Before reading the compensation management topic, one should know the impact of compensation system on the organisation and its gravity if it is not managed effectively. First and last word on compensation management is that, it is core and direct influencing factor on employee motivation and other factors succeeds.
The HR Compensation Analyst assists with producing the organization's compensation program. Their primary responsibility is the research and study to determine appropriate employee compensation. In addition, they evaluate predicted market trends, recommend revisions to company compensation plans, review job descriptions, and assist the Compensation Manager.
The HR Compensation Manager directs the organization's compensation program. Their responsibilities include developing job descriptions, analyzing jobs, conducting salary surveys and job evaluations, and establishing a salary structure. They suggest revisions to the compensation plan and procedures, administer bonus and incentive programs, and manage the performance appraisal system.
The Fair Labor Standards Act was passed in June 1938. The main objective of the law was to establish minimum standards of living necessary for health, efficiency, and well being of workers. A major provision of the act was the establishment of a minimum wage, initially 25 cents an hour, along with a maximum workweek of 44 hours.
Employee pay raises have averaged a little less than four percent for the past several years according to data compiled by WorldatWork. The two main reasons cited for the relatively low pay raises are: lower rates of inflation and cost-of-living increments, and the increasing use of bonus and variable pay to reward high performing employees.
In India, The Payment Wages Act was enacted in the year 1936 for the purpose of payment of wages regularly to the workers within time limit not exceeding wage period of one month with out any deduction by his employer. Deduction form salary or wages can be done in case of absence, loss or damage, fines and advances.etc. Deductions shouldn't exceed 50% from wage.
Compensation management is one of the most challenging human resource areas because it contains many elements and has a far-reaching effect on the organisation's goals. The purpose of providing compensation is to attract, retain and motivate employees. There are two main types of financial compensation.
An example of indirect financial compensation is when the company contributes to an employee's housing subsidy or a pension plan.
Not all compensation is financial. A worker can get great satisfaction from his work and enjoy the environment in which he works. This is called non-financial compensation and cannot be counted in terms of money. For example, a veterinarian might enjoy working outside, going to farms to treat animals and deliver calves. A publisher might enjoy the challenge of producing books that will enrich people's lives.
It is not always possible to provide a perfect pay package (the agreement between the organisation and the employee about how much money and other benefits the employee will receive). Because of this, some companies allow their employees to work out their own compensation packages.
Objective of Compensation
The objective of the compensation function is to create a system of rewards that is equitable to the employer and employee alike. The desired outcome is an employee who is attracted to the work and motivated to do a good job for the employer. Patton suggests that in compensation policy there are seven criteria for effectiveness. Compensation should be:
Employees, in exchange of their work, generally expect some appreciation. Money is considered as the most important motivating factor for employees, though non-financial incentives work efficiently. The goals of compensation management are to design the lowest-cost pay structure that will attract, motivate and retain competent employees. Here the term compensation and salary of employee are one and same.
Before knowing about Compensation management one must know the labor laws of the country which are governing employees compensation or remuneration system. International Labour Organisation (ILO) made conventions on labour welfare especially on regularly in payment of wages & salaries with minimum pay for stipulated working hours. In accordance with the conventions & recommendations of ILO every country has established labour laws and enforced, who ever contravene them shall be liable for penalty or punishment under serious cases both may be awarded. Naturally judiciary of the concern country is watchdog for dealing labour issues.
India is one of the countries with very high population and stands second in place followed by china. In the India, parliament has enforced four key laws on wages of workers that are Payment of wages act 1936 and Minimum wages act 1948 for the purpose of ensuring minimum payment for particular type of jobs in different sectors and industries according to stipulated working hours prescribed by the law. Normally eight hours is stipulated working time in almost all countries, above stipulated time if any worker is made to work, his employers has to compulsory pay overtime, if not it shall be treated as unlawful by the court of law for which it may impose penalty. Other side of coin it may create serious dissatisfaction among workers and make them feel that they are being exploited which may lead to agitations eventually may lead strikes which is ultimate weapon in hands of workers, ultimately organisations may chose for lockout which is the weapon in hands of employers altogether may create industrial disputes. On this law may support worker agitation for not complying payment of wages by their employer in accordance with wage laws and in some cases law may support employer if workers agitation causes serious damages to organisation.
The third key law is workmen's compensation act 1923, the primary objective of this law is to have any compensation by an employee from his employer if any accident occurs, which make permanent are partial disablement. This law defines under schedules various types of accidents certain to happen to worker and percentage of compensation paid to him in accordance with his age.
The fourth key law is Equal Remuneration Act, 1976, according to the section 4 it is the DUTY OF EMPLOYER TO PAY EQUAL REMUNERATION TO MEN AND WOMEN WORKERS FOR SAME WORK OR WORK OF A SIMILAR NATURE. According to Section 3, a settlement arrived at between the management and the employees cannot be a valid ground for effecting discrimination in payment of remuneration between male and female employees performing the same work or work of a similar nature; Mackinnon Mackenzie and Co. v. Audrey D’ Costa, (1987) 2 SCC 469.
"The most important thing is to note that compensation plays a major role in attracting talent from the market and compensation system of the organisation is Key factor for creating employer brand, which is most important factor for attracting talent people. Having talent people for the organisation is a major asset for the organisation development"
Importance of employees compensation or reward system
- Compensation or reward system of the organisation is most influencing factor for employee motivation, must remember.
- If we observe history of causes of industrial disputes, employee compensation a reward system issues were the main reason in most cases.
- good compensation system of rewards system in the organisation will minimise industrial disputes and helps in maintaining peace and harmony within the organisation.
- Compensation system plays a key role in employee attrition.
- Compensation system mostly influences retention of employee in the organisation.
- Most of employee satisfaction depends upon compensation a reward system of organisation.
- Effective compensation system builds employer brand, which plays a key role in attracting talent.
- Effective compensation system makes employee to put his full efforts for achievement of organisation's goals and objectives.
- Effective compensation system builds initiative towards work, which in turn enhances the productivity of organisation.
- Effective compensation makes employees feel belongingness towards the organisation.
Companies in allegations on employees salary issues
Especially on crux matter of compensation system in the year 2012- September, law suits were filed on well known giant companies like Walmart Stores for not paying overtime to its workers and less payment of wages without following the United States federal laws.
Apple incorporation's electronic components supplier Foxconn Electronics from China had faced same allegations on less payment of wages and also no payment for additional Working hours to its workers. Kingfisher airlines in India succumbed into losses by various reasons eventually failed to pay salaries to its employees for nearly a period of seven months which lead to strike by its employees. Due to no salary payment for months to its employees created severe financial crisis to one of its employee's family, which abetted his wife to commit suicide out of depression. Extremely disappointed Kingfisher airlines employees resorted to road demonstration against company, which ultimately lead to company's reputation down.
Recent example as Walmart claims to giant retail stores dipped in serious allegations accompanied by lawsuit filed for not paying overtime wages at least minimum wages in accordance with federal laws. Opposite to united states federal labour laws, Walmart stores insisting workers to appear for work early hours working during lunch breaks and leaving workplace at late hours.
