Compensation, Its benefits and challenges confronted in

Banking sector of pakistan:

Shehroz Habib
1155-2017
(MBA 2.5)
Faculty of Management Science
Indus University Karachi
Shehrozhabib003@gmail.com

Contents Page No.

Introduction 3
Literature review 4
Compensation 5
Direct compensation 6
Indirect compensation 6
Benefits of compensation 7
Challenges of compensation 7
State bank of Pakistan 9
Compensation practice at state bank Pakistan 10
Conclusion 18

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Abstract:
The objective of this report is to determine the benefits and challenges related
to compensation in banking sector of Pakistan. The report is descriptive and it
covers the various forms of direct (employee’s pay, short and long term
incentives, organizational performance award etc) and indirect (paid leave,
insurance, retirement income and various employee benefits).

Keywords:
Compensation, Benefits, Challenges, banking sector

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Introduction:
When talking about compensation, we usually mean the payment received by an
employee from an employer in the form of a salary, wages, benefits and variable
pay. However, it’s important to note that compensation can also refer to money
that is paid to someone for something that has been lost or damaged, such as
“workers compensation” for unemployed or injured workers. It can also refer to a
payout as the result of a lawsuit. In a more general sense, compensation can
mean anything of value given to make up for a loss, such as a paid dinner to
“compensate you for your time and trouble”. In this sense, compensation is a
counterbalance. Compensation usually takes the form of monetary payment
exchanged for time, labor and expertise.

The different types of compensation include:

 Salary
 Hourly Wages
 Sales Commission
 Tips
 Stock Options
 Bonuses
 Incentive Pay
 Other Variable Pay
 Benefits (healthcare, paid leave, etc.)
 Non-monetary compensation (recognition, meals, etc.)

Compensation may refer to the direct and indirect benefits that a worker receives
from an employer. The term also refers to how much somebody has to pay a
victim for wrongdoing. That wrongdoing may have resulted in damage to property
or injury to a person.

When it refers to an employee’s pay package, we call it compensation and

benefits. Successful employers develop programs that outline equitable processes
to reward their workers and executives.

Employers structure their pay and benefit packages to attract the best employees.
They also try to structure them so that their workers stay in the company.
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Problem Statement:
Compensation and benefits is a primary motivator for employees. Nowadays,
people look for a job not only suit their creativity and talents, but compensate
them- both in term of salary and other benefits-accordingly. Therefore, when the
problems occur to the compensation and benefits of the staffs are going to have
impact on employee’s job satisfaction. When the staffs receives the salary less
than they expected, they will feel that their efforts are not appreciated by the
organization and what they did is meaningless. So, the staff will feel job
dissatisfaction and less motivated by the organization. According to the Society
for Human Resources Management report, job dissatisfaction can contribute to
multiple organizational problems and has been associated with increased levels of
turnover and absenteeism, which ultimately cost the organization in terms of low
performance and decreased productivity. (SHRM, 2009) Thus, employer must
ensure that the compensation and benefits system is fair and equitable to all the
staffs and understanding the system. By doing so, employer can create a real job
satisfaction and motivate their employees.

Literature Review:
This research examines the relationship between compensation benefits and
challenges in healthcare industry of Pakistan. In order to gain a better
understanding about this issue, an examination of literature on related study
were carried out. This chapter will consist of Definition of compensation,
compensation benefits and challenges, direct compensation (Monetary benefits)
and indirect compensation (Non-monetary benefits). For thoroughly capturing the
significances of compensation and benefits, the selection related literature is
explained in detail. And, the relationship between compensation and benefits and
job satisfaction among healthcare staff is being discussed and explored in the
following sections by using some nations and different industry for examples.
Last, the comprehensive review of all the related studies will be provided.

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Compensation:
Compensation has been defined in a variety of ways. In English, “compensation” is
defines as something that counterbalances, offsets, or makes up for something
else’s. However, if we look at the origin if the word in different languages, we can
get a sense of the richness of the meaning, which combines entitlement, return,
and reward (Atul, Matt & George, 2002; Mark, 2002; Mansour, Peter, Mary, &
Robert, 2006). In Japanese, compensation is defines as kyuyo, which is made up of
two separate character (kyu and yo), both meaning “giving something”. Besides,
in China, the traditional characters for the word “compensation” are based on the
symbols for logs and water; compensation provides the necessities in life
(Milkovich & Newman, 2008).

