Assignment on

C.E.O.’s
Compensation Package

Submitted By
ANAND MOHAN

(ROLL-40066)

KUNAL SHEKHAR

(ROLL-40075)

MONALISHA GUPTA

(ROLL-40077)

NEHA THAKUR

(ROLL-40080)

PGDM(09-11)

Direct and indirect monetary and nonmonetary rewards given

to employees on the basis of the value of the job, their
personal contributions, and their performance. These
rewards must meet both the organization's ability to pay
and any governing legal regulations.

Or

Compensation is the total reward received by an employee in exchange for services

performed for an organization. It can include both direct pay (salary and wages)
and indirect pay (benefits programs).

Human Resource Compensation's Objectives

The purpose of the University of Pennsylvania’s compensation system is to

achieve the following objectives:

 Evaluate jobs consistently and fairly.

 Place University staff positions in the appropriate pay grade with salary
ranges that are competitive with the marketplace for comparable jobs.
 Regularly measure the external market value for comparable jobs and adjust
the salary structures accordingly.
 Create and support a system which will provide flexibility to managers in
pay administration and to staff in career development.

 Concept of compensation-

 An organization exists to accomplish specific goals & objectives hence, hires

employees. The individuals hired by the organization have their own needs.
One is for money, which enables them to purchase a wide variety of goods &
services available in the marketplace. Hence there is a basis for an exchange:
the employee offers specific skill/behavior, behaviors desired by the
organization to meet its goals and objectives in return for money, goods, & / or
services.
 C.E.O.’s Compensation

 CEO salaries keep going UP.

 Rising CEO pay is not simply a function of what individual companies do, but
is influenced by the behavior of leap froggers at other firms."

 CEO overpayment has higher costs than previously realized. It has been argued
that even if a CEO is overpaid, a large company can easily absorb the cost.
However, the study found that CEO pay has direct consequences for
compensation at lower employee levels.

 The effects of CEO overpayment cascade down to subordinates at diminishing

degrees. For example, where one CEO was overpaid by 64 per cent, individuals
at Level 2 (chief operating officer, chief finance officer, etc.) were overpaid by
26 per cent, while individuals at Level 5 (division general managers) were
overpaid by 12 per cent. The cumulative effect of this systemic overpayment
impacts on overall organizational performance and shareholder value.

 CEO pay impacts subordinate turnover. The study found that CEOs serve as a
key reference point for employees in determining whether their own pay is fair.
If the CEO is overpaid, subordinates are more likely to leave. The turnover
effect becomes more pronounced the farther away you get from CEO level.
Even if an employee is overpaid relative to the market, they will have a greater
propensity to leave if their CEO is overpaid by a larger percentage than they
are.
 "CEO compensation impacts employee retention more than we realized. Our
research found that CEO overpayment is related to turnover, which can have
important long-term consequences. It is quite possible that those most likely to
leave because of perceived unfairness are precisely those employees coming up
in the organization that would eventually rise to the top management team
level.”

 CEO underpayment also cascades. The study found that CEO underpayment
tends to get cascaded through an organization, with multiplying effects. If the
CEO is underpaid more than you are, you are less likely to leave, but if the
CEO is underpaid less than you are, you are more likely to leave.

 Notions of fairness are powerful. The study found that CEOs tend to be
concerned with the perception of fairness. If the CEO is paid generously, they
will typically use their influence to pay others generously as well. And, if they
are seen as being underpaid, that will also have an effect.

 Powerful CEOs pay employees more. CEOs who also serve as chairman of the
board tend to pay their employees more. This effect is more pronounced at
higher levels, but diminishes at lowers levels. The effect disappeared at Level 5
(division general managers), but was strong at Levels 2 - 4 (the top
management team through the junior vice president ranks).
Overview of Penn's Salary Structure

The University of Pennsylvania employs over 10,000 individuals who perform jobs
that require a wide range of knowledge, skills, and abilities, from accountants to
veterinary technicians. Penn’s salary structures were designed with these
differences in mind. All new hires at Penn must be paid at least the minimum of
the salary grade. Most salary offers for new hires fall between the minimum and
top of first third of the salary range. Because Penn is committed to remaining
competitive in the marketplace, salary offers above the top of the first third may
occur if the candidate has a unique combination of education, experience, and
skills that well-exceed the minimum qualifications. Factors, such as the budget and
market issues are also considered when setting a salary for a new hire.

