COMPENSATION MANAGEMENT

Definition:

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 existance of
the company. Compensation may be adjusted according the 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 advertize 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 value 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 expence of satisfaction and morale. Conversely, an employer wishing to
reduce employee turnover may seek to increase salaries and salary levels.

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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 predetermined 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

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Overtime Pay

Bonuses, Profit Sharing, Merit Pay

Stock Options

Travel/Meal/Housing Allowance

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

What are regulations affecting compensation?

FLSA

Compensation Plans
Develop a program outline.

Set an objective for the program.

Establish target dates for implementation and completion.

Determine a budget.
Designate an individual to oversee designing the compensation program.

Determine whether this position will be permanent or temporary.

Determine who will oversee the program once it is established.

Determine the cost of going outside versus looking inside.

Determine the cost of a consultant's review.

Develop a compensation philosophy.

Form a compensation committee (presumably consisting of officers or at least including one

officer of the company).

Decide what, if any, differences should exist in pay structures for executives, professional
employees, sales employees, and so on (e.g., hourly versus salaried rates, incentive-based
versus noncontingent pay).

Determine whether the company should set salaries at, above, or below market.

Decide the extent to which employee benefits should replace or supplement cash compensation.

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Conduct a job analysis of all positions.

Conduct a general task analysis by major departments. What tasks must be accomplished by
whom?

Get input from senior vice presidents of marketing, finance, sales, administration, production, and
other appropriate departments to determine the organizational structure and primary functions of
each.

Interview department managers and key employees, as necessary, to determine their specific job
functions.

Decide which job classifications should be exempt and which should be nonexempt.

Develop model job descriptions for exempt and nonexempt positions and distribute the models to
incumbents for review and comment; adjust job descriptions if necessary.

Develop a final draft of job descriptions.

Meet with department managers, as necessary, to review job descriptions.

Finalize and document all job descriptions.

Evaluate jobs.

Rank the jobs within each senior vice president's and manager's department, and then rank jobs
between and among departments.

Verify ranking by comparing it to industry market data concerning the ranking, and adjust if
necessary.

Prepare a matrix organizational review.

On the basis of required tasks and forecasted business plans, develop a matrix of jobs crossing
lines and departments.

Compare the matrix with data from both the company structure and the industrywide market.

Prepare flow charts of all ranks for each department for ease of interpretation and assessment.

Present data and charts to the compensation committee for review and adjustment.
Determine grades.

Establish the number of levels - senior, junior, intermediate, and beginner - for each job family
and assign a grade to each level.

Determine the number of pay grades, or monetary range of a position at a particular level, within
each department.

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Establish grade pricing and salary range.

Establish benchmark (key) jobs.

Review the market price of benchmark jobs within the industry.

Establish a trend line in accordance with company philosophy (i.e., where the company wants to
be in relation to salary ranges in the industry).
Determine an appropriate salary structure.

Determine the difference between each salary step.

Determine a minimum and a maximum percent spread.

Slot the remaining jobs.

Review job descriptions.

Verify the purpose, necessity, or other reasons for maintaining a position.

Meet with the compensation committee for review, adjustments, and approval.
Develop a salary administration policy.

Develop and document the general company policy.

Develop and document specific policies for selected groups.

Develop and document a strategy for merit raises and other pay increases, such as cost-of-living
adjustments, bonuses, annual reviews, and promotions.

Develop and document procedures to justify the policy (e.g., performance appraisal forms, a merit
raise schedule).

Meet with the compensation committee for review, adjustments, and approval.
Obtain top executives' approval of the basic salary program.

Develop and present cost impact studies that project the expense of bringing the present staff up
to the proposed levels.

Present data to the compensation committee for review, adjustment, and approval.

Present data to the executive operating committee (senior managers and officers) for review and
approval.
Communicate the final program to employees and managers.

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Present the plan to the compensation committee for feedback, adjustments, review, and approval.

Make a presentation to executive staff managers for approval or change, and incorporate
necessary changes.

Develop a plan for communicating the new program to employees, using slide shows or movies,
literature, handouts, etc.

Make presentations to managers and employees. Implement the program.

Design and develop detailed systems, procedures, and forms.

Work with HR information systems staff to establish effective implementation procedures, to

develop appropriate data input forms, and to create effective monitoring reports for senior
managers.