According to Deluca (1993) and Rajkumar (1996), compensation is defines as pay,

reward, remuneration, or salary and wage management. These terms are often
used interchangeably in organization. In an organization perspective,
compensation is often defines as an important human resource management
function where it emphasizes planning, organizing, and controlling various types
of pay systems. For example, direct and indirect payments, monetary and non-
monetary rewards and cash and non-cash payments, those compensation is used
for rewarding employees who perform in their work or service (Noe, Hollenbeck,
Gerhart & Wright, 2004). In this research, compensation refers to all forms of
financial returns and tangible services employees receive as part of employment
relationship. It can be seen as a measure of justice. Normally, it is the major
source of employees’ financial security (Milkovich & Newman, 2008).

Zhou, Qian, Henan and Lei (2009) stated that compensation provides competitive
base salary levels necessary to attract and retain talent and compensates for day-
to-day responsibilities performed at fully acceptable level and above. Chen and
Brian (2004) propose that the types of compensation typically contain the
following components base salary, overtime pay (OT), bonuses, commissions, the
dollar value of restricted stock awards and gains from exercising stock options,
profit sharing, and so on.

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Direct Compensation (Monetary benefits):
The well-recognized form of compensation, and probably the first type of
compensation sought by most workers, is direct compensation. Direct
compensation is the money directly paid to employees in exchange for their
labor. Direct compensation includes wages, salaries, bonuses, tips and
commissions.
One of the easiest ways to induce employees to stay with the company is to
increase direct financial compensation. This may mean increased hourly wages or
salaries. Alternatively, may opt to increase variable pay, which is pay that has to
be earned by performing to some standard. For example, employer may offer
performance pay for each employee that meets his or her quarterly performance
goals.

Indirect compensation (Non-monetary benefits):

Indirect financial compensation is a benefit given to an employee that has
financial value, but is not a direct monetary payment. It is often referred to as a
non-cash benefit. In certain circumstances, these non-cash benefits may be more
valuable to an employee than a high salary or wage. Let's take a quick look at
some examples.

Group medical insurance coverage is often a coveted benefit. Employer-

sponsored medical insurance may be the only way an employee with a sick
spouse can afford health insurance and offers quite an inducement to come
aboard and stay with the company. Employer can examine the organization’s
current group plan and make sure it's up to par and perhaps beat what the other
organization is offering. Supplementing group medical with group dental
coverage, short-term and long-term disability insurance, and life insurance can
provide employees with a sense of security for themselves and their families.

Retirement plans can also offer an attractive incentive. If a company offers a

defined benefit plan, it's promising to pay a certain amount of retirement benefits
to an employee upon the employee's retirement. You can think of it like a private-
sector social security payment - a set amount each month for life.

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Benefits of compensation:
Employers know that keeping quality employees requires providing the right
compensation and benefits package. Compensation includes wages, salaries,
bonuses and commission structures. Employers shouldn't ignore the benefits
portion of employee compensation and benefits, because the benefits sweeten
employment contracts with the priorities that most employees need. Some of the
benefits of providing good compensation package are:
 Increased motivation level
 Boost employee loyalty
 Increased productivity and profitability
 Job satisfaction and so on..

Challenges of compensation:
Compensation is more than providing a paycheck and cost of living increases. In
many organizations, employee performance relative to organizational goals
serves as the basis for compensation. Whether brought on by economic
difficulties, changes in technology or other business factors, human resources
departments face challenges in effective compensation management.

Forms of Pay
Employee pay begins with a cash base and bonus pay, but may also contain non-
cash forms of compensation. The valuation of non-cash compensation is often
most difficult for employees to appreciate, but it offers the most opportunity for
creativity on the part of the organization.

Underlying Pay Philosophy

“All organizations pay according to some underlying philosophy about jobs and
the people who do them, Compensation programs must consider and value the
work of those who provide internal support to the organization as well as those
who directly impact financial results. An organization’s compensation strategy will
dictate the rate and timing of pay increases, which jobs are eligible for bonuses,
and the level of competitiveness with similar organizations.

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Employee Incentives and Compensation
Pay-for-performance has become increasingly popular. Companies use
compensation to reward and boost the morale of high-performing employees, but
also to motivate underachievers.