Penn's Salary Structure – Non-Exempt Positions

Hourly Rates/Salary—35 Hour Work Week

1st Hourl 2nd

Grade Min Hourly Hourly Max Hourly
Third y Third

27 42,908 23.58 54,350 29.86 65,793 36.15 77,235 42.44

26 36,363 19.98 46,060 25.31 55,757 30.64 65,453 35.96

25 30,816 16.93 39,034 21.45 47,251 25.96 55,469 30.48

24 27,083 14.88 33,402 18.35 39,721 21.82 46,040 25.30

23 22,951 12.61 28,307 15.55 33,662 18.50 39,017 21.44

22 19,450 10.69 23,989 13.18 28,527 15.67 33,065 18.17

21 18,722 10.29 22,155 12.17 25,587 14.06 29,020 15.94

Hourly Rates/Salary—37.5 Hour Work Week

 1st Hourl 2nd
Grade Min Hourly Hourly Max Hourly
Third y Third

27 45,973 23.58 58,233 29.86 70,492 36.15 82,752 42.44

26 38,960 19.98 49,350 25.31 59,739 30.64 70,129 35.96

25 33,017 16.93 41,822 21.45 50,626 25.96 59,431 30.48

24 29,017 14.88 35,788 18.35 42,558 21.82 49,329 25.30

23 24,591 12.61 30,329 15.55 36,066 18.50 41,804 21.44

22 20,840 10.69 25,702 13.18 30,565 15.67 35,427 18.17

21 20,060 10.29 23,737 12.17 27,415 14.06 31,092 15.94

Hourly Rates/Salary—40 Hour Work Week

1st Hourl 2nd

Grade Min Hourly Hourly Max Hourly
Third y Third

27 49,038 23.58 62,115 29.86 75,192 36.15 88,268 42.44

26 41,558 19.98 52,640 25.31 63,722 30.64 74,804 35.96

25 35,218 16.93 44,610 21.45 54,001 25.96 63,393 30.48

24 30,951 14.88 38,173 18.35 45,395 21.82 52,618 25.30

23 26,230 12.61 32,350 15.55 38,471 18.50 44,591 21.44

22 22,229 10.69 27,416 13.18 32,602 15.67 37,789 18.17

21 21,397 10.29 25,320 12.17 29,243 14.06 33,165 15.94

Effective April 1, 2010

 IMPORTANCE OF COMPENSATION

Compensation and Reward system plays vital role in a business

organization. Since, among four Ms, i.e. Men, Material, Machine and
Money, Men has been most important factor, it is impossible to imagine a
business process without Men. Every factor contributes to the process of
production/business. It expects return from the business process such as
rent is the return expected by the landlord, capitalist expects interest and
organizer i.e. entrepreneur expects profits. Similarly the labour expects
wages from the process.

Labour plays vital role in bringing about the process of production/business

in motion. The other factors being human, has expectations, emotions,
ambitions and egos.

Labour therefore expects to have fair share in the business/production

process. Therefore a fair compensation system is a must for every business
organization. The fair compensation system will help in the following:

o An ideal compensation system will have positive impact on the

efficiency and results produced by employees. It will encourage the
employees to perform better and achieve the standards fixed.

o It will enhance the process of job evaluation. It will also help in setting
up an ideal job evaluation and the set standards would be more
realistic and achievable.

o Such a system should be well defined and uniform. It will be apply to

all the levels of the organization as a general system.

o The system should be simple and flexible so that every employee

 would be able to compute his own compensation receivable.

o It should be easy to implement, should not result in exploitation of

workers.

o It will raise the morale, efficiency and cooperation among the workers.
It, being just and fair would provide satisfaction to the workers.

o Such system would help management in complying with the various

labor acts.

o Such system should also solve disputes between the employee union
and management.

o The system should follow the management principle of equal pay.

o It should motivate and encouragement those who perform better and

should provide opportunities for those who wish to excel.

o Sound Compensation/Reward System brings peace in the relationship

of employer and employees.

o It aims at creating a healthy competition among them and encourages

employees to work hard and efficiently.
 o The system provides growth and advancement opportunities to the
deserving employees.

o The perfect compensation system provides platform for happy and

satisfied workforce. This minimizes the labour turnover. The
organization enjoys the stability.

o The organization is able to retain the best talent by providing them

adequate compensation thereby stopping them from switching over to
another job.

o The business organization can think of expansion and growth if it has

the support of skillful, talented and happy workforce.

o The sound compensation system is hallmark of organization’s success

and prosperity. The success and stability of organization is measured
with pay-package it provides to its employees.