Have the necessary forms printed.

Develop and determine format specifications for all reports.

Execute test runs on the human resources information system.

Execute the program.

Monitor the program.

Monitor feedback from managers.

Make changes where necessary.

Find flaws or problems in the program and adjust or modify where necessary.

Case Study Tata Consultancy Services

EVA and Compensation Management System at Tata Consultancy Services

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Abstract:
The case examines the compensation management system at TCS based on the EVA
model. With the implementation of EVA based compensation, the salary of employees
comprised of two parts - fixed and variable.
The variable part of the salary was arrived after considering Corporate EVA, Business unit
EVA and also individual performance EVA. The new system was implemented successfully
and it helped the company identify the non-performers.
The company also benefited a great deal in retaining talent. However, it also received
criticism from several quarters for 'putting golden handcuffs on excellent performers.'

Issues:
ails
Study the compensation management system at TCS
Analyze EVA as a performance measurement tooln
Introduction
During the first quarter of the financial year 2005-06, about 1000 employees whose performance was
not up to the mark were asked to leave Tata Consultancy Services (TCS), the largest IT company in
India. HR experts believed that this decision was based on the implementation of the EVA3 based
model for assessing employees' contributions, at the company.

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The first two year cycle of EVA had

just been completed when the
retrenchment decision was taken.
Those who were asked to leave
had obtained low ratings in their
performance appraisal for two
consecutive years, despite being
under mentorship. At a time when
IT manpower was in short supply
and IT and BPO companies were
going out of their way to reduce
employee attrition, TCS's decision
to retrench employees made
headlines in several Indian news
dailies. On April 19, 2005, TCS
announced its annual results for the
fiscal 2004-05. The company
declared total revenues of US$ 2.24
billion and net profit of US$ 0.51
billion. TCS had been the first
Indian IT company to achieve the
US$ 1 billion revenue milestone in
the fiscal 2002-03.

It continued its success story when it became the first Indian IT company to earn revenues of more
than US$2 billion per annum.

S. Ramadorai (Ramadorai), CEO & Managing

Director of TCS commented, "Consistent with
our position as the pioneer of the Indian IT
industry, TCS is proud to be the first IT
Company to cross the two billion dollar
milestone. Through our strategic initiatives we
have managed to double our revenues in the
last two years. We are alive to the challenges
facing the industry and are geared to enhance
our leadership position."4 TCS aimed at
earning revenues of US$ 5 billion by 2010.
The EVA compensation model was used as a
basis for giving incentives to employees and
the bonus declared was a part of improved
EVA achieved. In the EVA model, the
components of fixed and variable pay were
determined. Fixed pay comprised of wages
and pension while the variable pay had
components like bonus, profit sharing and
stock options.
1According to Ramadorai, "There's no ceiling on the bonus. It can be equal to the fixed
portion of the salary, providing the cell has shown that kind of EVA growth. It is not just compensation,
we wish our employees to also get a feeling of ownership for their own unit, and its performance. We

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want each employee to feel as if they are running their business. They have to think like entrepreneurs
and know the cost attached to their business and how will they add value to the investment
Background Note
TCS started operations in 1968, as a division
of Tata Sons Limited, one of Asia's largest
business conglomerates, with a wide range of
interests in engineering, telecommunications,
energy, financial services and chemicals. The
initial journey in the IT business was not easy
for TCS.
During the first two decades of its operations,
TCS faced many hurdles due to the rigid
government licensing system, which made it
difficult to import computers. Describing the
difficulties in doing business during those
times, Ramadorai said, "It would take us two
years in India and almost a year in the US to
get all the clearances we needed to import
computers. By the time we got the approvals,
the model of the computer would have
changed.

Then we had to explain to Indian customs officers that model numbers don't mean much, etc. But they
would say, go back and get the license amended. On top of that, we had to pay 300 per cent import
duties and give export commitments that were sometimes 250 per cent the value of the computers we
were importing. Those were painful processes. Very few companies would have persisted through all
of that."6

F C Kohli (Kohli) was the first CEO of TCS

(from 1972 - 1996). In 1969, the company had
10 consultants and 200 operators who carried
out IT assignments in Tata group companies.
One of the first assignments that TCS
undertook was the punch card managements
system for Tata Iron and Steel Company
(TISCO). One of the first projects done for
external clients was the Inter Bank
Reconciliation System (IBRS) for Central
Bank of India in 1969. TCS worked on similar
project for 14 other banks, and also went on to
work for municipal authorities and telephone
companies. During the 1970s, TCS aimed at
serving foreign clients, mainly to improve its
own systems and procedures, as the foreign
clients demanded high service quality and
capability...

