Grade and pay structure - compensation management - Manu Melwin Joy

Grade and pay structures provide a logically designed framework within which an organization’s pay policies can be implemented.

1. Grade and Pay structure Compensation Management

2. Prepared By Kindly restrict the use of slides for personal purpose. Please seek permission to reproduce the same in public forms and presentations. Manu Melwin Joy Assistant Professor Ilahia School of Management Studies Kerala, India. Phone – 9744551114 Mail – [email protected]

3. Grade and Pay structure Grade and pay structures provide a logically designed framework within which an organization’s pay policies can be implemented.

4. Grade and Pay structure They enable the organization to determine where jobs should be placed in a hierarchy, define pay levels and the scope for pay progression and provide basis upon which relativities can be managed, equal pay achieved and the processes of monitoring and controlling the implementation of pay practices take place.

5. Grade and Pay structure A grade and pay structure can also serve as a medium through which the organization communicates the career and pay opportunities available to employees.

6. Grade structure Compensation Management

7. Grade structure A grade structure consists of a sequence or hierarchy of grades, bands or levels into which groups of jobs that are broadly comparable in size are placed.

8. Grade structure There may be a single structure, which is defined by the number of grades or bands it contains.

9. Grade structure Alternatively the structure may be divided into a number of career or job families consisting of groups of jobs where the essential nature and purpose of the work are similar but the work is carried out at different levels.

10. Types of Grade structure Narrow-graded structures , which consist of a sequence of narrow grades (generally 10 or more). They are sometimes called multi-graded structures.

11. Types of Grade structure Broad-graded structures , which have fewer grades (generally six to nine)

12. Types of Grade structure Broad-banded structures, which consist of a limited number of grades or bands (often four to five). Structures with six or seven grades are often described as broad-banded even when their characteristics are typical of broad grades.

13. Types of Grade structure Career family structures , which consist of a number of families (groups of jobs with similar characteristics) each divided typically into six to eight levels. The levels are described in terms of key responsibilities and knowledge, skill and competence requirements and therefore define career progression routes within and between career families. There is a common grade and pay structure across all the career families

14. Types of Grade structure Job family structures , which are similar to career families except that pay levels in each family may differ to reflect market rate considerations (this is sometimes referred to as market grouping). The structure is therefore more concerned with market rate relativities than mapping careers.

15. Types of Grade structure Combined structures , in which broad bands are superimposed on career/job families or broad bands are divided into families.

16. Types of Grade structure Pay spines , consisting of a series of incremental 'pay points' extending from the lowest- to the highest-paid jobs covered by the structure.

17. Pay structure Compensation Management

18. Pay structure A grade structure becomes a pay structure when pay ranges, brackets or scales are attached to each grade, band or level.

19. Pay structure Pay structures are defined by the number of grades they contain and especially in narrow or broad graded structures, the span or width of the pay ranges attached to each grade.

20. Pay structure Span is the scope the grade provides for pay progression and is usually measured as the difference between the lowest point in the range and the highest point in the range as a percentage of the lowest point. Thus a range of 20,000 to 30,000 would have a span of 50 per cent.

21. Pay structure Pay structure define the different levels of pay for jobs or groups of jobs by reference to their relative internal value as determined by job evaluation, to external relativities as established by market rate surveys and to negotiated rates for jobs.

22. Incidence of grade and Pay structure

23. Narrow Graded structure Compensation Management

24. Narrow Graded structure A conventional narrow graded pay structure consists of a sequence of job grades into which jobs of broadly equivalent value are slotted. A pay range is attached to each grade.

25. Narrow Graded structure Jobs are allocated to grades on the basis of an assessment of their relative internal value. Grades may be defined in terms of a points bracket, if a point factor job evaluation scheme is used.

26. Narrow Graded structure Alternatively, they may be defined verbally if a job classification system is used or by reference to the benchmark jobs slotted into the grade.

27. Narrow Graded structure A pay range is attached to each grade. It indicates the minimum and maximum rates payable for any job in the grade and the scope for the pay of job holders to progress while they are in that grade.

28. Narrow Graded structure Narrow graded pay structures are based on the belief that individuals should progress through ranges by reference to their performance, skill, competence or time in the job.

29. Narrow Graded structure The advantages of narrow graded structures are that they clearly indicate pay relativities, provide a framework for managing relativities and for ensuring that jobs of equal value are paid equally, allow better control over the fixing of rates of pay and pay progression and are easy to explain to employees.

30. A Narrow Multi Graded structure

31. Broad Banding Compensation Management

32. Broad banding Broad banding is a job grading structure that falls between using spot salaries vs. many job grades to determine what to pay particular positions and incumbents within those positions.

33. Broad banding While broadbanding gives the organization using it some broad job classifications, it does not have as many distinct job grades as traditional salary structures do

34. Broad banding Thus, broadbanding reduces the emphasis on ‘status’ or hierarchy and places more of an emphasis on lateral job movement within the company.

35. Broad banding In a broadbanding structure an employee can be more easily rewarded for lateral movement or skills development, whereas in traditional multiple grade salary structures pay progression happens primarily via job promotion. In this way, broadbanding is a more flexible pay system.

36. Broad banding This flexibility, however, can lead to internal pay relativity problems as there isn’t as much control over salary progression as there would be within a traditional multi-level grading structure.

37. Zones in Broad band structure

38. Broad banding For a suitable organization in the right cultural setting, broadbanding can do the following: Reward performance more efficiently – as the pay ranges are wide, the company has the flexibility to reward a star performer, even when they aren’t getting promoted.

39. Broad banding For a suitable organization in the right cultural setting, broadbanding can do the following: Take the emphasis off of job evaluation – because the number of levels have been reduced, job evaluation can be streamlined as there aren’t as many distinct grades that need to be considered when slotting a job into the structure.

40. Broad banding For a suitable organization in the right cultural setting, broadbanding can do the following: Manage a flexible/mobile workforce – for companies that have staffing needs that change frequently or are difficult to predict, or work within a business environment that is in flux, broadbanding offers a program that is easier to maintain than a traditional system with many distinct levels.