Compensation and remuneration are grammatically synonym but in the context of labor laws both have different meaning and purpose for which it is paid. Remuneration is paid for work done by a worker or employee whereas compensation is paid for loss suffered physically, mentally or disabled worker or employee.
The HR Compensation Analyst assists with producing the organization's compensation program. Their primary responsibility is the research and study to determine appropriate employee compensation. In addition, they evaluate predicted market trends, recommend revisions to company compensation plans, review job descriptions, and assist the Compensation Manager.
The HR Compensation Manager directs the organization's compensation program. Their responsibilities include developing job descriptions, analyzing jobs, conducting salary surveys and job evaluations, and establishing a salary structure. They suggest revisions to the compensation plan and procedures, administer bonus and incentive programs, and manage the performance appraisal system.
Facts [+]
A recent WorldatWork survey of more than 6,000 managers and employees in 26 organizations in North America found that many employees and managers do not understand why they get paid what they do. 40% reported as knowing what to do to increase their base pay. Only 38% percent reported knowing how to increase the size of their cash bonus.
The 2011 Nielsen survey also showed that the top five dimensions students considered when it comes to seeking employment were high degree of independence at work, salary package, learning on the job, growth prospects and standing of the company in the market respectively.
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Mercer Human Resource Consulting, a subsidiary of Marsh and McLennan, is a global leader in HR and financial services. Mercer Human Resource Consulting provides expertise in human resource areas, ranging from compensation and benefits to operational effectiveness and employee performance and engagement. Mercer has over 15,000 employees serving clients in 41 countries.
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Mercer Human Resource Consulting, a subsidiary of Marsh and McLennan, is a global leader in HR and financial services. Mercer Human Resource Consulting provides expertise in human resource areas, ranging from compensation and benefits to operational effectiveness and employee performance and engagement. Mercer has over 15,000 employees serving clients in 41 countries.
The Adamson Act was signed by President Woodrow Wilson in 1916. The law established for railroad workers an eight-hour workday with additional pay for overtime work. This was the first federal law that regulated the hours of workers in private companies in the U.S. The 1938 Fair Labor Standards Act made the eight-hour work day a "legal work day" work throughout the nation.
The Fair Labor Standards Act was passed in June 1938. The main objective of the law was to establish minimum standards of living necessary for health, efficiency, and well being of workers. A major provision of the act was the establishment of a minimum wage, initially 25 cents an hour, along with a maximum workweek of 44 hours.
Employee pay raises have averaged a little less than four percent for the past several years according to data compiled by WorldatWork. The two main reasons cited for the relatively low pay raises are: lower rates of inflation and cost-of-living increments, and the increasing use of bonus and variable pay to reward high performing employees.
In India, The Payment Wages Act was enacted in the year 1936 for the purpose of payment of wages regularly to the workers within time limit not exceeding wage period of one month with out any deduction by his employer. Deduction form salary or wages can be done in case of absence, loss or damage, fines and advances.etc. Deductions shouldn't exceed 50% from wage.
Compensation: an overview
Compensation management is one of the most challenging human resource areas because it contains many elements and has a far-reaching effect on the organisation's goals. The purpose of providing compensation is to attract, retain and motivate employees. There are two main types of financial compensation.
- Direct financial compensation - the pay that a worker receives as wages, salaries, commissions and bonuses, and
- Indirect financial compensation - all financial rewards that are not included in direct compensation (i.e. benefits).
An example of indirect financial compensation is when the company contributes to an employee's housing subsidy or a pension plan.
Not all compensation is financial. A worker can get great satisfaction from his work and enjoy the environment in which he works. This is called non-financial compensation and cannot be counted in terms of money. For example, a veterinarian might enjoy working outside, going to farms to treat animals and deliver calves. A publisher might enjoy the challenge of producing books that will enrich people's lives.
It is not always possible to provide a perfect pay package (the agreement between the organisation and the employee about how much money and other benefits the employee will receive). Because of this, some companies allow their employees to work out their own compensation packages.
India: Central government employees draw more salary along with benefits than state government employees, compared with private sector employees. There is a particular pay structure fixed for every government employee in India which is not in private companies. The pay structure of government employees in India is as follows
Employee salary : Basic pay + Grade pay + Dearness Allowance (DA) + House Rent Allowance (HRA) + City Compensatory Allowance (CCA)
The details of above said components of salary of government employees are as follows.
- Basic pay: The primary component of employee salary which is bases for calculation of other components in the employee salary.
- Grade pay: An amount which is fixed by the government on the range of employee in government hierarchy. (for example; Group A officers have high grade pay than Group B officers.)
- Dearness Allowance: Certain percentage of the amount on basic pay. This percentage varies from state government to Central government employees. An allowance paid to employees on the basis of consumer Price index. Consumer price index denotes the cost of the products which influences by the inflation. (in simple terms cost of living) At present, 41% is for state government employees and 72 % is for Central government employees as dearness allowance on their basic pay.
- House Rent Allowance (HRA): Certain percentage of the amount on basic pay. This percentage varies from state government to Central government employees. This allowance is paid to employees are meeting house rent expenditure.
- City Compensatory Allowance (CCA): An allowance paid according to the city or town where employee do the job and the purpose of this allowance is to compensate high cost of living especially in cities like Mumbai, Delhi, Calcutta and Hyderabad et cetera . Government decides the amount of allowance to be paid to employees on basis of city or town.
Facts [+]
An estimated twenty-five million American employees without bank accounts are unable to be paid via direct deposit. Increasing numbers of organizations are offering employees without bank accounts payroll cards, similar to debit cards. Electronically transferring funds to employees is estimated to be up to 75% cheaper than issuing traditional paychecks.
"Red-circling" refers to freezing a highly tenured or highly skilled employee's base pay in the event that the pay rate is above the established range maximum assigned to the job grade or classification. A red-circled employee is usually not eligible for further base pay increases until the top pay rate for their job grade/classification is increased.
An estimated twenty-five million American employees without bank accounts are unable to be paid via direct deposit. Increasing numbers of organizations are offering employees without bank accounts payroll cards, similar to debit cards. Electronically transferring funds to employees is estimated to be up to 75% cheaper than issuing traditional paychecks.
"Red-circling" refers to freezing a highly tenured or highly skilled employee's base pay in the event that the pay rate is above the established range maximum assigned to the job grade or classification. A red-circled employee is usually not eligible for further base pay increases until the top pay rate for their job grade/classification is increased.
Objective of Compensation
The objective of the compensation function is to create a system of rewards that is equitable to the employer and employee alike. The desired outcome is an employee who is attracted to the work and motivated to do a good job for the employer. Patton suggests that in compensation policy there are seven criteria for effectiveness. Compensation should be:
- Adequate Minimal governmental, union, and managerial levels should be met.
- Equitable Each person should be paid fairly, in line with his or her effort, abilities, and training.
- Balanced Pay, benefits, and other rewards should provide a reasonable total reward package.
- Cost-effective Pay should not be excessive, considering what the organization can afford to pay.
- Secure Pay should be enough to help an employee feel secure and aid him or her in satisfying basic needs.
- Incentive-providing Pay should motivate effective and productive work.
- Acceptable to the employee The employee should understand the pay system and feel it is a reasonable system for the enterprise and himself or herself.