EMPLOYEE COMPENSATION

Employees receive compensation from a company in return for work performed.

While most people think compensation and pay are the same, the fact is that
compensation is much more than just the monetary rewards provided by an
employer. According to Milkovitch and Newman in Compensation, it is "all forms
of financial returns and tangible services and benefits employees receive as part of
an employment relationship" The phrase "financial returns" refers to an
individual's base salary, as well as short- and long-term incentives. "Tangible
services and benefits" are such things as insurance, paid vacation and sick days,
pension plans, and employee discounts.

Compensation costs have risen sharply in recent years, primarily because of

escalating benefit costs. Employers now spend more than $1 trillion on employee
benefits. In 2003 the Society for Human Resource Management reported that
benefit costs averaged 39 percent of total payroll in 2001, up from 37.5 percent in
2000. This means that, on average, employers provide about $18,000 in benefits to
each employee annually. The biggest cost increases have been in health benefits,
which have been rising at an average of 12 percent annually for the past several
years.

An organization must contain these spiraling costs if it is to get a proper return on

its human resource investment, and thus gain a competitive advantage. When
compensation-related costs escalate, the organization must find a way to offset
them. In the past, companies passed along these increases in costs to the customer
in the form of higher prices. However, most U.S. companies now find it very
difficult to raise prices.

Pay and benefits are extremely important to both new applicants and existing
employees. The compensation received from work is a major reason that most
people seek employment. Compensation not only provides a means of sustenance
and allows people to satisfy their materialistic and recreational needs, it also serves
their ego or self-esteem needs. Consequently, if a firm's compensation system is
viewed as inadequate, top applicants may reject that company's employment offers,
and current employees may choose to leave the organization. With the aging of the
U.S. workforce and the impending retirement of the "baby boomers," employers
must be more concerned than ever before about retaining skilled, productive
workers. Moreover, disgruntled employees choosing to remain with the
organization may begin to behave unproductively (e.g., become less motivated,
helpful, or cooperative).

Pay and benefits are extremely important to both new applicants and existing
employees. The compensation received from work is a major reason that most
people seek employment. Compensation not only provides a means of sustenance
and allows people to satisfy their materialistic and recreational needs, it also serves
their ego or self-esteem needs. Consequently, if a firm's compensation system is
viewed as inadequate, top applicants may reject that company's employment offers,
and current employees may choose to leave the organization. With the aging of the
U.S. workforce and the impending retirement of the "baby boomers," employers
must be more concerned than ever before about retaining skilled, productive
workers. Moreover, disgruntled employees choosing to remain with the
organization may begin to behave unproductively (e.g., become less motivated,
helpful, or cooperative).

INFLUENCE OF PAY ON EMPLOYEE

ATTITUDES AND BEHAVIOR

Because compensation practices heavily influence recruitment, turnover, and

employee productivity, it is important that applicants and employees view these
practices in a favorable light. In the following section, we discuss how people form
perceptions about a firm's compensation system and how these perceptions
ultimately affect their behavior.

One would expect that an individual's satisfaction with his or her compensation
would simply be a function of the amount of compensation received: the higher the
compensation rate, the greater the satisfaction. However, in reality things are not
that simple. In fact, the amount of pay is less important than its perceived fairness
or equity. To put this finding in perspective, consider the behavior of many
professional athletes when negotiating a new contract. The average NBA salary in
2003 was $4.9 million; the average baseball salary was $2.4 million; the average
NFL salary was $1.3 million. Yet, ball players continue to ask for more money. In
many instances, these demands stem from neither need nor greed. Rather, the
demand for greater salaries often stems from perceptions of inequity. For instance,
despite a $15 million salary, a player may feel that his pay is inequitable because a
less capable player (or someone he perceives as being less capable) is earning an
equal or greater salary.

Because equity is such an important concern, individuals responsible for

developing a firm's compensation system need to understand how perceptions of
equity are formed. Equity theory, formulated by J. Stacy Adams, attempts to
provide such an understanding. The theory states that people form equity beliefs
based on two factors: inputs and outcomes. Inputs (I) refer to the perceptions that
people have concerning what they contribute to the job (e.g., skill and effort).
Outcomes (O) refer to the perceptions that people have regarding the returns they
get (e.g., pay) for the work they perform. People judge the equity of their pay by
comparing their outcome-to-input ratio (O/I) with another person's ratio. This
comparison person is referred to as one's "referent other." People feel equity when
the O/I ratios of the individual and his or her referent other are perceived as being
equal. A feeling of inequity occurs when the two ratios are perceived as being
unequal. For example, inequity occurs if a person feels that he or she contributes
the same input as a referent other, but earns a lower salary.