41. Broad banding One concern noted by companies that have implemented broadbanding is that compensation costs may go up. This is due to the wider than normal band taking away that more gradated top end control on salary levels.

42. Broad banding This can be effectively managed through the use of market data, in order to help managers to validate their pay decisions for a particular employee to the external market before proceeding to give higher than normal pay increases.

43. Broad banding Broadbanding , like other grading systems, relies on the buy-in of all key stakeholders including the business managers, HR managers, and employees.

44. Broad banding Tailored communication to each of these groups will go a long way towards ensuring the successful implementation of a broadbanding program.

45. Career/Job Families Compensation Management

46. Career/Job Families Career families consists of jobs in a function or occupation such as marketing, operations, finance or HR that are related through the activities carried out and the basic knowledge and skill required but in which the levels of responsibility, knowledge, skill or competency needed differ.

47. Career/Job Families In a career family structure, the different career families are identified and the successive levels in each family are defined by reference to the key activities carried out and the knowledge and skills or competencies required to perform them effectively.

48. Career/Job Families They define career paths – what people have to know and be able to do to advance their career with a family and to develop career opportunities in other families.

49. Career/Job Families Typically, career families have between six and eight levels as in broad graded structure. Some families may have more levels than others.

50. A career family Structure

51. Career/Job Families In effect, a career structure is a single graded structure in which each grade has been divided into families.

52. Career/Job Families The difference between a conventional graded structure and a career family structure is that in the former, the grade definitions are all the same.

53. Career/Job Families In a career family structure, although the levels may be defined generally for all families, separate definitions expressed as competency requirements exists for levels in each of the career families.

54. Career/Job Families Career family structure provide the foundation for personal development planning by defining the KSA required at higher levels or in different functions and describing what needs to be learnt through experience, education or training.

55. Career/Job Families Level definitions in a family can be more accurate that in a conventional structure because they concentrate on roles within the family with common characteristics.

56. Career/Job Families A considerable amount of work is required to produce clear analytical level definitions that are properly graded and provide good career guidelines.

57. Combined Career/Job Family and Broad Branded Structures Compensation Management

58. Combined Career/Job Family and Broad Branded Structures It is possible to combine career or job family structures with broad – branded structures.

59. Combined Career/Job Family and Broad Branded Structures This can be done by superimposing a broad banded structure on career / job families.

60. Combined Career/Job Family and Broad Branded Structures In effect, this means that in each job or career family, the levels are restricted to four or five rather than the more typical seven or eight.

61. Broad band divided into career families

62. Pay spine Compensation Management

63. Pay spine A scale showing the rates of pay for employees working at each level of an organization.

64. Pay spine It also shows the increases in pay an employee gets when they spend a certain length of time at a particular level.

65. Pay spine Pay spines consist of hierarchy of pay or spinal column points between which there are pay increments and to which are attached grades.

66. Pay spine This consists of a series of incremental pay points ranging from lowest to highest. Increments usually happens between 2.5 to 3 %.

67. Performance Linked Compensation Compensation Management

68. Performance Linked Compensation Performance-related pay or pay for performance is a salary paid relating to how well one works. Car salesmen or production line workers, for example, may be paid in this way, or through commission.

69. Performance Linked Compensation Pay-for-Performance ("PFP") systems tie compensation directly to specific business goals and management objectives. To do this, companies must deliver competitive pay for competitive levels of performance, pay above market for exceptional performance, and reduced pay for poor performance. To achieve this, companies must match measurable and controllable performance targets to company objectives.

70. Performance Linked Compensation Many employers use this standards-based system for evaluating employees and for setting salaries. Standards-based methods have been in de facto use for centuries among commission-based sales staff: they receive more pay for selling more, and low performers do not earn enough to make keeping the job worthwhile even if they manage to keep the job.

71. Incentives Compensation Management

72. Incentives Incentives can be defined as monetary or non-monetary reward offered to the employees for contributing more efficiency.

73. Incentives Incentive can be extra payment or something more than the regular salary or wage.

74. Incentives Incentive acts as a very good stimulator or motivator because it encourages the employees to improve their efficiency level and reach the target.

75. Incentives The two common types of incentives are: Monetary or Financial Incentives. Non-Monetary/Non-Financial Incentives.

76. Monetary or Financial Incentives Compensation Management

77. Monetary or Financial Incentives The reward or incentive which can be calculated in terms of money is known as monetary incentive.

78. Monetary or Financial Incentives These incentives are offered to employees who have more physiological, social and security need active in them.

79. Monetary or Financial Incentives Pay and allowances . Regular increments in salary every year and grant of allowance act as good motivators. In some organizations pay hikes and allowances are directly linked with the performance of the employee. To get increment and allowance employees perform to their best ability.

80. Monetary or Financial Incentives Profits sharing . The organization offer share in the profits to the employees as a common incentive for encouraging the employees for working efficiently. Under profits sharing schemes generally the companies fix a percentage of profits, and if the profits exceed that percentage then the surplus profits is distributed among the employees. It encourages the employees to work efficiently to increase the profits of the company so that they can get share in the profits.

81. Monetary or Financial Incentives Co-partnership/stock option . Sharing the profit does not give ownership right to the employees. Many companies offer share in management or participation in management along with share in profit to its employees as an incentive to get efficient working form the employees. The co-partnership is offered by issue of shares on exceeding a fixed target.

82. Monetary or Financial Incentives Bonus . Bonus is a onetime extra reward offered to the employee for sharing high performance. Generally when the employees reach their target or exceed the target then they are paid extra amount called bonus. Bonus is also given in the form of free trips to foreign countries, paid vacations or gold etc. some companies have the scheme of offering bonus during the festival times.

83. Monetary or Financial Incentives Commission . Commission is the common incentive offered to employees working under sales department. Generally the sales personal get the basic salary and also with this efforts put in by them. More orders mean more commission.

84. Monetary or Financial Incentives Suggestion system . Under suggestion system the employees are given reward if the organization gains with the suggestion offered by the employee. For example, if an employee suggests a cost saving technique of then extra payment is given to employee for giving that suggestion. The amount of reward or payment given to the employee under suggestion system depends on the gain or benefit which organization gets with that suggestion it is a very good incentive to keep the initiative level of employees high.