Facts [+]
Mercer Human Resource Consulting, a subsidiary of Marsh and McLennan, is a global leader in HR and financial services. Mercer Human Resource Consulting provides expertise in human resource areas, ranging from compensation and benefits to operational effectiveness and employee performance and engagement. Mercer has over 15,000 employees serving clients in 41 countries.
Ma Foi Consulting Solutions HR BPO India has 350 clients and over 250 associates. Globally, ADP claims to manage human resource, payroll, tax and benefits administration solutions to over 5.7 lakh clients.
Mercer Human Resource Consulting, a subsidiary of Marsh and McLennan, is a global leader in HR and financial services. Mercer Human Resource Consulting provides expertise in human resource areas, ranging from compensation and benefits to operational effectiveness and employee performance and engagement. Mercer has over 15,000 employees serving clients in 41 countries.
Ma Foi Consulting Solutions HR BPO India has 350 clients and over 250 associates. Globally, ADP claims to manage human resource, payroll, tax and benefits administration solutions to over 5.7 lakh clients.
Direct Employee compensation
Direct compensation refers to monetary benefits offered and provided to employees in return of the services they provide to the organization. The monetary benefits include basic salary, house rent allowance, conveyance, leave travel allowance, medical reimbursements, special allowances, bonus, Pf/Gratuity, etc. They are given at a regular interval at a definite time.
Basic Salary
Salary is the amount received by the employee in lieu of the work done by him/her for a certain period say a day, a week, a month, etc. It is the money an employee receives from his/her employer by rendering his/her services.
HRA
HRA stands for House Rent Allowance, it is an allowance that almost every salaried employee receives as part of there salary package from there employer to meet the cost of rent that they pay for their home. In other words, HRA is a compulsory part of salary of an individual which every salaried person receives irrespective of the type of property he resides in. Which means, if your employer chooses to offer HRA then you will get this as part of your salary whether you stay in a rented house or reside in your own house. As being a taxable part of salary, HRA gets special treatment in income tax law and is exempt from income tax to a certain extent.
Conveyance
Organizations provide for cab facilities to their employees. Few organizations also provide vehicles and petrol allowances to their employees to motivate them.
Holidays and Leave
Payment for holidays and leave is also included in direct compensation. Leave includes sick time, funeral leave, maternity leave, military duty or other paid time away from work.
Bonuses
All forms of bonuses are included in direct compensation. Bonuses are compensation for employees for work performed; they are paid in addition to salary or wages. Bonuses are considered compensation if (per the IRS) they "arise out of an employment relationship or are associated with the performance of services." Bonuses are considered taxable to employees, but are considered an expense of doing business and are, in most cases, a tax benefit to the employer.
Other Allowances
Other paid or reimbursed allowances are included in direct compensation, including ravel (including meals) and some medical care when it is paid by the employee and reimbursed.
Special Allowance
Special allowance such as overtime, mobile allowances, meals, commissions, travel expenses, reduced interest loans; insurance, club memberships, etc are provided to employees to provide them social security and motivate them which improve the organizational productivity.
Basic Salary
Salary is the amount received by the employee in lieu of the work done by him/her for a certain period say a day, a week, a month, etc. It is the money an employee receives from his/her employer by rendering his/her services.
HRA
HRA stands for House Rent Allowance, it is an allowance that almost every salaried employee receives as part of there salary package from there employer to meet the cost of rent that they pay for their home. In other words, HRA is a compulsory part of salary of an individual which every salaried person receives irrespective of the type of property he resides in. Which means, if your employer chooses to offer HRA then you will get this as part of your salary whether you stay in a rented house or reside in your own house. As being a taxable part of salary, HRA gets special treatment in income tax law and is exempt from income tax to a certain extent.
Conveyance
Organizations provide for cab facilities to their employees. Few organizations also provide vehicles and petrol allowances to their employees to motivate them.
Holidays and Leave
Payment for holidays and leave is also included in direct compensation. Leave includes sick time, funeral leave, maternity leave, military duty or other paid time away from work.
Bonuses
All forms of bonuses are included in direct compensation. Bonuses are compensation for employees for work performed; they are paid in addition to salary or wages. Bonuses are considered compensation if (per the IRS) they "arise out of an employment relationship or are associated with the performance of services." Bonuses are considered taxable to employees, but are considered an expense of doing business and are, in most cases, a tax benefit to the employer.
Facts [+]
According to The Payment of Bonus Act 1965, in Indian organizations irrespective of profits or losses it is mandatory for payment of bonus to the Every employee (receiving salary or wages up to RS. 10,000 p.m). engaged in any industry to do any skilled or unskilled manual, supervisory, managerial, administrative, technical or clerical work is entitled to bonus for every accounting year if he has worked for at least 30 working days in that year.
For employees Minimum payment of bonus is 8.33% and maximum bonus payable is 20% on the allocable surplus derived form available surplus of the organization. [Allocable surplus= 67% of the available surplus (other than banking companies) or 60% of the available surplus (banking companies and companies linked with abroad)]. This act exempts certain class of employers prescribed under [Section 32]of this act.
Other Allowances
Other paid or reimbursed allowances are included in direct compensation, including ravel (including meals) and some medical care when it is paid by the employee and reimbursed.
Special Allowance
Special allowance such as overtime, mobile allowances, meals, commissions, travel expenses, reduced interest loans; insurance, club memberships, etc are provided to employees to provide them social security and motivate them which improve the organizational productivity.
Indirect Employee Compensation
What doesn't fall under direct compensation is indirect compensation, of which the employee is the beneficiary, but does not receive directly.
Indirect compensation refers to non-monetary benefits offered and provided to employees in lieu of the services provided by them to the organization. They include Leave Policy, Overtime Policy, Car policy, Hospitalization, Insurance, Leave travel Assistance Limits, Retirement Benefits, Holiday Homes.
Leave Policy
It is the right of employee to get adequate number of leave while working with the organization. The organizations provide for paid leaves such as, casual leaves, medical leaves (sick leave), and maternity leaves, statutory pay, etc.
Overtime Policy
Overtime is the amount of time someone works beyond normal working hours. Normal hours may be determined in several ways:. Employees should be provided with the adequate allowances and facilities during their overtime, if they happened to do so, such as transport facilities, overtime pay, etc. Overtime pay rates can cause workers to work longer hours than they would at a flat hourly rate. Overtime laws, attitudes toward overtime and hours of work vary greatly from country to country and between different economic sectors. Overtime means extra productivity from employee that should be equal or more than the overtime payment made.
Hospitalization
The employees should be provided allowances to get their regular check-ups, say at an interval of one year. Even their dependents should be eligible for the medi-claims that provide them emotional and social security.
Insurance
Organizations also provide for accidental insurance and life insurance for employees. This gives them the emotional security and they feel themselves valued in the organization.
Leave Travel
The employees are provided with leaves and travel allowances to go for holiday with their families. Some organizations arrange for a tour for the employees of the organization. This is usually done to make the employees stress free.
Retirement Benefits
Organizations provide for pension plans and other benefits for their employees which benefits them after they retire from the organization at the prescribed age.
Holiday Homes
Organizations provide for holiday homes and guest house for their employees at different locations. These holiday homes are usually located in hill station and other most wanted holiday spots. The organizations make sure that the employees do not face any kind of difficulties during their stay in the guest house.