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The HR Policies
TCS gave utmost importance to its human resource function. The company believed in the premise
that "good ideas can come from any level of the organization and teams can do better than the
individuals."

The mission statement of HR division at TCS states, "The role of HR is to provide the context for
energizing and developing people to play effective roles in ensuring that TCS becomes one of the top
global consulting firms. Towards achieving this we will identify, develop, facilitate, and measure the
human and technological processes in the pursuit of excellence. We will foster the values of the TATA
group." (Refer Exhibit II for Vision, Mission and Values of TCS).
In TCS, the HR division acted as a facilitator. The company had institutionalized all HR processes.
TCS firmly believed that recruiting the right people was the secret of success of any organization
especially when the supply of talent was much below the demand...

The EVA Model

TCS adopted EVA in 1999, when the company had a staff of around 15000, working at several
locations across the world. Through the EVA model, TCS aimed at creating economic value by
concentrating on long term continuous improvement.

EVA measured operating and financial

performance of the organization and the
compensation of all employees was linked to
it. TCS went in for the EVA as during that time,
the company was not a public limited
company and hence could not have a stock
option plan. There were several people who
played an important role in the success of the
organization, who needed to be recognized.
As there was no wealth sharing mechanism in
place, EVA was adopted to focus on
continuous improvement rather than short
term goals and also to motivate employees.
Commenting on this, S Mahalingam
(Mahalingam), CFO and Head Global Finance
for TCS said, "We wanted to construct a
defined incentive system, which would reward
on the basis of profitability...
EVA-Linked Compensation System
In 1996, TCS was organized into a three dimensional model with the first dimension comprising of
industry practices, which included engineering, transportation and telecom; the second dimension
comprising of service practices like e-business, outsourcing, technology consulting; while global and

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regional operating areas formed the third dimension.

A business unit could be a part of a service, a practice, a geographical unit or a combination of all the
three. Every unit was considered to be a revenue center and had its own EVA target. The units that did
not fall under the purview of any of these were corporate offices and research & development, the
costs of which were divided among all the units. Through EVA-linked compensation, employees could
claim stakes at three EVA levels - at the organization level, at the business unit and the individual
level. The individual was informed how he or she could contribute to the EVA enhancement at all three
levels. EVA was controlled by revenues, capital and costs, and an individual could contribute in any or
all of these areas at all the three levels...

The Benefits
The benefits of EVA were realized across all levels in the organization. Employees became aware of
their responsibilities and their share in increasing the EVA of the unit and organization. All the units
could determine how they had fared against the targets.

The bonus banks also helped in sustaining performance from the individuals, with close relationship
between pay and performance. There was an increased sense of belonging among the employees
and the employees were motivated to increase their contribution as they were also equally benefited
by the increase in EVA.
EVA was not just a performance metric but an integrated management process aimed at achieving
long term goals. One of the major benefits of implementing EVA in TCS was increased transparency in
the organization. The internal communication within a unit had increased considerably. The decision
making process became more decentralized...
The Drawbacks
The EVA-based compensation system received severe criticism during the initial years of its
implementation. Industry analysts commented that EVA concentrated mainly on return on investments,
due to which the growth of TCS could be restricted. In 2003, TCS caused an uproar in the IT industry
when it reduced the variable salaries of employees by 10%. This was the initial impact of EVA which
was implemented in the company from April 01, 2003. The reduction in the variable salary resulted in
an overall reduction of monthly take-home salary for most of its employees...
Case Intro 2
Exhibits
Exhibit I: Goal Setting and Balanced Scorecard Perspectives
Exhibit II: TCS - Mission, Vision and Values
Exhibit III: Components of TCS EVA Incentive
Exhibit IV: Best IT Employers in India
Exhibit V: TCS Employee Satisfaction (2003-04)
Exhibit VI: Top 15 Companies in Businessweek Information Technology 100 Rankings (2005)

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