85. Monetary or Financial Incentives Productivity linked with wage incentives . These are wage rate plans which offer higher wages for more productivity. Under differential piece wage system efficient workers are paid higher wages as compared to inefficient workers. To get higher wages workers perform efficiently.

86. Monetary or Financial Incentives Retirement benefits . Some organizations offer retirement benefits such as pension, provident fund, gratuity etc. to motivate people. These incentives are suitable for employees who have security and safety need.

87. Monetary or Financial Incentives Perks/ fringe Benefits/ perquisites. If refers to special benefits such as medical facility, free education for children, housing facility etc. these benefits are over and above salary. These extra benefits are related with the performance of the employees..

88. Non-Monetary/Non-Financial Incentives Compensation Management

89. Non-Monetary/Non-Financial Incentives Money is not the only motivator, the employees who have more of esteem and self actualization need active in them get satisfied with the non-monetary incentives only.

90. Non-Monetary/Non-Financial Incentives The incentives which cannot be calculated in terms of money are known as non-monetary incentives.

91. Non-Monetary/Non-Financial Incentives Generally people working at high job position or at high rank get satisfied with non-monetary incentives.

92. Non-Monetary/Non-Financial Incentives Status. Status refers to rank, authority, responsibility, recognition and prestige related to job. By offering higher status or rank in the organization managers can motivate employees having esteem and self- actualization need active in them.

93. Non-Monetary/Non-Financial Incentives Organizational climate. It refers to relations between superior/ subordinates. These are the characteristics which describe and organization. These characteristics have direct influence over the behavior of a member. A positive approach adapted by manager creates better organizational climate whereas negative approach may spoil the climate, Employees are always motivated in the healthy organizational climate.

94. Non-Monetary/Non-Financial Incentives Career advancement. Managers must provide promotional opportunities to employees. Whenever there are promotional opportunities employees improve their skill and efficiency with the hope that they will be promoted to high level. Promotion is a very big stimulator or motivator which induces people to perform to their best level.

95. Non-Monetary/Non-Financial Incentives Job enrichment/ assignment of challenging job. Employees get bored by performing routine job. They enjoy doing jobs which offer them variety and opportunity to show their skill. By offering challenging jobs, autonomy to perform job, interesting jobs, employees get satisfied and they are motivated. Interesting, enriched and challenging job itself is a very good motivator or stimulator .

96. Non-Monetary/Non-Financial Incentives Employee’s recognition. Recognition means giving special regard or respect which satisfies the ego of the subordinates. Ego-satisfaction is a very good motivator. Whenever the good efforts or the positive attitudes are show by the subordinates then it must be recognized by the superior in public or in presence of other employees. etc.

97. Non-Monetary/Non-Financial Incentives Employee’s recognition. Whenever if there is any negative attitude or mistake is done by subordinate then it should be discussed in private by calling the employee in cabin. Examples of employee’s recognition are congratulating employee for good performance, displaying the achievement of employee, giving certificate of achievement, distributing mementos, gifts etc.

98. Non-Monetary/Non-Financial Incentives Job security. Job security means life time bonding between employees and organization. Job security means giving permanent or confirmation letter. Job security ensures safety and security need but it may have negative impact. Once the employees get job secured they lose interest in job. Of example government employees do not perform efficiently as they have no fare of losing job. Job security must be given with some terms and conditions.

99. Non-Monetary/Non-Financial Incentives Employee’s participation. It means involving employee in decision making especially when decisions are related to workers. Employees follow the decision more sincerely when these are taken in consultation with them for example if target production is fixed by consulting employee then he will try to achieve the target more sincerely.

100. Non-Monetary/Non-Financial Incentives Autonomy/ employee empowerment. It means giving more freedom to subordinates. This empowerment develops confidence in employees. They use positive skill to prove that they are performing to the best when freedom is given to them.

101. Bonus Compensation Management

102. Bonus Bonus pay is compensation over and above the amount of pay specified as a base salary or hourly rate of pay. The base amount of compensation is specified in the employee offer letter, in the employee personnel file, or in a contract.

103. Bonus Bonus pay can be distributed randomly as the company can afford to pay a bonus, or the amount of the bonus pay can be specified by contract. Bonus pay that is specified by contract is used most frequently to reward executives.

104. Bonus While employees might wish that executive bonus payments were tied to performance results, this is not always the case.

105. Bonus A structure of bonus payments is frequently found in sales organizations to reward sales performance at specified levels over and above commission. Some sales organizations reward employees with bonus pay without commission.

106. Bonus Bonus pay is used by many organizations as a thank you to employees or a team that achieves significant goals. Bonus pay is also used to improve employee morale, motivation, and productivity.

107. Bonus As long as bonus pay is discretionary by the employer, it is not considered to be a contract. If the employer promises a bonus, however, the employer may be legally liable to pay the bonus.

108. Types of Bonus Compensation Management

109. Current Profit Sharing Compensation Management

110. Current Profit Sharing One very basic type of bonus program is current profit sharing. A company sets aside a predetermined amount, usually between 2.5 and 7.5 percent of payroll but sometimes as high as 15 percent, as a bonus on top of base salary.

111. Current Profit Sharing Such bonuses depend on company profits, either the entire company's profitability or from a given line of business. Sometimes the bonuses are given across the board, and sometimes they are given in larger percentages of compensation the more someone makes.

112. Current Profit Sharing Profit sharing refers to various incentive plans introduced by businesses that provide direct or indirect payments to employees that depend on company's profitability in addition to employees' regular salary and bonuses. In publicly traded companies these plans typically amount to allocation of shares to employees.

113. Current Profit Sharing The profit sharing plans are based on predetermined economic sharing rules that define the split of gains between the company as a principal and the employee as an agent

114. Current Profit Sharing For example, suppose the profits are x, which might be a random variable. Before knowing the profits, the principal and agent might agree on a sharing rule s(x). Here, the agent will receive s(x) and the principal will receive the residual gain x-s(x).