Flexible Timings
Organizations provide for flexible timings to the employees who cannot come to work during normal shifts due to their personal problems and valid reasons.
Indirect compensation refers to non-monetary benefits offered and provided to employees in lieu of the services provided by them to the organization. They include Leave Policy, Overtime Policy, Car policy, Hospitalization, Insurance, Leave travel Assistance Limits, Retirement Benefits, Holiday Homes.
Leave Policy
It is the right of employee to get adequate number of leave while working with the organization. The organizations provide for paid leaves such as, casual leaves, medical leaves (sick leave), and maternity leaves, statutory pay, etc.
Overtime Policy
Overtime is the amount of time someone works beyond normal working hours. Normal hours may be determined in several ways:. Employees should be provided with the adequate allowances and facilities during their overtime, if they happened to do so, such as transport facilities, overtime pay, etc. Overtime pay rates can cause workers to work longer hours than they would at a flat hourly rate. Overtime laws, attitudes toward overtime and hours of work vary greatly from country to country and between different economic sectors. Overtime means extra productivity from employee that should be equal or more than the overtime payment made.
Facts [+]
In the United States, the Fair Labor Standards Act of 1937 applies to employees in industries engaged in, or producing goods for, interstate commerce. The FLSA establishes a standard work week of 40 hours for certain kinds of workers, and mandates payment for overtime hours to those workers of one and one-half times the workers' normal rate of pay for any time worked above 40 hours. The law creates two broad categories of employees, those who are "exempt" from the regulation and those who are "non-exempt". Under the law, employers are not required to pay exempt employees overtime but must do so for non-exempt employees.
European Union (EU) directives
The directives require:
European Union (EU) directives
The directives require:
- maximum average working week (including overtime) of 48 hours over a 17 week reference period
- minimum daily rest period of 11 consecutive hours in every 24
- breaks when the working day exceeds 6 hours
- minimum weekly rest period of 24 hours plus the 11 hours daily rest period in every 7-day period
- minimum of 4 weeks paid annual leavenight work restricted to an average of 8 hours in any 24-hour period
- all sectors of activity, both public and private
- Doctors in training used to work a maximum week of 58 hours until 2009. From 1 August 2009 their maximum working week fell to 48 hours
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According to The Factories act, 1948 [section 59] in India worker works in a factory for more than nine hours in any day or for more than forty-eight hours in any week, he shall, in respect of overtime work, be entitled to wages at the rate of twice his ordinary rate of wages.
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Biometric system leads to reduction in sum paid as overtime
INDIA, March, 2012: The amount paid on an average per month as overtime allowance to the employees of Finance Ministry has come down by around one fourth after installation of biometric attendance system, the Ministry has said in response to an RTI query.
The Ministry used to pay an average overtime allowance of Rs 2,26,978 each month, which after installation of biometric attendance system has reduced to Rs 62,600 approximately, the RTI (The Right to Information Act 2005 ) reply.
Biometric attendance system was installed in the Ministry to ensure that the employees and officials come to their office on time and do not leave early.
The application to seek the information on overtime allowance paid by the Ministry was filed by RTI activist Gopal Prasad.
He had also sought information on the modernisation plans undertaken by the Ministry at its offices here.
Biometric system leads to reduction in sum paid as overtime
INDIA, March, 2012: The amount paid on an average per month as overtime allowance to the employees of Finance Ministry has come down by around one fourth after installation of biometric attendance system, the Ministry has said in response to an RTI query.
The Ministry used to pay an average overtime allowance of Rs 2,26,978 each month, which after installation of biometric attendance system has reduced to Rs 62,600 approximately, the RTI (The Right to Information Act 2005 ) reply.
Biometric attendance system was installed in the Ministry to ensure that the employees and officials come to their office on time and do not leave early.
The application to seek the information on overtime allowance paid by the Ministry was filed by RTI activist Gopal Prasad.
He had also sought information on the modernisation plans undertaken by the Ministry at its offices here.
The employees should be provided allowances to get their regular check-ups, say at an interval of one year. Even their dependents should be eligible for the medi-claims that provide them emotional and social security.
Insurance
Organizations also provide for accidental insurance and life insurance for employees. This gives them the emotional security and they feel themselves valued in the organization.
The employees are provided with leaves and travel allowances to go for holiday with their families. Some organizations arrange for a tour for the employees of the organization. This is usually done to make the employees stress free.
Retirement Benefits
Organizations provide for pension plans and other benefits for their employees which benefits them after they retire from the organization at the prescribed age.
Holiday Homes
Organizations provide for holiday homes and guest house for their employees at different locations. These holiday homes are usually located in hill station and other most wanted holiday spots. The organizations make sure that the employees do not face any kind of difficulties during their stay in the guest house.
Flexible Timings
Organizations provide for flexible timings to the employees who cannot come to work during normal shifts due to their personal problems and valid reasons.
Variable pay Plans
Variable pay, also known as performance pay, is used to recognise and reward employee contribution above and beyond their normal job requirements, towards company productivity, profitability, quality and the like. Sreeradha D Basu explains
WHAT IS VARIABLE PAY?
Variable pay is often based on two main factors: your own performance and your company's performance. So, most schemes evolved by companies have a target-setting and actual payout based on that combination. Variable pay is one of the five main components of total rewards in any organisation, and is usually a percentage of fixed pay.
The other components include fixed pay (salary and all cash allowances), retirals (mostly, statutory and pension-related such as PF, gratuity), benefits and perquisites (leaves, medical, car, insurance, etc) and Esops (mainly, stock options and restricted stock units or RSUs).
WHAT ARE THE TYPICAL VARIABLE PAY-OUTS ACROSS DIFFERENT LEVELS?
At junior level, variable pay ranges from 10% to 15% of fixed pay. For sales people, variable pay plus sales incentives can range from 30% to 40%. Sales incentives aren't defined as variable pay as they are commissions.
At middle level, it ranges from 15% to 30% and at senior levels, it is typically between 30% to 50%. At very senior levels, Esops and RSUs are also given above target levels as additional performance incentives.
HOW DO COMPANIES USE IT?
Variable pay has become an increasingly popular mode of compensation in most companies. This is more so in the increasingly competitive business environment, where companies are looking to reduce their investment in fixed costs and increase the use of variable costs, since the latter is paid out only depending on the achievement of certain results.
Companies also use variable pay to drive performance culture and even leverage it to attract and retain talent since talented people prefer joining organisations where they will be differentiated for their performance.
HOW HAS VARIABLE PAY EVOLVED IN INDIA?
Variable pay started gaining importance in the Indian market in the last decade. Largely a Western concept, it came into Asia and emerging markets like India and China, migrating with the MNCs. But Indian companies are now progressing on a par with the West, since the best part about variable pay is that it's performance-linked. Even PSUs are now moving towards it though the percentage there is typically not as high.
More organizations are replacing their annual salary increases and holiday bonuses with pay-for-performance plans. According to HR consulting firm Hewitt Associates, 78% of American companies use some form of variable pay plan to reward employees based on performance with the main incentive of aligning employee actions with corporate goals and objectives.