A person's referent other could be any one of several people. People may compare
themselves to others:

 Doing the same job within the same organization

 Working in the same organization, but performing different jobs
 Doing the same job in other organizations

For example, an assistant manager at a Wal-Mart department store might compare

her pay to other assistant managers at Wal-Mart, to Wal-Mart employees in other
positions (either above or below her in the organizational hierarchy), or to assistant
managers at Kmart department stores.

While the mechanism for choosing a referent other is largely unknown, one study
found that people do not limit their comparisons to just one person; they have
several referent others. Thus, people make several comparisons when they assess
the fairness of their pay; perceived fairness is achieved only when all comparisons
are viewed as equitable. When employees' O/I ratios are less than that of their
referent others, they feel they are being underpaid; when greater, they feel they are
being overpaid. According to equity theory, both conditions produce feelings of
tension that employees will attempt to reduce in one of the following ways:

1. Decrease inputs by reducing effort or performance.

2. Attempt to increase outcomes by seeking a raise in salary.
3. Distort perceptions of inputs and/or outcomes by convincing themselves that
their O/I ratio already is equal to that of their referent other.
4. Attempt to change the inputs and/or outcomes of their referent other(s). For
example, they may try to convince their referent other(s) to increase inputs
(e.g., work harder for their pay).
5. Choose a new referent other whose O/I ratio already is equal to their own.
 6. Escape the situation. This response may be manifested by a variety of
behaviors, such as absenteeism, tardiness, excessive work-breaks, or
quitting.

COMPENSABLE FACTOR RATING CRITERIA

Skill/know-how Education
Experience
Knowledge

Effort Physical effort

Mental effort

Responsibility

Judgement/decision-Making
Internal business contacts
Consequence of error

Responsibility Supervisory responsibilities

Responsibility for independent action
Responsibility for machinery/equipment
Fiscal responsibility
Responsibility for confidential information

Working conditions Risks Comfort

Physical demands
Personal demands

This approach to job evaluation is difficult and time-consuming. However, most

organizations believe that it is well worth the effort. If properly conducted, the
overall score for each job should reflect its relative worth to the organization, thus
enabling the firm to establish internal consistency.
CONTEMPORARY COMPENSATION ISSUES

Modern organizations are making very significant changes in their compensation

systems in order to better fit the dynamic, highly competitive business
environment. Firms increasingly are using things such as skill-based pay, which
compensates employees for the number and types of skills they possess instead of
the type of job they have. Similarly, there is a strong movement to "at-risk"
compensation, where employee pay is tied to performance. Under this system, the
employee's bonus does not become part of his or her base pay. Instead, the bonus
must be re-earned each year. These changes, and numerous others, are designed to
help offset compensation costs by gains in productivity, and to develop more
flexible workforces.

Compensation structure

In network marketing, the framework of relationships between the firm and its
independent agents, and among the agents themselves, on the basis of which
commissions are computed and along which they are passed on.

The Ideal Organizational Structure for Compensation

An organization's compensation program focuses on two major objectives. First, it

must identify the right pay programs to recognize and reward desired behaviors.
Second, it must decide how to organize work procedures to make the best use of
available resources.

In meeting this second objective, an organization must determine whether to

manage the compensation function on a centralized or decentralized basis. This is a
complex issue because the management of the pay program must be consistent
with both the strategy of human resources and the mission of senior management.

A centralized approach is best when an organization seeks to promote a one-

company image and has a single structure and a consistent way of implementing its
pay program. This approach enables the organization to cut down on duplication of
activities and lessen an organization's needs for outside consultants and vendors.

A decentralized approach with an indirect link to corporate headquarters has a total

line orientation that is highly responsive to the demands of the operating units.
Under the line manager's direction, each operating unit runs an independent salary
management program. This approach is appropriate for organizations that have
diverse strategic objectives and compete in different markets for both customers
and employees.

Determining the "right" compensation structure for the organization depends on

many factors. The article includes types of questions one might ask in considering
how best to organize the compensation function to support the company's strategy.

What’s Wrong in this Compensation Structure??