115. Current Profit Sharing The purpose of profit sharing bonuses is to encourage employees to understand how their work affects the company's performance and to improve the company's profitability.

116. Current Profit Sharing Learn how your company makes money and how your position can help it make more. The annual report and other statements will give you an idea of how the company is performing.

117. Current Profit Sharing It will also make you look good to your manager if you show an interest in the company's performance.

118. Gain Sharing Compensation Management

119. Gain Sharing Gain sharing is a system of management used by a business to increase profitability by motivating employees to improve their performance through involvement and participation. As their performance improves, employees share financially in the gain (improvement).

120. Gain Sharing Gainsharing’s goal is to improve performance and eliminate waste (time, energy, and materials) by motivating employees to work smarter as a team rather than just working harder.

121. Gain Sharing There are two important parts of a Gain sharing system. One is a bonus calculation. The second is a structured system for employee involvement. Because of these two parts, Gain sharing is best seen as an "organizational development" tool.

122. Gain Sharing This type of bonus program is most common in manufacturing plants and is designed to reward productivity and improved product quality.

123. Gain Sharing Gain sharing works best when employees become responsible for production quantity and quality and are encouraged to improve the way the product is made. This program reflects a philosophy that employees know their job best.

124. Gain Sharing Gain sharing programs pay out bonuses for statistical improvements in production and quality on a quarterly or sometimes monthly basis, providing a sense of excitement for participants.

125. Gain Sharing These programs are often very successful, transforming the manufacturing plant into a center of employee commitment.

126. Employee Stock Option Compensation Management

127. Employee Stock Option An employee stock option (ESO) is commonly viewed as a complex call option on the common stock of a company, granted by the company to an employee as part of the employee's remuneration package

128. Employee Stock Option Many companies use employee stock options plans to retain and attract employees, the objective being to give employees an incentive to behave in ways that will boost the company's stock price.

129. Employee Stock Option If the company's stock market price rises above the call price, the employee could exercise the option, pay the exercise price and would be issued with ordinary shares in the company,

130. Employee Stock Option The employee would experience a direct financial benefit of the difference between the market and the exercise prices.

131. Employee Stock Option If the market price falls below the stock exercise price at the time near expiration, the employee is not obligated to exercise the option, in which case the option will lapse.

132. Employee Stock Option Another substantial reason that companies issue employee stock options as compensation is to preserve and generate cash flow.

133. Employee Stock Option The cash flow comes when the company issues new shares and receives the exercise price and receives a tax deduction equal to the "intrinsic value" of the ESOs when exercised.

134. Employee Stock Option Employee stock options are mostly offered to management as part of their executive compensation package. They may also be offered to non-executive level staff, especially by businesses that are not yet profitable, insofar as they may have few other means of compensation

135. Employee Stock Option Employee stock options are mostly offered to management as part of their executive compensation package. They may also be offered to non-executive level staff, especially by businesses that are not yet profitable, insofar as they may have few other means of compensation

136. Employee Allowances Compensation Management

137. Employee Allowances Allowance is a sum of money paid regularly to a person, typically to meet specified needs or expenses. Allowances are generally calculated on basic salary.

138. Employee Allowances Types of Allowances 1.Fully exempted allowances. 2. Partly exempted allowances. 3. Fully taxable allowances.

139. Dearness Allowances Compensation Management

140. Dearness Allowances Dearness Allowance: This allowance is given to protect real income against inflation. Generally, dearness allowance (DA) is paid as a percentage of basic pay.

141. Dearness Allowances As of June 2012, the Dearness Allowance is calculated s a percentage of an Indian citizen's basic salary to mitigate the impact of inflation on people belonging to the low income group,

142. Dearness Allowances The guidelines that govern the DA vary according to where one lives (for example, whether rural or urban) .

143. Dearness Allowances The III Central Pay Commission recommended payment of DA whenever the CPI rose by 8 points over the index of 200 (with base 1960 = 100). The extent of neutralization granted with effect from 1-1-1973 ranged from 100% to 35%.

144. Dearness Allowances The IV Central Pay Commission recommended the grant of DA on a 'percentage system' of the basic pay (1986).It also recommended payment of DA twice a year; 1 January and 1 July.

145. Dearness Allowances The V Central Pay Commission looked into the issue of differential neutralization and found it to be injustice to senior officers and recommended uniform neutralization of 100% to employees at all levels

146. Dearness Allowances The Commission had suggested that dearness allowance should be converted into dearness pay every time the cost of living rises by 50% over the base level.

147. Dearness Allowances The VI Central Pay Commission recommended revision of base year of the Consumer Price Index (CPI) as frequently as feasible.It also changed base year for DA calculation to 2001 (base year 2001=100),

148. Dearness Allowances Formula for calculating Dearness Allowance for Central government employees after 1.1.2006 is : Dearness Allowance %= {(Average of AICPI(Base year 2001=100) for the past 12 months – 115.76)/115.76}*100

149. House Rent Allowance Compensation Management

150. House Rent Allowance House Rent Allowance (HRA) is an allowance given by many Indian employers, including government employers, to salaried employees in India to help them meet the cost of rent of House occupied by them on lease or rental basis.

151. House Rent Allowance HRA is exempt from tax under Section 10(13A) of the Income Tax Act, subject to certain conditions.

152. House Rent Allowance House Rent Allowance forms part of taxable salary income of an individual and an employee may be eligible to receive it, if his employer chooses to offer the allowance.

153. House Rent Allowance Thus a salaried employee may be eligible for House Rent Allowance (HRA) irrespective of Whether he/she stays in a rented/ leased accommodation or resides in his/her own house.

154. House Rent Allowance As stated earlier, House Rent Allowance received by a salaried employee is exempt from tax under Section 10(13A) of the Income Tax Act, subject to the following conditions:

155. House Rent Allowance House Rent Allowance (HRA) is part of the salary package offered by the employer to the employee The employee receiving HRA stays in a leased/rented accommodation and pays rent for it. Rent paid by the salaried employee exceeds 10% of his/her salary.