Sensing the need to retain talent in a tough market, companies across sectors are tying the performance and fortunes of employees with their own, and are attracting mid to-senior-level employees with a substantial hike in variable pay in comparison to fixed pay, without taking a hit on immediate costs.
According to search firms, sectors like e commerce, IT and ITeS, FMCG and consumer durables and pharma have doled out a large part of their pay as variable pay over the past year. "Sectors like e-commerce are witnessing rapid growth and are hiring new people at senior levels.
"If the sectors the companies operate in do not perform well, the company will not perform well, and it becomes difficult to give out increments. Then, variable pay becomes effective for distinguishing the high performers from the rest and retaining them in your company," says Adil Malia, group president(Dt.2012) , human resources, Essar.
For instance, at Essar, high performers this year got variable hikes which were about 25% more than the average performers. Pande feels the situation is starkly different from the pre-slowdown years of 2005-2009 , when companies were hiring left, right and centre, and were not worried about parity issues .
"Now they are holding every individual accountable for performance and are then looking at their variable pay. The days of random mass hiring are gone, and the hike in salary only comes into effect at the end of the quarter or year," he feels.
Variable pay is often based on two main factors: your own performance and your company's performance. So, most schemes evolved by companies have a target-setting and actual payout based on that combination. Variable pay is one of the five main components of total rewards in any organisation, and is usually a percentage of fixed pay.
The other components include fixed pay (salary and all cash allowances), retirals (mostly, statutory and pension-related such as PF, gratuity), benefits and perquisites (leaves, medical, car, insurance, etc) and Esops (mainly, stock options and restricted stock units or RSUs).
WHAT ARE THE TYPICAL VARIABLE PAY-OUTS ACROSS DIFFERENT LEVELS?
At junior level, variable pay ranges from 10% to 15% of fixed pay. For sales people, variable pay plus sales incentives can range from 30% to 40%. Sales incentives aren't defined as variable pay as they are commissions.
At middle level, it ranges from 15% to 30% and at senior levels, it is typically between 30% to 50%. At very senior levels, Esops and RSUs are also given above target levels as additional performance incentives.
HOW DO COMPANIES USE IT?
Variable pay has become an increasingly popular mode of compensation in most companies. This is more so in the increasingly competitive business environment, where companies are looking to reduce their investment in fixed costs and increase the use of variable costs, since the latter is paid out only depending on the achievement of certain results.
Companies also use variable pay to drive performance culture and even leverage it to attract and retain talent since talented people prefer joining organisations where they will be differentiated for their performance.
HOW HAS VARIABLE PAY EVOLVED IN INDIA?
Variable pay started gaining importance in the Indian market in the last decade. Largely a Western concept, it came into Asia and emerging markets like India and China, migrating with the MNCs. But Indian companies are now progressing on a par with the West, since the best part about variable pay is that it's performance-linked. Even PSUs are now moving towards it though the percentage there is typically not as high.
More organizations are replacing their annual salary increases and holiday bonuses with pay-for-performance plans. According to HR consulting firm Hewitt Associates, 78% of American companies use some form of variable pay plan to reward employees based on performance with the main incentive of aligning employee actions with corporate goals and objectives.
Sensing the need to retain talent in a tough market, companies across sectors are tying the performance and fortunes of employees with their own, and are attracting mid to-senior-level employees with a substantial hike in variable pay in comparison to fixed pay, without taking a hit on immediate costs.
"If the sectors the companies operate in do not perform well, the company will not perform well, and it becomes difficult to give out increments. Then, variable pay becomes effective for distinguishing the high performers from the rest and retaining them in your company," says Adil Malia, group president(Dt.2012) , human resources, Essar.
For instance, at Essar, high performers this year got variable hikes which were about 25% more than the average performers. Pande feels the situation is starkly different from the pre-slowdown years of 2005-2009 , when companies were hiring left, right and centre, and were not worried about parity issues .
"Now they are holding every individual accountable for performance and are then looking at their variable pay. The days of random mass hiring are gone, and the hike in salary only comes into effect at the end of the quarter or year," he feels.
Compensation for Individual Performance
Pay for Individual Performance
Organizations may reward individual performance with incentives such as piecework rates, standard hour plans, merit pay, individual bonuses, and sales commissions. These alternatives are summarized in Figure
1. Piecework Rates
An obvious advantage of piece rates is the direct link between how much work the employee does and the amount the emoloyee earns. In spite of their advantages, piece rates are relatively rare for several reasons. Most jobs, including those of managers, have no physical output, so it is hard to develop an appropriate performance measure. This type of incentive is most suited for very routine, standardized jobs with output that is easy to measure. For complex jobs or jobs with hard-to-measure outputs, piecework plans do not apply very well. Also, unless a plan is well designed to include performance standards, it may not reward employees for focusing on quality or customer satisfaction if it interferes with the day's output.
2. Standard Hour Plans
Another quantity-oriented incentive for production workers is the standard hour plan, an incentive plan that pays workers extra for work done in less than a preset "standard time." The organization determines a standard time to complete a task, such as tuning up a car engine. If the mechanic completes the work in less than the standard time, the mechanic receives an amount of pay equal to the wage for the full standard time. Suppose the standard time for tuning up an engine is two hours. If the mechanic finishes a tuneup in 1 1/2 hours, the mechanic earns two hours' worth of pay in 1 1/2 hours. Working that fast over the course of a week could add significantly to the mechanic's pay.
Almost all organizations have established some program of merit pay—a system of linking pay increases to ratings on performance appraisals. (described the content and use of performance appraisals.) Merit pay is most common for management and professional employees.
Rewards employees with 200% variable payout
INDIA: After growing faster than Indian information technology (IT) industry, Cognizant Technology Solutions Corp has now rewarded its employees by giving out as much as 200% of the variable components of their 2011 salaries.
Typically, anywhere from 20 to 30% of an employee salary is labeled as variable pay, linked to a combination of overall company performance and individual performance.
"The company has done the repeat of 2010 in rewarding its top performers. The top performers got around 200% of their target bonus while the average bonus given was 150%. The bonuses were on expected lines as the company has been scoring good quarter on quarter," said a Cognizant employee in Chennai on condition of anonymity.
Improshare
An employee share ownership plan ("stock option" or "stock ownership", abbreviated to "ESOP") is the practice of companies giving staff members shares in their company as part of their salary and "stock option" plan converts an employee in to a shareholders of an organisation. Today, employee stock option plan has become an employee retention tool/strategy for the organisations, especially in the information technology sector.
Organizations may reward individual performance with incentives such as piecework rates, standard hour plans, merit pay, individual bonuses, and sales commissions. These alternatives are summarized in Figure
INDIA: Defence Minister A K Antony in a report to Parliament upper house disclosed that 637 scientists have resigned from the Defence Research and Development Organisation (DRDO) during the period of 2007-2011, most of them were younger scientists who resigned. Better incentives, better increments and promotions are few main reasons behind the resignation of scientists from DRDO. defence Minister said "corrective measures " had been put in place "to stem the flow of resignations". The government has planned to grant performance related incentive scheme to DRDO scientists, on par with the similar organisations.
