Reward and Compensation

Management
Session 9

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 Reward Management

• This management discipline is concerned with the formulation and

implementation of strategies and policies, the purposes of which are to
reward employees
• fairly,
• equitably and
• consistently in accordance with their value to the organisation.

• It deals with:
• design,
• implementation and
• maintenance of reward systems (processes, practices, procedures) that
aim to meet the needs of both the organisation and its stakeholders.
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 Philosophy of Reward Management
• Strategic sense: long-term focus & it must be derived from the business
strategy

• Total Reward approach: considering all approaches of reward (financial

or not) as a coherent whole; integration with other HRM strategies

• Differential reward according to the contribution

• Fairness, equity, consistency, transparency

• Attractive and competitive total remuneration

• Provide for the personal needs

• Increase commitment toward the organisation

• Tax-efficient 3
 Total Reward (Armstrong 2009)
All types of reward:

• Non-financial as well as financial,

• Indirect as well as direct,

• Extrinsic as well as intrinsic.

Each element is developed, implemented and treated as an

integrated and coherent whole.

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 What to pay

• Need to establish a pay structure

• Balance between:
– Internal equity – the worth of the job to the organization
– External equity – the external competitiveness of an
organization’s pay relative to a pay elsewhere in its
industry

• A strategic decision with trade-offs

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 Remuneration model

Job Analysis Job Evaluation

Pay Survey Job Hierarchy

Pricing Jobs

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 Job-evaluation
A systematic process
• For defining the relative worth/ size of jobs/ roles
within an organisation
• For establishing internal relativities
• For designing an equitable grade structure and grading
jobs in the structure

• To give an input for reward considerations

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 Organization As A Determinant Of Direct Financial
Compensation

• It is based on :
- Compensation policies

– Pay leaders

– Pay based on market rate

– Pay followers
- Ability to pay

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 Labor Market As Determinant Of Direct Financial
Compensation

 It includes:

 Compensation surveys- what are other firms paying?,

geographic area of survey
 Cost of living- when prices rise over a period of time
 Labor Unions

 Compensation legislations

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 Job as determinant of direct financial Compensation

• Job itself continues to be factor.

• Organizations pay for value they attach to certain duties,

responsibilities, and other job related factors as working
conditions.

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 Employee as determinant of direct Financial
Compensation

• Performance
• Competencies
• Skills
• Experiences
• Seniority

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REWARD CLASSIFICATIONS

• Intrinsic - Extrinsic

• Financial-Nonfinancial

• Membership-
Performance

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Structure of Rewards

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 Incentive Payments

 Incentives are variable rewards granted to employees according to variations

in their performance.
 Importance

 Greater Output
 Reduced supervision

 High Efficiency
 High Motivation

 Disadvantages
 Deteriorated Quality
 Jealousy feeling
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 Types of Incentive Schemes

 Individual Incentive Schemes

– Performance-related
– Competence and skill related
– Service-related

 Group Incentive Schemes

 Company Wide Incentive Plans

– Profit-Sharing Plans

– Employee stock ownership plan

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16-5

Components of Pay Structure in

India
• The two essential components of pay structure are; basic wages and
dearness allowance .
• The basic wage rate is fixed taking the skill needs of the job, experience
needed, difficulty of work, training required, responsibilities involved and
the hazardous nature of the job.
• Dearness allowance is paid to employees in order to compensate them for
the occasional or regular rise in the price of essential commodities.

 Under the Workmen's Compensation Act

Wages for leave period, holiday pay, overtime pay, bonus, attendance bonus and good
conduct bonus
 Under the Payment of Wages Act
Retrenchment compensation, payment in lieu of notice , gratuity payable on
discharge

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Compensation Administration
16-6

Components of Pay Structure

 Bonus
 Payments made under a profit sharing scheme
 Value of house accommodation
 Medical allowances
 Travelling allowances
 Any other sum paid to defray special expenses incurred by the
worker
 Contribution to pension, provident fund

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Compensation Administration
17-21

Fringe Benefits

These are extra benefits provided to employees in addition to the normal

compensation paid in the form of wages or salaries.

Features
 Supplementary forms of compensation
 Paid to all employees
 Indirect compensation, since they are not directly related to performance
 May be statutory or voluntary

Need for fringe benefits

 Employee demands
 Trade union demands
 A kind of social security
 To improve industrial relations

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Compensation Administration
17-22

Types of Fringe Benefits

T y p e s o f F r i n g e B e n e f i ts

P a y m e n t f o r T im e E m p lo y e e S a fe ty a n d W e lf a r e r e c r e a t i o n a l O ld a g e a n d
n o t w o rk e d s e c u r it y h e a lt h fa c ilit ie s r e tir e m e n t
b e n e fits

H o u rs o f P a id S h if t H o lid a y P a id
w o rk h o lid a y s p r e m iu m pay v a c a tio n