156. House Rent Allowance Rent paid by a salaried employee to his/her parents, for occupying a house owned by them, is eligible for exemption under Indian Income Tax Act.

157. House Rent Allowance However rent paid by a salaried employee to his/her spouse, for occupying a house owned by the spouse, is not eligible for exemption under Indian Income Tax Act.

158. House Rent Allowance You must have valid rental receipts, for having paid the rent, in order to claim tax exemption on House Rent Allowance (HRA).

159. Conveyance Allowance Compensation Management

160. Conveyance Allowance A conveyance allowance refers to an amount of money reimbursed to someone for the operation of a vehicle or the riding of a vehicle.

161. Conveyance Allowance The allowance is typically a designated amount or percentage of total transportation expenses that is referenced in a country's tax laws or code.

162. Conveyance Allowance Organizations and private or public businesses may also offer a conveyance allowance in addition to reimbursing employees or members for transportation expenses.

163. City Compensatory Allowance Compensation Management

164. City Compensatory Allowance This allowance is paid to employees who are posted in big cities . The purpose is to compensate the high cost of living in cities like Delhi, Mumbai etc.

165. City Compensatory Allowance The CCA amount varies from city & it is highest in metropolitan cities. The amount payable to the employees depends upon the grade pay of the employees.

166. City Compensatory Allowance It is not calculated on the % of the basic salary. It is common to a particular class of the employee for a particular place.

167. Foreign Allowance Compensation Management

168. Foreign Allowance This allowance is paid by the Government of India to its citizen employees for being posted outside the country and it is not included in total income. It is completely tax-free U/S 10 (7).

169. Foreign Allowance Foreign Service Incentive Allowances consist of two tax-free allowances provided as incentives to foreign service.

170. Foreign Allowance The Foreign Service Premium is provided as an incentive to foreign service and as such recognizes that there are disutilities and disincentives, some of which may be financial, resulting from service outside Country.

171. Foreign Allowance The Post Specific Allowance is a non-accountable travel allowance designed to assist employees in travelling from post and reflects 80% of return full (Y) economy air fare between the employee's post and the headquarters city.

172. Child Education Allowance Compensation Management

173. Child Education Allowance It was only in the 6th CPC that the CHILDREN’S EDUCATION ALLOWANCE & HOSTEL SUBSIDY was introduced to Central Government employees. Prior to this, the scheme was being granted in a simple form as TUITION FEES.

174. Child Education Allowance From Rs. 30 to 40 per month, the scheme was revamped much to the excitement of the Central Government employees, and earned their appreciation. 

175. Child Education Allowance One could see that the scheme, launched in the nation’s interest and with the intention of attaining higher standards in the field of education and literacy, had succeeded. 

176. Child Education Allowance Under this scheme, Central Government employees were now eligible to refund the educational expenses of Rs. 1000 per month per child, for two children, adding up to Rs. 12,000 per annum per child.

177. Child Education Allowance By submitting original receipts for the expenses incurred for the education of their children from Kindergarten, right up to Class XII, the employee could claim a maximum reimbursement of Rs. 12,000 per year.

178. Child Education Allowance As a result, Central Government employees began sending their children to only the best schools. It wouldn't be an exaggeration to say that the scheme was a big boon for Central Government employees living in small and medium-sized towns and cities. 

179. Overtime Allowance Compensation Management

180. Overtime Allowance Industrial employees are entitled to additional payment for work done beyond the normal working hours.

181. Overtime Allowance There are two sets of rules applicable for overtime payment viz. ( i ) Departmental Rules and (ii) The Factories Act.

182. Overtime Allowance For work beyond normal working hours and upto 9 hrs. a day or beyond 44.75 hrs upto 48 hrs in a week, overtime is paid under departmental rules which is known as DOT.

183. OVER TIME PAYMENTS UNDER DEPARTMENTAL RULES (DOT) For work done beyond 9 hrs. a day or 48 hrs a week, payment is admissible at twice the rate of pay plus all allowances under the Factories Act (often loosely termed as OT Bonus).

184. OVER TIME PAYMENTS UNDER DEPARTMENTAL RULES (DOT) In the case of Day Workers, the overtime is paid at the rate of Basic Pay + Dearness Allowances + City Compensatory Allowance + Personal Pay + Special Pay +Pension to the extent as applicable, divided by 200 for each hour of overtime worked.

185. OVER TIME PAYMENTS UNDER THE FACTORIES ACT, 1948 For work done, beyond 9 hrs. a day or 48 hrs a week, there are two sets of rules –one for the Day Worker and the other for the Piece Worker.

186. OVER TIME PAYMENTS UNDER THE FACTORIES ACT, 1948 Day Worker: Hourly rate of payment which are applicable equally in the day shift as well in the night shift is calculated at the rate = twice the pay & allowances/200.

187. OVER TIME PAYMENTS UNDER THE FACTORIES ACT, 1948 Piece Worker: Hourly rate of payment in the day shift is calculated at the rate = twice the pay & allowances/200. In the night shift, the same becomes = (twice the pay + pay/4 + allowances)/200.

188. Helper Allowance Compensation Management

189. Helper Allowance Any allowance, by whatever name called, granted to meet the expenditure incurred on a helper where such helper is engaged for the performance of duties of an office or employment of profit.

190. Academic Allowance Compensation Management

191. Academic Allowance Any allowance, by whatever name called, granted for encouraging academic research and training pursuits in educational and research institutions.

192. Academic Allowance Any allowance, by whatever name called, granted for encouraging academic research and training pursuits in educational and research institutions.

193. Uniform Allowance Compensation Management

194. Uniform Allowance Uniforms that employees must wear as a condition of employment may be provided tax-free as a working condition fringe benefit so long as they are not adaptable to street wear or cannot be worn as ordinary clothing.

195. Uniform Allowance Your employee does not receive a taxable benefit if either of the following conditions applies: You supply your employee with a distinctive uniform he or she has to wear while carrying out the employment duties. You provide your employee with special clothing (including safety footwear and safety glasses) designed to protect him or her from hazards associated with the employment.