Source: TOI, 6-12-2012
As an incentive to work efficiently, some organizations pay production workers a piecework rate, a wage based on the amount they produce. This rate is often paid in addition to employees' base pay. The amount paid per unit is set at a level that re-wards employees for above-average production volume. For example, suppose that on average, assemblers can finish ten components in an hour. If the organization wants to pay its average assemblers $12 per hour, it can pay a piecework rate of $12 per hour divided by 10 components/hour, or $1.20 per component. An assembler who produces the average of 10 components per hour earns an amount equal to $12 per hour. An assembler who produces 12 components in an hour would earn $1.20 x 12, or $14.40 each hour.
An obvious advantage of piece rates is the direct link between how much work the employee does and the amount the emoloyee earns. In spite of their advantages, piece rates are relatively rare for several reasons. Most jobs, including those of managers, have no physical output, so it is hard to develop an appropriate performance measure. This type of incentive is most suited for very routine, standardized jobs with output that is easy to measure. For complex jobs or jobs with hard-to-measure outputs, piecework plans do not apply very well. Also, unless a plan is well designed to include performance standards, it may not reward employees for focusing on quality or customer satisfaction if it interferes with the day's output.
2. Standard Hour Plans
Payment according to standard our plan is mostly seen in areas where there is daily labour intensive. Daily labour will be paid according to the hours he has worked. Standard our plan for payment of wages is being used in the field of construction, agriculture sector and in the areas where more manual labour is required.
In terms of their pros and cons, standard hour plans are much like piecework plans. They encourage employees to work as fast as they can, but not necessarily to care about quality or customer service. Also, they only succeed if employees want the extra money more than they want to work at a pace that feels comfortable.
3. Merit Pay
Merit pay refers to the process of determining employee compensation (base salary or bonuses), in part, on the basis of how well each employee performs at work. The principle is simple, at least in theory. It makes sense to reward more productive employees for their increased contributions to the organization, in the interests in fairness, but also with an eye to trying to retain the best employees in a company.
Almost all organizations have established some program of merit pay—a system of linking pay increases to ratings on performance appraisals. (described the content and use of performance appraisals.) Merit pay is most common for management and professional employees.
A drawback of merit pay, from the employer's standpoint, is that it can quickly become expensive. Managers at a majority of organizations rate most employees' performance in the top two categories (out of four or five). Therefore, the majority of employees are eligible for the biggest merit increases, and their pay rises rapidly. This cost is one reason that some organizations have established guidelines about the percentage of employees that may receive the top rating.
Another drawback of merit pay is that it makes assumptions that may be misleading. Rewarding employees for superior performance ratings assumes that those ratings depend on employees' ability and motivation. But performance may actually depend on forces outside the employee's control, such as managers' rating biases, the level of cooperation from coworkers, or the degree to which the organization gives employees the authority, training, and resources they need. Under these conditions, employees will likely conclude that the merit pay system is unfair. The HR How-To box suggests ways to set up a merit pay system so that is maximizes the advantages of this type of pay while minimizing the drawbacks.
Advantages of Merit PayThese are reasons why you might want to consider merit pay.
- Allows the employer to differentiate pay given to high performers.
- Merit pay helps an employer differentiate between the performance of high and low performing employees and reward the performance of the higher performers.
- Merit pay, unlike profit sharing or similar bonus pay schemes, allows an employer to differentiate between the performance of the company as a whole and the performance of an individual. While many merit pay programs also provide an overall reward that is distributed to all employees, to promote such values as team work, a portion of the available compensation is reserved for strong performers.
- Merit pay also provides a vehicle for an employer to recognize individual performance on a one time basis. This is useful for rewarding employees who may have participated in a one-time project such as implementing a new HRIS or opening up a new sales territory.
4. Performance Bonuses
Like merit pay, performance bonuses reward individual performance, but bonuses are not rolled into base pay. The employee must re-earn them during each performance period. In some cases, the bonus is a one-time reward. Bonuses may also be linked to objective performance measures rather than subjective ratings. Bonuses for individual performance can be extremely effective and give the organization great flexibility in deciding what kinds of behaviour to reward.
Rewards employees with 200% variable payout
INDIA: After growing faster than Indian information technology (IT) industry, Cognizant Technology Solutions Corp has now rewarded its employees by giving out as much as 200% of the variable components of their 2011 salaries.
Typically, anywhere from 20 to 30% of an employee salary is labeled as variable pay, linked to a combination of overall company performance and individual performance.
"The company has done the repeat of 2010 in rewarding its top performers. The top performers got around 200% of their target bonus while the average bonus given was 150%. The bonuses were on expected lines as the company has been scoring good quarter on quarter," said a Cognizant employee in Chennai on condition of anonymity.
5. Sales Commissions
A variation on piece rates and bonuses is the payment of commissions, or pay calculated as a percentage of sales. For instance, a Insurance policy salesperson might earn commissions of 5 percent on the amount of the insurance policy of an insured person by him. Selling a 100000 worth Insurance policy will earn 5000/- commissions for the Salesperson. At most organizations today, commissions range from 5 to 20 percent of sales. 21 In a growth-oriented organization, sales commissions need not be limited to salespeople. Many of the technical experts at Scientific &. Engineering Solutions are eligible for commissions and bonuses tied to the profitability of the sales they help to close. The HR How-To box provides additional suggestions for incentive pay.
Pay For Team Performance
Gainsharing
Organizations that want employees to focus on efficiency may adopt a gainsharing program, which measures increases in productivity and effectiveness and distributes a portion of each gain to employees. For example, if a factory enjoys a productivity gain worth $30,000, half the gain might be the company's share. The other $15,000 would be distributed among the employees in the factory. Knowing that they can enjoy a financial benefit from helping the company be more productive, employees supposedly will look for ways to work more efficiently and improve the way the factory operates.
Gainsharing addresses the challenge of identifying appropriate performance measures for complex jobs. Even for simpler jobs, setting acceptable standards and measuring performance can be complicated. Gainsharing frees employees to determine how to improve their own and their group's performance. It also broadens employees1 focus beyond their individual interests. But in contrast to profit sharing, discussed later, it keeps the performance measures within a range of activity that most employees believe they can influence. Organizations can enhance the likelihood of a gain by providing a means for employees to share knowledge and make suggestions, as we will discuss later in this chapter.
Gainsharing is most likely to succeed when organizations provide the right conditions. Among the conditions identified, the following are among the most common:
- Management commitment
- Need for change or strong commitment to continuous improvement
- Management acceptance and encouragement of employee input
- High levels of cooperation and interaction
- Employment security
- Information sharing on productivity and costs
- Goal setting
HOW GAINSHARING MOTIVATES EMPLOYEES
Many firms have had a difficult time developing compensation systems that were simultaneously motivational and cost-effective. Managers have reported that gainsharing motivated employees in their organization in several ways. First, financial rewards, applied in the proper setting and in the proper way, can be a powerful motivator. In addition, gainsharing provides:
Many firms have had a difficult time developing compensation systems that were simultaneously motivational and cost-effective. Managers have reported that gainsharing motivated employees in their organization in several ways. First, financial rewards, applied in the proper setting and in the proper way, can be a powerful motivator. In addition, gainsharing provides:
- Financial participation, which is a powerful tool for increasing employee commitment and loyalty—the same psychological processes that operate for senior and middle managers are applicable to other employees;
- The ability to see the outcomes of work in monetary terms;Rewards that are directly tied to work behavior;
- Group rewards that lead to group cohesion and peer pressure to perform;
- An expanded role for employees in an organization that fulfills higher level psychological needs by encouraging employees to take more responsibility, utilize more talents on the job, and become a genuine partner in the operation of the business;
- An opportunity for expanded communication leading to greater trust in the organization—the calculation of the monthly bonus formula permits employees to understand fundamental business problems;
- An opportunity to unify the organization as many gainsharing plans include all employees (hourly, salaried, clerical, and so on) as participants; and
- An equitable distribution of the gains from productivity improvement.