Presentation of Compensation
How a manager speaks regarding pay can inadvertently create ill will when the
intention was to deliver good news. It is important to use specifics when speaking
with employees rather than categorize any pay increase as “good”, “significant”
or some other qualifier. Employee perceptions of compensation are based on
individual values, needs and expectations.

Offering Competitive Pay

Businesses wishing to compete for the best of the available talent pool must offer
a competitive compensation program compared to other companies within their
industry and at large.

Automation and Outsourcing

Automating compensation, including outsourcing some compensation functions,
enables businesses to standardize its system throughout the organization,
eliminate paperwork and help departments to communicate more effectively. It
minimizes payroll errors and makes it easier to compensate performance based
on quantifiable measures. Organizations may also use technology to benchmark
jobs and survey employees.

Generational Differences in Expectations

People are living longer, and thus, working longer. In a look at physician
compensation, Max Reibolt of The Coker Group noted a difference in work ethic
and expected compensation that fell along generational lines. Older workers were
more likely to work longer hours in exchange for their pay while younger workers
expected high levels of pay even when their productivity was aided by
technology.

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Multinational Business Operations
Multinational corporations must balance the needs and expectations of
employees from various countries. Compensation must balance conformity with
local laws and customs against global corporate policies.

Controlling Labor Costs

Labor costs often constitute the largest line in a corporation’s budget. In a tight
economy, companies are faced with a flat, if not shrinking, pool of funds. The cost
of labor is broader than the amount paid to employees, taking into account
recruitment, training, turnover, infrastructure and overhead, and the impact of
these things on productivity.

State bank of Pakistan:

Introduction:
The state bank of Pakistan is a central bank of Pakistan. Before independence the
reserve bank of India is now the state bank of Pakistan. The state bank of Pakistan
act 1956 with subsequent amendments forms the basis of its operations today.
The headquarters are located in Karachi whereas the bank has a fully owned
subsidiary with the name SBP Banking Services Corporation (SBP-BSC) which is the
operational arm of the central bank and has branch offices in 15 cities across
Pakistan, including the capital city Islamabad and the four provincial capitals and
has head office in Karachi. State bank has other fully owned subsidiaries as well
namely, I) National Institute of Banking and Finance (NIBAF) which is the training
arm of the bank and also provides training to commercial banks, 2) Deposit
Protection Corporation (DPC) and recently SBP was given ownership of 3) Pakistan
Security Printing Corporation (PSPC) as well.

History:
Before independence on 14 August 1947, during the British colonial era, the
Reserve Bank of India was the central bank for both India and Pakistan. On the
30th of December 1948 the British Government's commission distributed the

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Reserve Bank of India's reserves between Pakistan and India—30 percent (750 M
gold) for Pakistan and 70 percent for India.
The losses incurred in the transition to independence, the small amount taken
from Pakistan's share (a total of 230 million). In May 1948 Muhammad Ali Jinnah
(Founder of Pakistan) took steps to establish the State Bank of Pakistan
immediately. These were implemented in June 1948, and the State Bank of
Pakistan commenced operation on July 1, 1948.

Compensation management practice at state bank of Pakistan:

Compensation and benefits is the most pivotal element affecting an organization’s
overall performance. It is directly related to employee’s commitment with the
organization and leading organizations always use it as a tool to attract and retain
the most talented human resource capital.
State Bank provides matchless intrinsic as well as extrinsic motivations for
development of the professionalism. Following is a brief of motivations provided
to its employees by the State Bank of Pakistan:
A. SALARY STRUCTURE

B. FRINGE BENEFITS

 Staff loan policy

 Facility of outstanding duty
 Facility of bank’s car ceiling
 Medical facility
 Telephone charges at residence
 Facility of newspaper and journal
 Group term assurance
 Cash awards for acquiring
 Retirement policies
 Professional/Academic qualification
 Family pension
 Gratuity
 Benevolent fund scheme
 Grant from the fund gift to retiring employee

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General Salary structure:
(Officer Cadre)
Salary Grade Minimum (pkr) Maximum (pkr)
OG-7 58,500 135,300
OG-6 43,400 109,300
OG-5 40,200 103,000
OG-4 36,500 95,000
OG-3 30,000 83,000
OG-2 25,000 67,500
OG-1 16,481 47,850

(Support Staff Cadre)

Salary Grade Minimum (pkr) Maximum (pkr)
S-7 14,400 37,400
S-6 13,838 34,500
S-5 11,903 31,600
S-4 10,733 29,000
S-3 9,675 24,500
S-2 8,573 20,300
S-1 8,100 18,700

