of FRS 102 Share-based Payment, companies are required to

recognize the expenses of employee equity compensation schemes with effect from 1

January 2005. This article highlights the major implications to the financial results of the

three most common equity compensation schemes, namely share option scheme,

performance shares scheme, and Share Appreciation Rights (SAR, also known as

phantom share scheme).

Key Characteristics

The key characteristics of each scheme are as follows:

Share option scheme

The company grants employees the right to subscribe for new shares in the

company at a fixed price.

Employees are required to pay the company the exercise price in consideration for

the shares.

Employees can generally only exercise the right after remaining in service with

the company for a period of time and/or after meeting certain performance targets.

The right would generally expire after a period of 5 to 10 years from the date of

the grant.

Performance share scheme

The company grants employees shares in the company.

Employees will generally receive the shares, at no cost, after remaining in service

with the company for a period of time and/or after meeting certain performance

targets.

Share Appreciation Rights

Similar to the share option scheme except that:

Upon exercise of the option, the employees do not pay the exercise price to the

company nor receive the shares; instead, they are paid the difference between the

exercise price and the market price of the shares in cash.

While all three schemes require the use of fair values of the share options or shares for

the recognition of the compensation expense over the vesting period, the impact on the

company’s financial position and financial results is different.

Impact on net assets

The three schemes have a different effect on the net asset values of companies. Under

FRS 102, share option scheme and performance share scheme are considered “equity-

settled”. This means that in recognizing an expense for the compensation costs, a

corresponding increase in shareholders’ equity is recognized. Hence, the net asset

position of the company is unchanged. In contrast, obligations under SAR schemes are

considered liabilities of the company, as there would be a cash settlement when the right

is exercised. The recognition of the compensation cost under SAR results in a decrease in

the net asset of the company.

IMPACT ON EARNINGS VOLATILITY

(1) Revaluation of share options/shares during life of grant

With share option and performance share grants, fluctuations in the values of the share

options and shares during the life of the grant do not affect the results of the company.

This is because the measurement of the share option or share is determined at the date of

the grant and is not subsequently revalued. In contrast, for SAR, the company is required

to revalue the SAR at every reporting date until the right is settled or expires. This is

because the company has to measure its liability (cash payment to employees) at the

expected settlement amount. Hence, SAR schemes create more volatility to the financial

results. In addition, more resources are also required to perform the revaluation at every

reporting date.

SAR will continue to impact earnings even after the vesting period because the liability is

re-measured until the exercise date.

(2) Treatment of unvested rights

The compensation cost is a function of number of options or shares that are expected to

vest by the vesting date and the fair value of the option or share. In estimating the number

of options or shares expected to vest, only non-market based conditions, which are not

based on the market performance of the shares, are considered. These non-market based

conditions include the continuance of service over a period of time, and the meeting of a

certain revenue target. If no employees meet the non-market based vesting condition by

the vesting date, the company does not incur any expense. No performance shares would

be issued for performance share schemes and no share options or SAR would vest. If

share options or SAR are vested by vesting date, the financial impact of the two schemes

is different.

For share option schemes, if the share options are not subsequently exercised by the

employees (for instance, because the options are out of the money), the company is not

allowed to reverse the expenses already charged to the income statement. For SAR

schemes, the liabilities are stated at the expected cash settlement. If the SAR is not

subsequently exercised, the company is allowed to reverse the expenses previously

charged to the income statement.

Impact on Tax

Regardless of the above changes, charges to an entity’s income statement relating to

share option or performance share schemes, in form of capital or notional cost (such as

cost of options granted), are not tax-deductible. Compensation charges that represent

actual outgoings (cash outflow or actual liability) to the company may be deductible such

as the buying back of its own shares, i.e. treasury shares, to satisfy the obligation to the

employees.

In addition, such share-based compensation costs must be directly related to the

employee’s employment compensation benefits in Singapore to be tax-deductible. The

compensation costs to the entity should match the services rendered by the employee to

the same entity. Certain steps must be taken to support the claim for a deduction.

Impact on Earnings Per Share

Share option and performance share grants have a dilutive effect on EPS, as shares will

be issued. For SAR schemes, shares are not issued; hence there is no dilutive effect on

EPS.

Moving forward

Prior to the implementation of FRS 102, the design of the share compensation plan is

often dependent on non-financial factors as the company is not required to recognize an

expense on the equity instrument granted. However, with the implementation of FRS

102, it is critical for companies to consider and analyse the financial impact, arising from

the design and structure of the scheme, at an early stage.