Gainsharing Plans
Improshare
Improshare, which stands for Improved Productivity through Sharing. Improshare was created byMitchell Fein, an industrial engineer.
The Improshare plan is a form of gainsharing that focuses on sharing physical productivity gains with employees. Standard hours are calculated for the production of each unit, and Improshare pays a bonus when the time needed in the production process is reduced. Gains realized by working either faster or more efficiently are then split between the employer and employees, and the employee portion is shared among all workers. Improshare does not require any form of employee participation, although participation is compatible with the process.
Improshare bonuses are based on the overall productivity of the work team. Improshare output is measured by the number of finished products that a work team produces in a given period. Both production (direct) employees and nonproduction (indirect) employees are included in the determination of the bonus.' Since a cooperative environment benefits all, Improshare promotes increased interaction and support between employees and management.
The bonus is based not on dollar savings, as in the Scanlon and Rucker Plans, but on productivity gains that result from reducing the time it takes to produce a finished product. Bonuses are determined monthly by calculating the difference between standard hours (Improshare hours) and actual hours, and dividing the result by actual hours. The employees and the company each receive payment for 50 percent of the improvement. Companies such as Hinderliter Energy Equipment Corporation pay the bonus as a separate check to emphasize that it is extra income.
Scanlon plan
"Cost saving productivity-incentive plan"
Joseph Scanlon was a union organiser in a steel works, who put a proposal to the owners aimed at saving the jobs of his union members. The steelworkers agreed to work in a more efficient way in return for an equal share of the savings that this generated.
Since its development in 1927, the Scanlon plan has been implemented in many organizations, especially in smaller unionized industrial firms. The basic concept underlying the Scanlon plan is that efficiency depends on teamwork and plant-wide cooperation.
The philosophy behind the Scanlon Plan is that employees should offer ideas and suggestions to improve productivity and, in turn, be rewarded for their constructive efforts. The plan requires good management, leadership, trust and respect between employees and managers, and a workforce dedicated to responsible decision making. When correctly implemented, the Scanlon Plan can result in improved efficiency and profitability for the organization and steady employment and high compensation for employees.
According to Scanlon's proponents, effective employee participation, which includes the use of committees on which employees are represented, is the most significant feature of the Scanlon Plan. This gives employees the opportunity to communicate their ideas and opinions and to exercise some degree of influence over decisions affecting their work and their welfare within the organization.
Incentive rewards are paid to employees on the basis of improvements in preestablished ratios. Ratios of labor costs to total sales value or total production or total hours to total production are the most commonly used. Savings due to differences between actual and expected ratios are placed in a bonus fund. A predetermined percentage of this fund is then split between employees and the organization.
The Scanlon plan is not a true profit-sharing plan, because employees receive incentive compensation for reducing labor costs, regardless of whether the organization ultimately makes a profit. Organizations that have implemented the Scanlon plan have experienced an increase in productivity and a decrease in labor costs. Also, employee attitudes have become more favorable, and cooperation between management and workers has increased.For example, if the firm's workforce were able to realize $1,000,000 in sales with only $90,000 in labor costs, the $10,000 in savings would be split among the employees and their firm.
Rucker plan
The Rucker plan, almost as old as the Scanlon plan, was developed in the 1930s by the economist Allan W. Rucker. The Scanlon formula measures performance against a standard of labor costs in relation to the dollar value of production, whereas the Rucker formula introduces a third variable: the dollar value of all materials, supplies, and services that the organization uses.
The Rucker formula is calculated as follows:$ Value of Labor Costs$ Value of Production - $ Value of Materials, Supplies, Services
The result is what economists call the “value added” to a product by the organization. The use of value added rather than the dollar value of production builds in an incentive to save on other inputs.
Team Bonuses and Awards
In contrast to gainsharing plans, which typically reward the performance of all employees at a facility, bonuses for team performance tend to be for smaller work groups. These bonuses reward the members of a group for attaining a specific goal, usually measured in terms of physical output. Team awards are similar to team bonuses, but they are more likely to use a broad range of performance measures, such as cost savings, successful completion of a project, or even meeting deadlines.
Both types of incentives have the advantage that they encourage group or team members to cooperate so that they can achieve their goal. However, depending on the reward system, competition among individuals may be replaced by competition among teams. Competition may be healthy in some situations, as when teams try to outdo one another in satisfying customers. On the downside, competition may also prevent necessary cooperation among teams. To avoid this, the organization should carefully set the performance goals for these incentives so that concern for costs or sales does not obscure other objectives, such as quality, customer service, and ethical behaviour.
Pay for Organizational Performance
Two important ways organizations measure their performance are in terms of their profits and their stock price. In a competitive marketplace, profits result when an organization is efficiently providing products that customers want at a price they are willing to pay. Stock is the owners' investment in a corporation; when the stock price is rising, the value of that investment is growing. Rather than trying to figure out what performance measures will motivate employees to do the things that generate high profits and a rising stock price, many organizations offer incentive pay tied to those organizational performance measures. The expectation is that employees will focus on what is best for the organization.
These organization-level incentives can motivate employees to align their activities with the organization's goals. Linking incentives to the organization's profits or stock price exposes employees to a high degree of risk. Profits and stock price can soar very high very fast, but they can also fall, as witnessed by many wary investors. The result is a great deal of uncertainty about the amount of incentive pay each employee will receive in each period. Therefore, these kinds of incentive pay are likely to be most effective in organizations that emphasize growth and innovation, which tend to need employees who thrive in a risk-taking environment.
2012,India: Wipro company has tweaked the variable pay structure for its IT (Information Technology) and BPO (Business Process Outsourcing) employees. the company's annual meeting top management decided to attached their variable pay with organisational performance Linked to the customer satisfaction, this decision made clearly visible how much employee earns.
2012,India: Wipro company has tweaked the variable pay structure for its IT (Information Technology) and BPO (Business Process Outsourcing) employees. the company's annual meeting top management decided to attached their variable pay with organisational performance Linked to the customer satisfaction, this decision made clearly visible how much employee earns.
1. Profit Sharing
Under profit sharing, payments are a percentage of the organization's profits and do not become part of the employees' base salary. Organizations use profit sharing for a number of reasons. It may encourage employees to think more like owners, taking a broad view of what they need to do in order to make the organization more effective. They are more likely to cooperate and less likely to focus on narrow self-interest. Also, profit sharing has the practical advantage of costing less when the organization is experiencing financial difficulties. If the organization has little or no profit, this incentive pay is small or nonexistent, so employers may not need to rely as much on layoffs to reduce costs.