(Specialized Salary Structure)

level Minimum (pkr) Maximum (pkr)
Entry 40,000 80,000
Middle 60,000 120,000
Higher 80,000 150,000
Managerial M-1 or M-2 M-1 or M-2

Core Benefits (applicable across salary structure):

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 1. Medical
 Full medical facilities for self, spouse, children and dependent
parents as per bank rules.
 Also, applicable to retired employee

2. Rest & Recreation Leave & Allowance

 15 days leave with 50% of monetized salary as Rest & Recreation
Allowance each year for Officers.

3.Leaves
 All officer-grade employees earn leaves for every 6 working day.
 All support-grade employees earn leaves for every 5 working days
 Leaves earned can be accumulated up to 40 per year for Officer-
grade employees
 Leaves earned can be accumulated up to 72 per year for Support-
grade employees.
 Upon accumulation of leave balance, the employee can proceed to
perform Hajj once in the entire service
 90 days maternity leaves (exclusive of regular leaves) are allowed to
all female employees subject to maximum of three times.

4. Staff Loans
 Personal loan (Interest free) to meet emergencies up to 03
monetized salaries payable in a maximum period of 2 years.
 House Building Loan / Car Loan up to 60 monetized salaries payable
in the entire remaining service (up to 60th birthday of employee).
The bank on behalf of the employees free of cost also insures this
loan without charging of premium from employees
 Computer loan of PKR 70,000 (maximum) payable in the entire
remaining service

5. Group Term Assurance (GTA)

 Group term assurance covers the employee as under

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 Salary Ranges (pkr) Sum Assured (pkr) Life insurance premium
(pkr)
55,001 and Above 1,50 0,00 0 312.50
37,501 to 55,000 1,00 0,00 0 208.33
18,001 to 37,500 800, 000 166.67
Up to 18,00 600,000 125.00

6. Annual Merit Increases

 Annual Merit Increase (AMI) for the year 2005 is paid as per following
schedule:
For Employees in Grade OG-1 and Below:
AMI for employees in grades OG-1 and below has been determined on
the basis of their average marks awarded by the reporting and finalizing
officers as per following grid:

Range of Marks AMI

49-50 4.5%
47-48 4%
41-46 3%
11-40 2%
0-10 Nil

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For Employees in Grades OG-2 to OG-5:
AMI for employees in grades OG 2 to OG 5 has been determined on the basis of
placing the absolute performance ratings of employees as reported by their
respective appraisers in appropriate clusters and thereafter categorizing these
ratings in accordance with Bell Curve principles into four appraisal categories as
follows:
Appraisal category AMI
A = Outstanding Performers 9%
B+ = Above Average 7%
B = Fully Satisfactory 5%
C = Below Average 1.5%

For OG – 7 Employees:
AMI for OG- 7 employees is at a uniform rate of 6 %.
For Employees in Separate Salary Structure for Specialized Professionals:
AMI for employees in cluster of Separate Salary Structure for Specialized
Professionals has been determined at a uniform rate of 5%.
7. Performance Bonus
 Top 10% of performers in the Bank are paid a one time Performance
Bonus@ 3% of annualized monetized pay.

8. Bank Provided Car

Entitlement (Pakistan assembled)

OG–5 800 cc car (AC) without petrol ceiling and driver salary
OG–6 1000 cc car (AC) without petrol ceiling and driver salary
OG–6 (HOD) 1000 cc car (AC) with petrol ceiling (200 Liters) and
driver salary
OG–7 1300 cc car (AC) of their choice with petrol ceiling (340 Liters)
on optional Bank’s driver or driver salary

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 9. Transfer of Ownership
Cars are provided to the employees on the basis of a loan depreciation
scheme. On completion of 5 years deprecation life of the cars the
assignee becomes the owner of vehicles.

10.Telephone Facility
.OG.7 (900 calls) OG.6 (600 calls)
OG.5&4 (400 calls) OG 3&2. (200 calls)

11.Post Retirement Benefits

Officers Grade 4 and above on their retirement or their family members

in the events of employee’s death are entitled for the following
additional benefits for a period of six months:
a) 40% Monetized pay in lieu of House Rent Ceiling
b) Electricity, Gas and water charges as per entitlement at the time of
Retirement/Death
c) 50% of telephone charges as per entitlement at the time of
Retirement/Death
d) Cost of 50% Petrol Ceiling as per entitlement at the time of
Retirement/Death

12.Pension Policy
Prior to 1997 Federal Government rules as contained in “Compendium
of Pension Rules and Order” were applicable in State Bank of Pakistan.