REWARDS AND BENEFITS AT IBM

Whether you're joining IBM as a fresh graduate or a seasoned professional, we believe

that everyone who works here should feel valued and appreciated. That is why we offer a

Total Compensation package that includes both Cash Compensation and Benefits.

Cash compensation

We want to ensure that IBM continues to attract, retain and motivate high-performing

people. As such, we offer a cash compensation structure that will recognise your specific

skills and business expertise. After all, they allow us to deliver best-of-class solutions for

our clients. Our compensation structure takes different forms to reflect individual

performance levels. It includes Base Pay, Fixed Bonuses, Allowances, or Other Payments

relevant to the local market. Performance Bonus and Sales Incentives may also be

included in your total cash compensation, and are used to ensure you are paid

competitively within the market.

Performance bonus

Another principle we follow to attract, motivate and retain the most talented employees is

to offer a Performance bonus. If you are a regular employee, you will have some portion

of your annual compensation tied directly to business results. This is to ensure you

receive the appropriate recognition and rewards.

Global recognition program

This is the pinnacle of sales excellence within IBM! We want you to know that we value

your contributions and appreciate your leadership. Our Global Recognition Program is

designed to bring out your best, and encourage you to inspire and motivate others.

Employee stock purchase plan

Since 1958, IBM has offered stock purchase plans because we believe in the value of

employee ownership. All regular employees, including IBMers who are regular part-

timers, are eligible to participate in the plan if they choose. Let's grow the company

together!

Note: Governmental regulations may prohibit offering the plan or may dictate different

plan provisions in certain countries.

Healthcare, well-being and personal benefits

We offer a range of personal benefits such as medical schemes, dental schemes, health

screening, wellness programmes, retirements and insurance programmes. You may even

be able to include your spouse/partner and dependants under your coverage for greater

peace of mind. We try to be as flexible as possible, so you choose what is appropriate for

your personal needs.

Flexibility and work-life balance

Quite simply, you are IBM's key to business success. We are committed to creating a

workplace culture and environment in which you can balance your career with your

personal priorities. We offer a number of programmes, ranging from staggered work

hours to working from home to part time regular work, which give you the opportunity to

achieve a better work/life balance.

Additional programmes

You will find that many of the benefits at IBM are designed to make life a little easier

and a lot more fun! IBM offers employees various discounts for goods and services -

IBM Personal Computer Purchase, Housing Assistance Purchase Plan, Car Purchase

Assistance Plan, Child Care Services, Mobile Phone Plans, Fitness Centres, and

Educational courses. You are also automatically eligible to join our many recreational,

social and cultural clubs, and events. Best of all, they're not just for you, but for your

entire family as well.

Staggered working hours

If you would prefer to work from home or start later in the day, you can at IBM. We give

you the flexibility to manage your work hours, so you can meet the needs of your

personal life.

COMPENSATION & BENEFIT PRACTICES, PROGRAMS, AND POLICIES.

Employee Benefits:

Benefit Plan Costs

Health Care Plans

(PPO, POS, HMO, HSA)

Dental Care Plans

Retirement Plans

Flexible Benefit Plans

Disability Benefit Plans

Group Life & AD&D Insurance Plans

Benefits for Part-Time Employees

Domestic Partner Benefits

Employee Policies and Programs:

Paid-Time Off (PTO)

Alternative Work Schedules

(including Telecommuting)

Recruiting and Hiring

Hiring Bonuses

Referral Bonuses

Retention Bonuses

Severance Practices

Workplace Environment

Career Planning & Professional

Development

Military Leave Policy

Benefit Plan Costs

Benefit Costs as Percent of Payroll

o Medical, Dental, Vision, Disability, Life, AD&D Plans

o Retirement Plans

Benefits Costs as a Monthly Amount Per Employee

o Medical, Dental, Vision, Disability, Life, AD&D Plans

o Retirement Plans

Health Care Plans (PPO, HMO, POS)