Compensation rates (both basic and cash/ non-cash benefits) are being designed in
every company with a sound basis. They are not just drawn out of nowhere. They
also need top management approval before it can be implemented because of its
impact on the company's profitability and operational budget.

As such, HR practitioners would do well to be familiar with the four (4) basic
compensation principles, namely: internal equity, external competitiveness,
affordability, and sustainability.

HR practitioners must also realize that regardless of the size of their organization,
no company will just give out anything unless the said rate or benefit are generally
being given out by others in the industry where the company belongs and/ or the
said rate/ benefit is mandated by law or the union CBA.

Hence, HR practitioners must learn how to do compensation benchmarking and the

use of compensation market data in the industries where they belong.

What is compensation package?

The compensation package comprises of monetary and non –monetary that
includes salary and special allowances, house rent allowances travel allowances,
mobile allowances ,employee stock options, club membership, accommodations,
retirement benefits and other benefits(insurance employee discounts, extended
leaves and retirement programs).
The basic goal of any compensation system
 To retain high quality employees
 To stimulate high performance
 To attract high quality employees

Total pay = direct (basic pay and incentives) +indirect compensation (benefits)

SALARY PACKAGE FOR JUNIOR MANAGERS

DESIGNA A(BA B(BENEFI C(PERFORM D(RET E(VALU AVER

TION SIC TS AND ANCE PAY ) IRAL ED AGE
SALA REIMBUR BENE PREQUI ANNU
RY) SEMENT) FITS) SITE) AL
CTC
MINIMU 11655 11774 1000 1959 0 316658
M
AVERAG 20443 19926 5173 3608 1641 609498
E
MAXIMU 17616 40507 9779 2961 17420 105939
M 6

 Retention payments

 Retention payments are designed to ensure senior executive continuity

particularly during times of organizational change. For example, a hospital that
is involved in a merger may offer retention bonuses to senior managers to
encourage them to stay with the organization as the merger proceeds to
completion.

 In another common scenario, an organization whose CEO is nearing

retirement may offer retention payments to a small group of senior
executives to encourage them to stay with the organization until a new CEO
is hired.
  The typical retention offer is a cash payment of a predetermined amount or a
percentage of salary payable to executives who remain with the organization
for a specific period of time. The retention package provides a promise of
financial support in return for commitment to the organization, but it does
not obligate the CFO to stay with the organization. He or she still has the
option to leave before the end of the specified term, forgoing the retention
payment.

 The purpose of compensation is not to “motivate” the right behaviors from

the wrong people. Compensation should be reasonable because it is part of
human nature to expect fair treatment when it comes to compensation, which
should be somehow proportional to our efforts and/or results. This sense of a
fair deal seems to be genetically anchored. Other primates also respond with
aggression or anger when they feel unfairly treated

Salary Snapshot for Chief Executive Officer (CEO) Jobs

Popular Industries Salary Range
Information Technology (IT) Services Rs 861,739-Rs 5,226,122
Financial Services Rs 1,001,357 - Rs 5,305,421
Logistics Rs 817,617 - Rs 5,105,549

Manufacturing and Distribution Rs 895,699 - Rs 5,323,739

Mechanical Engineering Services Rs 831,775 - Rs 4,789,123

Key Statistics for Chief Executive Officer (CEO) Jobs

Gender
 Female Male
5%   95%

Years of Experience
Less than 1 year 1%

1-4 years 6%

5-9 years 8%

10-19 years 40%

20 years or more 45%

Most Common Health Benefits

Medical: 71% Dental: 20%

Vision: 16% None: 28%

Some Highlights of Compensation of CEOs in India:

Naveen Jindal is India's highest paid CEO

According to report in The Economic Times, Jindal has received Rs 39.70 crore as
commission, salary and other perks during 2009-10. 
Recently, Kishore Biyani of Future group had offered Rs 50 crore (Rs 500 million)
to V Vaidyanathan to shift base to Future Capital Holdings from ICICI Prudential
Life Insurance. This is undoubtedly the highest salary for an Indian non-promoter
CEO.

India's richest business tycoon Mukesh Ambani decided to take a pay cut two
years ago to take home an annual salary of Rs 15 crore (Rs 150 million).

 CONCLUSION

Decisions concerning compensation issues are some of most critical decisions

faced by organization today, because of their influence on-:

- Organizational survival growth

- Employee perceptions of fairness and equity

Remuneration has now become the central issues for attracting and retaining
employees across industries. The compensation within the industry has also
undergone a sea change over the past couple of years due to phenomenal growth in
the entire sector.