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 After magnetization, the concept of pay has been abolished and 50% of
monetized salary is taken into account for the purpose of calculation of
retirement benefits.

13.Education Allowance
Rs.500/- per month is allowed to Clerical/Non-Clerical employees.

14.Traveling & Transportation Charges

a. Officers on their retirement are entitled to reimbursement of
economy class airfare for self and eligible family members from the
airports nearest to their place of posting and their hometown as per
bank record or they can claim payment of ACC sleeper train fare.
b. All officers and staff of the bank either on transfer or retirement are
entitled to actual cost of transportation of household effects to their
place of new posting/domicile outside Karachi against production of
proper receipts subject to a maximum amount of one month’s
monetized salary.

15.Travel & Daily Allowance

a) The rates of gross Daily Allowance for different categories of
employees are as under:
Category of employee Position Gross DA (Rs)
S-1 to S-3 Non-clerical staff 800
S-4 to S-7 Clerical staff 1500
OG- to OG-4 Junior officer to deputy 2600
director
OG-5 to OG-6 Joint director/director 3030
OG-7 Executive director 3500

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 For official tour of OG-6 and OG-7 bank provides transport facility, while
other officers/staff are entitled to 10% of the DA to meet their transport
requirements.
b) The rates of gross Daily Allowance for employees hired under the
separate Salary Structure for Specialized Professional is as under:
Sr No. Employee category Daily Allowance Entitled per day
1 Entry level 2600
2 Middle level 3030
3 Higher level 3030
4 Management level 3500

16.Retirement Policies:
There are two Retirement Benefit Schemes in the Bank viz. Contributory
Provident Fund & Gratuity Scheme and the other is General Provident
Fund & Pension Scheme. Salient features of these schemes are as under:
 Contributory Provident Fund and Gratuity Scheme:
A retiring employee who is governed under this Scheme (on the basis of
option) having 10 years or more service and in case of his/her death
during service, his/her family members are allowed Gratuity @ one
month’s monetized salary for each completed year of service, for entire
period of service and for service beyond 30 years, a sum equal to half
month’s monetized salary in respect of each completed year of service
in the Bank is also admissible to OG-2 and above.
 General Provident Fund and Pension Scheme:
An employee who retires after completing not less than ten years of
total qualifying service is entitled to gross pension.
 Commutation of Part-Pension
An employee may at any time before the expiry of one year from the
date of his retirement, request the sanctioning authority in writing for
commutation Upto 50% of his/her gross pension.
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  Family Pension:
In case of death of employees who had completed not less than ten
years of total qualifying service or while in receipt of pension his family
is entitled for pension at the rate of 50% of the gross pension from next
day of his/her death. The family pension is admissible to dependent
disabled/retarded children for life and to the widow/un-married
daughter until she gets married.
 Gratuity:
Where an employee retires or dies after completing qualifying service of
five years or more but less than 10 years and is not eligible to receive
pension, he or, as the case may be, his/her family shall be paid a
Gratuity at the rate of 50% of monetized salary for each completed year
of qualifying service of the employee.

Conclusion:
Compensation usually means the payment received by an employee
from an employer in the form of a salary, wages, benefits and variable
pay. However, it’s important to note that compensation can also refer to
money that is paid to someone for something that has been lost or
damaged, such as “workers compensation” for unemployed or injured
workers. Compensation has two types, direct and indirect
compensation. Direct compensation refers to monetary benefits while
indirect compensation refers to non-monetary benefits.
Compensation has some benefits but management also have to face
some challenges while making compensation plan. Benefits of
compensation includes, increased motivation level, boost employee
loyalty, increased productivity and profitability and job satisfaction. On
the other hand the challenges manager have to face are presentation of
pay, automation and outsourcing, generational difference in
expectation, etc
State bank is providing up to the level of compensation in all forms and
other organization should follow the structure too to attract and retain
employee.
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Reference :
 Study.com
 Relationship between compensation and benefits ( UKEssays)
 SBPWEB
 Challenges of compensation management by Patricia woodside

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