Monthly Premiums

o Premium Cost

o Percent of Premiums Paid by Company

Deductibles

o Percent of Plans with Deductibles

o Annual Deductible Amounts

Coinsurance

o Percent of Expense Covered by Plan

Out-of-Pocket Maximums (OOP)

o Percent of Plans with OOP Maximums

o Annual OOP Amounts

Lifetime Reimbursement Limits

o Percent of Plans with Lifetime Limits

Office Visit and Prescription Co-Payments

Domestic Partner Medical Benefits

HSA Qualified Health Plans

Impact on Other Healthcare Options

Monthly Premium Costs

Percent of Premiums Paid by Company

Annual Deductibles

Out-of-Pocket Maximums (OOP)

Lifetime Reimbursement Limits

Prescription Expense Coverage

Company Contributions

Dental Care Plans

Types of Dental Plans Offered

Timing of Employee Eligibility to Enroll

Expenses Covered

Costs of Monthly Premiums

Percent of Monthly Premium Paid by Company

Deductibles and Co-Insurance

Out-of-Pocket (OOP) Maximums

Orthodontic Expense Coverage

Orthodontic Reimbursement Limits

Retirement Plans

Types of Retirement Plans Available to Employees

o Defined Benefit Plan

o 401(k)

o Simple-IRA

o Profit Sharing Plan

o ESOP

o SEP-IRA

o Salary Reduction SEP

Eligibility Requirements

When do Employee Contributions Fully Vest

Retirement Plan Costs

o as a Percentage of Payroll

o per Employee

401(k) Matching Policy

Flexible Benefit Plans

Premium Conversion/Premium Only Plan (POP)

Unreimbursed Medical Expenses (UME)

Dependent Child Care Expenses (DCC)

Dependent Adult Care Expenses (DAC)

Adoption Assistance Expenses (AAE)

Cafeteria Plan

Transportation Benefit Plan

Disability Benefit Plans (Short- and Long-Term)

Who Pays the Premium

Eligibility for Disability Benefits

Waiting Periods

Duration of Plans

Setting Amount of Disability Benefits

Disability Payouts

Group Life & AD&D Insurance Plans

Group Life Plans

o Benefit Amounts

o Cost Coverage

o Supplemental Life Insurance

Accidental Death & Dismemberment (AD&D) Insurance

o Benefit Amounts

Benefits for Part-Time Employees

Benefits Available

Work Requirements for Eligibility

Covering the Costs

Domestic Partner Benefits

Domestic Partner Healthcare Benefits: Coverage

Eligibility Requirements

Employee Policies and Programs covered:

Paid-Time Off Policies

Number of Days Paid Time Off Provided by Type of Day:

o Holidays

o Floating Holidays

o Sick Days

o Vacation Days

o Personal Days

o Annual Leave Pool

o Other Paid Time Off

Number of Days Paid Time Off Provided by Type of Model:

o Traditional Model with Specified Sick Leave

o Traditional Model without Specified Sick Leave

o Annual Leave Model

Treatment of Unused Paid-Time Off:

o Unused Vacation Days

o Unused Sick Days

o Unused Annual Leave Days

o Time Limits on the Use of Carried-Over Paid Time Off

o Accrual of Paid Time Off

o Upon Termination

Alternative Work Schedules

Types of Alternative Work Schedules Offered:

o Telecommuting

o Flexible Work Hours

o Compressed Work Weeks

o Job Sharing

o Part-time Professional Employment

Eligibility

Productivity of Employees in Alternative Work Schedules

Methods Used to Monitor Productivity

Tools/Assistance Provided to Telecommuting Employees

Requirements for Telecommuting Employees

Recruiting and Hiring

Recruiting Budgets

Recruiting Sources

Job Posting Websites

Recruiting Tools

Interviewing Applicants

Pre-Employment Testing

Pre-Employment Screening

Referral Bonuses

Referral Bonus Eligibility by Employee Type and Level

Referral Bonuses Awarded by Type of New Hire

Referral Bonus Payments by Type of Hire

Amount of Referral Bonus

Timing of Referral Bonus Payouts

Hiring Bonuses

Hiring Bonus Eligibility by Employee Type and Level

Calculating Hiring Bonuses

Hiring Bonus Amounts by Employee Type and Level

Timing of Hiring Bonus Payouts

Hiring Bonus Forfeiture and Repayment Policies

Retention Bonuses

Retention Bonus Eligibility by Employee Type and Level

Calculating Retention Bonuses

Retention Bonus Amounts by Employee Type and Level

Payment of Retention Bonuses

Severance Practices

Severance Practices by Company Size

Calculation of Severance

Severance Pay Amounts

Placement Services Offered

Release Agreements

Trends in Severance Amounts

Workplace Environment

Dress Codes

Work Space Allocation

Company Sponsored Events and Activities

Career Planning and Professional Development Programs

Career Planning Programs

o Conference Attendance

o Professional Memberships

o Tuition Reimbursement

o Trade Journal Subscriptions

o Technical Career Ladders

o Job Rotation / Cross Training

o Management Succession Planning

o Formal Mentoring

Tuition Reimbursement

o Course Requirements to Receive Tuition Reimbursement

o Conditions of Tuition Reimbursement

Professional Development Programs

o Management or Supervisory Skills

o Leadership Development

o Project Management

o Interpersonal Communication

o Team Building

o Conflict Management

Training Budgets



Key Compensation Components

Compensation has become a far more complicated issue than just deciding how much to

pay your employees. In addition to salary, employers must consider many other

components — 401(k) plans, stock options, bonuses and vacation — that have become

part of compensation packages today.

Employees also have greater expectations of what should be included in their

compensation packages, and they may demand specific benefits that can be costly for

small businesses.

Costly or not, building a fair and attractive compensation packages is critical for

attracting and retaining employees. When setting up your compensation package,

consider the following components:

Salary and wages. This is usually the single largest component of a compensation

package and, not surprisingly, the most common point of comparison used by employees

and potential employees. Salary should be tied to a person's skills and experience.

Subsequent increases need to be based on an employee's performance, value and

contribution to an organization.

Check salary surveys and want ads, and scout out competitors to see if they are

underpaying or overpaying their staff. Paying too much is an unnecessary drain on your

resources, but paying too little will make it difficult to find and keep the best people.

Bonuses. Employee bonuses, which are usually paid in a single lump at the end of the

year, are one way of providing performance incentives. Profit-sharing plans are a more

formal way of doing this, but they're not as effective for rewarding individual

performance and compensating employees for meeting their goals.

Long-term incentives. Stock options or stock grants not only provide long-term

incentives to employees, but they can also help retain valuable team members through

your organization's crucial start-up phase.

Health insurance. Employer-sponsored health insurance is fairly standard among

medium-size companies. And it's a benefit that has great value to employees. An

employer-sponsored plan saves employees money and gives them peace of mind in

knowing that they won't be denied coverage, even if they have existing health problems.

If you think you can't afford it, think again. Providing insurance to your employees sends

the message that you care about their health and the health of their families. To minimize

costs, consider having employees pick up part of the tab. Employees who have coverage

through a spouse may want to opt out of a plan, particularly if there's a cost associated

with it.

Life and/or disability insurance. This is also a benefit that usually costs less when it's

purchased by an employer rather than an individual.

Retirement plans. 401(k) plans have become popular because they are relatively easy to

administer and are less expensive than traditional pension plans. Many employees like

these plans because they maintain some control over the amount of their contribution and

how the money is invested. Most small companies try to put some kind of savings or

401(k) plan in place, even if they don't contribute money to them.

Time off and flexible schedules. This includes holidays, vacations, sick days and

personal days. An employer unable to offer competitive salaries may close part of the gap

by offering more time off or flexible work hours. Some employers make no distinction

between sick, vacation and personal days and allow employees a set number of days off

each year to be used at their discretion. This prevents employees from abusing sick days

and keeps employees from feeling that they need to lie when a child is ill or a personal

emergency arises.

Miscellaneous compensation. Other forms of compensation to consider include

employee assistance programs, which can provide everything from psychological

counseling to legal assistance; discounts on company products; use of a company cars;

and any other incentives that motivate employees and give your company a competitive

advantage.

Compensation package of a top executive

The total compensation package of a top executive will generally have some

Combination of the following components: base salary, short-term bonus based on

Performance over the past twelve months, long-term bonus based on performance over

the past 3-5 years, stock options (qualified and/or non-qualified), restricted stock, stock

purchase and profit sharing. Everything in addition to base salary is not typical of what

the average worker receives, and each item should be examined in dividable. On op of

the above there will also be a pension, all the usual insurance (health, dental, disability,

life) and special fringe benefits ranging from tax preparation to country club membership.

Any practicing economist who has ever dealt with the compensation package of a highly

paid executive will have an understanding of the complexities involved in valuation,

compared to a normal wage earner.

SOURCE

http://www.culpepper.com/eBulletin/RecentHTGCSArticles.asp

http://asia.vault.com/companies/localesurveylists.jsp? country=India&acount=1