196. Uniform Allowance Employers may provide employees with tax-free allowances to purchase uniforms if the apparel qualifies under the Internal Revenue Code (IRC) as a uniform and employees substantiate their expenses under the accountable plan rules of the IRC.

197. Travelling Allowance Compensation Management

198. Travelling Allowance A travel allowance is a payment made to an employee to cover expenses when he or she travels for work. This money might be used to cover things like accommodation, food, drink and incidentals.

199. Travelling Allowance An allowance may be paid to an employee before or after they travel. If an allowance is paid to an employee before they travel, the employee does not need to use all of the allowance.

200. Travelling Allowance A single flat rate of TA incorporating accommodation, meals and incidental expenses will be paid to an employee directed to travel on official business by their employing Senator or Member, where the travel requires an overnight stay away from the employee’s work base.

201. Medical Allowance Compensation Management

202. Medical Allowance Medical allowance is a fixed allowance paid every month to the employees irrespective of the fact whether they submit the supporting bills or not.

203. Medical Allowance Medical reimbursement is a payment made to an employee against the medical bills produced by him/her subject to his/her entitlement.

204. Medical Allowance The maximum tax benefit available is Rs. 15,000 per annum. Under this head, one may avail for reduction in the taxable income for a maximum of or up to Rs. 15,000 for medical expenses during each financial year.

205. Medical Allowance Reimbursement by an employer of medical expenses incurred by an employee is generally tax-free. Where an employee is allowed to get reimbursement for the medical expenses incurred by him or his family members, the entire amount of reimbursement is tax-free and is not treated as a taxable perquisite.

206. Employee Benefits Compensation Management

207. Employee Benefits Employee benefits and benefits in kind (also called fringe benefits, perquisites, or perks) include various types of non-wage compensation provided to employees in addition to their normal wages or salaries

208. Employee Benefits The purpose of employee benefits is to increase the economic security of staff members, and in doing so, improve worker retention across the organization. As such, it is one component of reward management.

209. Benefits of Employee Benefits For employers: By providing increased access and flexibility in employee benefits, employers can not only recruit but retain qualified employees. Providing benefits to employees is seen as managing high-risk coverage at low costs and easing the company's financial burden.

210. Benefits of Employee Benefits For employers: Employee benefits have been proven to improve productivity because employees are more effective with they are assured of security for themselves and their families. Premiums are tax deductible as corporation expense, which means savings for the organization.

211. Benefits of Employee Benefits For employees: Employees can experience a peace of mind which leads to increased productivity and satisfaction by being assured that they are their families are protected in any mishap Employees with personal life and disability insurance can enjoy additional protection including income replacement in the event of serious illness or disability Employees can feel a sense of pride in their employer if they are satisfied with the coverage they receive

212. Gratuity Compensation Management

213. Gratuity Gratuity is a part of salary that is received by an employee from his/her employer in gratitude for the services offered by the employee in the company.

214. Gratuity Gratuity is a defined benefit plan and is one of the many retirement benefits offered by the employer to the employee upon leaving his job.

215. Gratuity An employee may leave his job for various reasons, such as – retirement / superannuation, for a better job elsewhere, on being retrenched or by way of voluntary retirement.

216. Gratuity Eligibility As per Sec 10 (10) of Income Tax Act, gratuity is paid when an employee completes 5 or more years of full time service with the employer(minimum 240 days a year).

217. Gratuity How does it work? An employer may offer gratuity out of his own funds or may approach a life insurer in order to purchase a group gratuity plan.

218. Gratuity How does it work? In case the employer chooses a life insurer, he has to pay annual contributions as decided by the insurer. The employee is also free to make contributions to his gratuity fund. The gratuity will be paid by the insurer based upon the terms of the group gratuity scheme.

219. Tax treatment of gratuity The gratuity so received by the employee is taxable under the head ‘Income from salary’. In case gratuity is received by the nominee/legal heirs of the employee, the same is taxable in their hands under the head ‘Income from other sources’.

220. Tax treatment of gratuity For the purpose of calculation of exempt gratuity, employees may be divided into 3 categories – (a) Government employees (b)Non-government employees  covered  under the Payment of Gratuity Act, 1972 (c)Non-government employees  not covered  under the Payment of Gratuity Act, 1972

221. Tax treatment of gratuity n case of government employees – they are  fully exempt  from receipt of gratuity. In case of non-government employees covered under the Payment of Gratuity Act, 1972 – Maximum exemption from tax is  least of the 3 below : ( i ) Actual gratuity received; (ii) Rs 10,00,000; (iii) 15 days’ salary for each completed year of service or part thereof

222. Tax treatment of gratuity Here, salary = basic + DA + commission (if it’s a fixed % of sales turnover). ‘Completed year of service or part thereof’ means: full time service of > 6 months is considered as 1 completed year of service;  <  6 months is ignored. Here, number of days in a month is considered as 26. Therefore, 15 days’ salary is arrived as = salary * 15/26

223. Tax treatment of gratuity In case of non-government employees not covered under the Payment of Gratuity Act, 1972 –  Maximum exemption from tax is  least of the 3 below : ( i ) Actual gratuity received; (ii) Rs 10,00,000; (iii) Half-month’s average salary for each completed year of service (no part thereof)

224. Tax treatment of gratuity Here, salary = basic + DA + commission (if it’s a fixed % of sales turnover). Completed year of service (no part thereof) means: full time service of  >  1 year is considered as 1 completed year of service. < 1 year is ignored. Average salary = 10 months’ salary (immediately preceding the month of leaving the job)/10

225. Tax treatment of gratuity Varun had been working with an IT company since past 10 years, 7 months. He is retiring on 15 th  April, 2010. His current Basic = Rs 40,000 pm, DA = Rs 5,000 pm. He is going to receive a gratuity amount of Rs 3 lakhs on retirement. Note: Varun’s basic and DA have been the same since past 1 year.

226. Tax treatment of gratuity Lets consider 2 situations here – (a) Varun’s employer is  covered  under Payment of Gratuity Act, 1972; and (b) Varun’s employer is  not covered  under Payment of Gratuity Act, 1972.