R e tre n c h m e n t L a y o ff
c o m p e n s a t io n c o m p e n s a t io n

S a fe ty W o r k m e n ’s H e a lth
m e a s u re s c o m p e n s a tio n b e n e fits

C a n t e e n s C o n s u m e r C r e d it H o u s in g L e g a l a id E m p lo y e e W e lfa r e H o l id a y E d u c a t i o n a l T r a n s - P a r t ie s & M is c e -
s o c ie tie s s o c ie tie s c o u n s e llin g o r g a n is a t io n s h o m e s fa c ilit ie s p o r ta tio n p ic n ic lla n e o u s

P r o v id e n t f u n d P e n s io n

D e p o s it li n k e d i n s u r a n c e

G r a t u it y
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Compensation Administration M e d ic a l b e n e fits
16-16

Broad banding

• Organizations that follow a skill-based or Competency Based Pay System

frequently use broad banding to structure their compensation payments to
employees.
• Broad branding simply compresses many traditional salary grades (say 15 to
20 grades) into a few wide salary bands (three or four grades).
• Depending on changing market conditions and organizational needs,
employees move from one position to another without raising objectionable
questions, (such as when the new grade is available, what pay adjustments
are made when duties change etc.)
• As a result movement of employees between departments, divisions and
locations becomes smooth
• Helps reduce the emphasis on hierarchy and status.

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Compensation Administration
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 Executive Compensation

• The executive compensation consists usually of two main parts:

• Short Term Pay: the base salary and short term bonuses, which
are paid on the basis of the immediate performance of the
organization.

• Long Term Pay : The long term pay is about the stock options,
restricted stocks and pay based on the performance against the
index.

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 Types of Executive Compensation

• Below are the most common forms:

– Cash Compensation
– Deferred Compensation – This is compensation that is
deferred until a later date, typically for tax purposes.
• Examples of deferred compensation include pensions,
retirement plans etc.

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• Long-Term Incentive Plans (LTIPs) – Long-term incentive
plans encompass all compensation that is tied to
performance.

• Stock options:
– Restricted stock- Outright grant of shares that are restricted in
transferability.

• Executive Perks – These are various other perks given to

executives, including the use of a private jet, travel
reimbursements and other rewards.
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• Golden Handcuff is a form of employee benefit or
executive compensation, in which a (substantial) bonus
is built into an executive's contract, subject to
continuous employment for a certain number of years.

• In case of leaving the employment premature there

would be substantial financial penalties or the entire
amount may have to be repaid.

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• For example, let's assume that John is the CFO of Company XYZ. John is

very talented and capable, and Company XYZ knows that it would be very

time-consuming and expensive to hire a new CFO if John were to leave. 

• The labor market for CFOs is very tight at the moment, meaning that

John has a lot of options at other companies and is probably getting

some interest from other firms.

• To keep John at Company XYZ, the board of directors decides to give him

some golden handcuffs: a $50,000 stay bonus that he must return if he

leaves the company in the next 18 months. John is actually free to leave

at any time, but if he does, he won't get to keep the $50,000.

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• Golden Handshake :
– A golden handshake is a clause in
an executive employment contract that provides the
executive with a significant severance package in the
case that the executive loses their job
through firing, restructuring, or even
scheduled retirement.

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• Golden Hello is a form of employee benefit or executive
compensation, wherein a signing bonus is given to an
executive to induce him to leave a previous employment
in order to take up a new employment by the payment of
a large sum of money or other considerable remuneration.

• Such welcome arrangement could be in cash or in shares

or in options.

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• Golden Parachute is a form of employee benefits or
executive compensation, wherein the executive is
provided with a lucrative severance package in the event
of job termination, for example in case of a takeover by an
acquiring company.

• A GP may include a continuation of salary, bonus and/or

certain benefits and perquisites, as well as accelerated
vesting of stock options.
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 Examples
• Departing Infosys CFO Rajiv Bansal's hefty severance package was one of the

central issues in the row that broke out between the company's founders and

its board, but India is far behind the West in offering so-called golden

parachutes to its executives.

• Only 3-5% of Indian CXOs now have severance pay as a safeguard clause in

their contracts compared with 60-70% of their counterparts in large US

companies

• Source: https://tech.economictimes.indiatimes.com/news/corporate/golden-parachutes-start-to-land-in-indian-tech-cxo-contracts/57216634
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 IMPORTANCE

Image Building
Ensure
Institutional Equity Legal
effectiveness Compliance
Effective
Compensation Administrati
Attract talent
vely Efficient

Motivate & Reward Valued

Retain Staff Employee Behavior
Management
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Challenges of remuneration
Remunera
tion
Monetary Vs.
Non Monetary
Rewards

Below Market
Skill
or Above
Market Rates -based Pay

Compar- Salary
able Worth Reviews
Pay
Secrecy 33
Thank you!

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