227. Tax treatment of gratuity

228. Medical Care Compensation Management

229. Medical Care Benefits are a critical piece of an employee compensation package, and health care benefits are the crown jewel. Health care benefits, along with time-off benefits, are the most popular of benefits to employees.

230. Medical Care Every employer must at least consider whether to offer these types of benefits and in some cases employers must offer health care in order to remain competitive with other businesses for the most talented employees and avoid penalties imposed by health care reform.

231. Medical Care Another reason why many employers choose to offer health care benefits is so that they themselves can take advantage of less expensive health insurance than they could get on their own as well as tax breaks for the contributions made by the business.

232. Advantages of Medical Care Attract and retain the most qualified employees. Whether health insurance is absolutely necessary to attract and retain the most qualified employees will depend upon factors such as whether your competitors or other similarly sized employers in your area are offering health insurance.

233. Advantages of Medical Care Gain tax advantages. You can offer employees something that increases their compensation package and yet allows you an income tax deduction for the contribution, so that your out-of-pocket cost is less than the value of the benefit to the employee.

234. Advantages of Medical Care Offer employees group purchasing power. Even if you decide not to contribute anything toward your employees' health insurance, you can offer them the opportunity to obtain group rates through your business.

235. Advantages of Medical Care Ensure the wellness of your workers. Insurance plans offer preventative care that can keep employees healthy and working. If employees don't get preventative care and yearly physicals (which they might not do if they don't have insurance), you could end up having more employees out for long periods of time with serious illnesses.

236. Disadvantages of Medical Care The costs. Health care costs have risen enormously in recent years. As a result, not only are the costs draining valuable resources from many small employers, the uncertainty makes financial planning extremely difficult.

237. Disadvantages of Medical Care The sometimes tense business of cost-sharing with employees. There is a way for a small employer to control costs and return certainty to the process: push any additional costs on to employees. While that may solve the financial problems, it creates many others. Even if you don't want to push all the costs on to employees, pushing some of the costs on to them is inevitable.

238. Disadvantages of Medical Care The administrative hassles. Even though the insurance company from whom you purchase the health insurance will usually act as plan administrator, you will have to choose the insurer and then spend part of your time filling out forms, remitting premiums, and acting as intermediary between employee and insurer, among many other tasks.

239. Disadvantages of Medical Care The potential liability. The potential for liability for selecting a health care provider that commits malpractice on an employee does exist. While this risk is small and should not be the driving reason behind a decision not to offer health insurance, you should be aware that several employers have been sued by their employees for what they contend was their employer's carelessness in selecting a provider.

240. Health Insurance Compensation Management

241. Health Insurance It is a well known fact that an employee values a health insurance cover and its benefits. It is viewed by the employee as the second best thing next to monetary compensation, and gives the employer the added advantage of being able to employ and retain the best in the business.

242. Health Insurance Health insurance is insurance against the risk of incurring medical expenses among individuals.

243. Health Insurance By estimating the overall risk of health care and health system expenses, among a targeted group, an insurer can develop a routine finance structure, such as a monthly premium or payroll tax, to ensure that money is available to pay for the health care benefits specified in the insurance agreement.

244. Health Insurance Group health insurance is a medical insurance that covers a group of people, who are usually the members of societies, employees of a common company, or professionals in a common group. Group health insurance helps companies identify and mitigate the risks faced by their employees .

245. Health Insurance Rising costs of healthcare have made it necessary for every employer to cover their employees and their families from financial instability that may arise in case of hospitalization.

246. Health Insurance Also , group health insurance helps companies in attracting talented staff. Whether you are a small group or a company, you can easily retain best talent in the industry by offering comprehensive health insurance coverage .

247. Provident Fund Compensation Management

248. Provident Fund The Employee Provident Fund (EPF) or simply Provident Fund (PF) is a long-term savings and pension instrument for all salaried persons in India.

249. Provident Fund For all employees in such an organisation who draw a basic monthly salary of Rs 6,500 or less, the PF is mandatory. For all others, the PF is optional -- such employees can opt out of the PF at his discretion.

250. Provident Fund The statutory requirement The EPF is maintained solely by the Employees' Provident Fund Organisation of India. As a statutory rule, any company having more than 20 employees, have to register with the EPFO.

251. Provident Fund Contribution to EPF Employees' contribution to the EPF comprises of 12 per cent of the Basic + DA + the cash value of food allowances. An equal amount of 12 per cent is contributed by the employer too, to the fund.

252. Why should you contribute to the EPF? Safety of returns The EPF is the safest debt instrument to invest in. Backed by the government, it guarantees safety of principal as well as the interest earned, making it suitable for long term financial goals. It also brings about an automatic discipline in investing.

253. Why should you contribute to the EPF? Loan options on EPF Most companies offer you a loan against EPF as a security at reasonable rates of interest. So the higher your PF balance, the more is your eligibility for such loans. In times of a crisis, if you so require some money, your EPF could come to your rescue.

254. Why should you contribute to the EPF? Tax treatment on EPF The contributions you make towards your provident fund gets you a tax benefit under section 80C, up to a maximum limit of Rs 1,00,000. Also, the maturity proceeds are tax free, if contributions to the fund have been for more than five years.

255. Why should you contribute to the EPF? Interest earned on EPF The rate of interest earned on a PF account is fixed every year during the months of March or April by the Government. The EPF currently for the financial year 2010-2011 carries an interest rate of 9.5 per cent. This interest rate is guaranteed and risk-free.

256. Why should you contribute to the EPF? Withdrawal facility in EPF The complete amount from your PF could be withdrawn on Retirement at the age of 55 years or due to early retirement on account of some disability etc. Partial withdrawal of money from the fund is permitted occasionally to meet expenses of marriage, medical costs or for building or purchase of a home.

257. Why should you contribute to the EPF? Shifting of jobs At such times, the PF balance could be transferred from one employer to another. The existing balance would continue to stay. With fresh contributions made by the new employer.

258. Why should you contribute to the EPF? Quitting of job PF could be withdrawn, if you quit your job and provide a declaration that you do not intend to work for the next six month.

259. Executive Level Rewards Compensation Management

260. Executive Level Rewards Executive compensation or executive pay is composed of the financial compensation and other non-financial awards received by an executive from their firm for their service to the organization.

261. Executive Level Rewards It is typically a mixture of salary, bonuses, shares of or call options on the company stock, benefits, and perquisites, ideally configured to take into account government regulations, tax law, the desires of the organization and the executive, and rewards for performance

262. Executive Level Rewards Executive Compensation packages are designed by a company's Board of Directors, typically by the Compensation Committee consisting of independent directors, with the purpose of incentivizing the executive team, who have a significant impact on company strategy, decision-making, and value creation (Pay for Performance) as well as enhancing Executive Retention.

263. Executive Level Rewards To help accomplish these goals, Executive Compensation has four distinct characteristics: Pay Package Design: Executive pay arrangements typically consist of six distinct compensation components: salary, annual incentives, long-term incentives, benefits, perquisites and severance/change-in-control agreements.

264. Executive Level Rewards To help accomplish these goals, Executive Compensation has four distinct characteristics: Equity Compensation: The majority of compensation of most executive pay packages comes in the form of company stock.

265. Executive Level Rewards To help accomplish these goals, Executive Compensation has four distinct characteristics: Performance-Contingent Pay: Executive pay packages are designed so that the bulk of an executive's compensation is contingent on a company achieving pre-established criteria of specific financial results and/or strategic objectives.

266. Executive Level Rewards To help accomplish these goals, Executive Compensation has four distinct characteristics: Vesting Schedules: Even after financial or strategic criteria for an award is met, full ownership of the equity award are often conditioned on the executive's compliance with certain covenants.

267. Shop floor Level Rewards Compensation Management

268. Shop floor Level Rewards Shop-floor incentive schemes are based on the principle of payment - by-performance .

269. Shop floor Level Rewards These schemes reward the number of items produced, the time taken to do a certain amount of work and/or some other measure of performance. They may relate to part or all of the pay received by an employee.

270. Shop floor Level Rewards F. W. Taylor(1911), stated that the object of shop-floor incentive scheme was to reward the input of labor within closelydefined tasks and by so doing, to stimulate people to work at a faster pace and increase their output.

271. Shop floor Level Rewards This is in accordance with the instrumentalist view of motivation which is closely associated with ‘ Taylorism ’.

272. Shop floor Level Rewards The view that employees will only work harder if they get more money still dominates thinking about shop floor incentive schemes.

273. Expatriates compensation Compensation Management

274. Expatriates compensation Expatriation is an expensive option so the decision to use an expatriate requires careful evaluation of the benefits that the expatriate will bring.

275. Expatriates compensation A company that decides to transfer an employee to another country must be prepared to propose a compensation package that takes into account a number of elements such as cost of living, housing, education expenses and taxation and not just salary.

276. Expatriates compensation From an organizational perspective, thinking about expatriation often starts with thinking about expatriate compensation. Compensation packages should attract, retain and motivate employees, while at the same time balancing these costs with the expected returns for the organization, which is not an easy task.

277. Expatriates compensation Though it may seem more expensive on the surface to create an expatriate compensation package, the fact is that it is often necessary from a business point of view because that specific skill is not available locally.

278. Expatriates compensation Broadly speaking, we can differentiate between two different approaches to expatriate compensation: the balance sheet approach and the going rate approach.

279. Expatriates compensation The balance sheet approach is the most widely used approach by organizations and its main idea is to maintain the expatriate’s standard of living throughout the assignment at the same level as it was in his/her home country.

280. Expatriates compensation Another important notion is that the balance sheet approach implies matching the expatriate’s salary with home-country peers, not with the host-country colleagues. On top of the home-country salary, host-country cost of living adjustments are usually made.

281. Expatriates compensation As argued by Sims and Schraeder (2005) in their recent review of expatriate compensation practices, such adjustments are made using the ‘no loss’ approach: expatriate compensation is adjusted upward for higher costs of living, but is not adjusted downward if the cost of living in the host country is less than in the home country.

282. Expatriates compensation Contrary to the balance sheet approach, there is a second approach, the going rate approach , which is also known as the ‘localization’, ‘destination’ or ‘host country-based’ approach.

283. Expatriates compensation As these names suggest, the core of this approach lies in linking the expatriate compensation to the salary structure of the host country, taking into account local market rates and compensation levels of local employees.

284. Expatriates compensation The going rate method aims to treat the expatriate employee as a citizen of the host country, encouraging a “when in Rome, do as the Romans do” mentality.

285. Expatriates compensation

286. Expatriates compensation The going rate method aims to treat the expatriate employee as a citizen of the host country, encouraging a “when in Rome, do as the Romans do” mentality.

287. Knowledge worker compensation Compensation Management

288. Knowledge worker compensation Knowledge based pay is a system of payment where employees are compensated based on their individual skill level and education attainment .

289. Knowledge worker compensation Under this system, employees are rewarded for reaching certain goals in education, training and skill development. Knowledge-based pay systems provide incentive for employees to improve their skill set and education .

290. Knowledge worker compensation With job-based pay, employee salaries are established based on job analysis and the requirements of a given position. With knowledge-based pay, more emphasis is placed on the ability of the employee to do the job.

291. Knowledge worker compensation Knowledge-based pay rewards employees who set goals to learn new skills and acquire new knowledge. Ambitious, self-motivated employees typically prefer this approach because it gives them a reason to focus on career development.

292. Knowledge worker compensation It also provides a mechanism to reward employees who want to perform at a higher level. When companies pay for knowledge and skill development, they contribute to a systemic raising of the bar for performance across all jobs.

293. Knowledge worker compensation Because knowledge-based pay is inherently more competitive within job ranks, it may cause conflict among colleagues and co-workers. Colleagues may feel slighted or bitter toward you if you make more money performing similar tasks.

294. Knowledge worker compensation You may also feel underpaid and undervalued if you aren't paid the same as someone doing the same job at a competing company. Plus, with a knowledge based pay system, you have to spend time to take classes or training and continue to develop skills if you want to make more money.