An organization setting up a profit-sharing plan should consider what to do if profits fall. If the economy slows and profit-sharing payments disappear along with profits, employees may become discouraged or angry. One way to avoid this kind of problem is to design profit-sharing plans to reward employees for high profits but not penalize them when profits fall. This solution may be more satisfactory to employees but does not offer the advantage of reducing labour costs without layoffs during economic downturns.
OBJECTIVES OF PROFIT-SHARING PLANS
The primary objectives of profit-sharing plans are to:
The primary objectives of profit-sharing plans are to:
- Improve productivity
- Recruit or retain employees
- Improve product/service quality
- Improve employee morale
2. Employee Stock Ownership Plans (ESOPs)/ Employee Stock Option
Social networking companies like, Facebook offered "stock option" to its employees those who stick to the company for a period of two years. similarly, Twitter, Google and Amazon have included stock option in the compensation package of their employees. Management experts feel that stock option is showing positive influence on retention of employees and termed it as a "Golden Handcuff ".
The stock option is the most popular long-term incentive. A stock option plans grant to employees the right to purchase a specific number of shares of company stock at a specific price during a period of time. The price at which the employee can buy the stock is equal to the market price at the time the stock option was granted. The assumption is that the price of the stock will go up, rather than go down or stay the same. Several trends have increased the attractiveness of stock options as a long-term executive incentive and retention tool.
example:-
Suppose that in 2009 a company's employees received options to purchase the company's stock at $10 per share. The employees will benefit if the stock price rises above $10 per share, because they can pay $10 for something (a share of stock) that is worth more than $10. If in 2012 the stock is worth $30, they can exercise their options and buy stock for $10 a share. If they want to, they can sell their stock for the market price of $30, receiving a gain of $20 for each share of stock. Of course, stock prices can also fall. If the 2012 stock price is only $8, the employees would not bother to exercise the options.
An Employee Share Option Plan (ESOP) is a defined contribution employee benefit plan that allows employees to become owners of stock in the company they work for, thereby increasing their commitment, loyalty, and effort. It is an equity based deferred compensation plan. Under the ESOP plan, companies provide their employees the opportunity to acquire the company's shares at a reduced price over a period of time.
Apple Computer, Wang Laboratories, AirTouch, Bristol-Myers Squibb, Nike, Quaker Oats, and Sara Lee. all of these diverse organizations offers a stock option program to its employees.
According to the National Center for Employee Ownership, an estimated 15,000 firms in the United States have established broad employee-ownership programs. Of these firms, about 10,000 have formed ESOPs, covering about 9 million workers.
In recent years, many organizations pushed eligibility for options further down in the organization's structure. For example, it is estimated there are 1,000 Google employees who have become millionaires from stock grants and options.
Important goals of the plan are:
Important goals of the plan are:
- to attract best talented employees.
- Acts as a retention tool.
- to motivate employees to act in the best interest of the organisation as a whole;
- to enhance employee identification with the organisation; and
According to WorldatWork, a compensation association, the use of stock options has become a very prevalent method of motivating and compensating hourly employees, as welt as salaried and executive personnel.
NIIT Technologies leadership team gets ESOPs worth Rs 1 crore (10 million)
July, 2012: Compensation Committee of Global IT services and software solution NIIT Technologies Ltd,India. granted 33,000 employee stock option (ESOP) to its Selected top 10-11 employees in three equal instalments. one third (i.e. 11000 stock options) granted would be given after the completion of one year. Next 11000 stock options would be given after the completion of second year and the rest would be given after the completion of third year.
July, 2012: Compensation Committee of Global IT services and software solution NIIT Technologies Ltd,India. granted 33,000 employee stock option (ESOP) to its Selected top 10-11 employees in three equal instalments. one third (i.e. 11000 stock options) granted would be given after the completion of one year. Next 11000 stock options would be given after the completion of second year and the rest would be given after the completion of third year.
Facts [+]
The National Center for Employee Ownership (NCEO) is a private, nonprofit membership and research organization that serves as the leading source of accurate, unbiased information on employee stock ownership plans (ESOPs), equity compensation plans such as stock options, and ownership culture. The NCEO was established in 1981.
The National Center for Employee Ownership (NCEO) is a private, nonprofit membership and research organization that serves as the leading source of accurate, unbiased information on employee stock ownership plans (ESOPs), equity compensation plans such as stock options, and ownership culture. The NCEO was established in 1981.
ESTABLISHING AN ESOPAn organization establishes an ESOP by using its stock as collateral to borrow capital from a financial institution. Once the loan repayment begins through the use of company profits, a certain amount of stock is released and allocated to an employee stock ownership trust (ESOT). Employees are assigned shares of company stock kept in the trust, based on length of service and pay level. On retirement, death, or separation from the organization, employees or their beneficiaries can sell the stock back to the trust or on the open market, if the stock is publicly traded.ADVANTAGES AND DISADVANTAGES OF ESOPSEstablishing an ESOP creates several advantages. The major one is that the firm can receive favorable tax treatment of the earnings earmarked for use in the ESOP. Second, an ESOP gives employees a “piece of the action” so that they can share in the growth and profitability of their firm. As a result, employee ownership may be effective in motivating employees to be more productive and focused on organizational performance. In one survey of over 1,100 ESOP companies, about 60% said productivity had increased, and 68% said financial performance was higher sinceconverting to an ESOP.Almost everyone loves the concept of employee ownership as a kind of “people’s capitalism.” However, the sharing also can be a disadvantage because employees may feel “forced” to join, thus placing their financial future at greater risk. Both their wages or salaries and their retirement benefits depend on the performance of the organization. This concentration is even riskier for retirees because the value of pension fund assets also depends on how well the company does.Another drawback is that ESOPs have been used as a management tool to fend off unfriendly takeover attempts. Holders of employee-owned stock often align with management to turn down bids that would benefit outside stockholders but would replace management and restructure operations. Surely, ESOPs were not created to entrench inefficient management. Despite these disadvantages, ESOPs have grown in popularity.
Facts [+]
The Domino's Pizza chain focused on its store managers to reduce worker turnover from a staggering 158% down to 107%, according to a StartupJournal.com article. To accomplish this, Domino's HR department deployed a store manager strategy of hiring more selectively, coaching them on how to create better workplaces, and motivating them with the promise of stock options and promotions.
The Domino's Pizza chain focused on its store managers to reduce worker turnover from a staggering 158% down to 107%, according to a StartupJournal.com article. To accomplish this, Domino's HR department deployed a store manager strategy of hiring more selectively, coaching them on how to create better workplaces, and motivating them with the promise of stock options and promotions.
Compensation Vs Remuneration
from the legal or law point of view, there is difference between payment of the compensation and payment of the remuneration of the employee
Compensation
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Remuneration
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Compensation is paid to the employee in case of death of employee, physical injury, or mentally suffered.
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Remuneration is paid to the employee for the work done to the organisation
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Payment of the compensation is compulsory only in case of the death of employee, injury or mentally suffered.
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Remuneration is paid periodically to the employee on daily basis, weekly basis, fortnightly or monthly basis for the work done.
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There is separate and dedicated law for payment of compensation.
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There is separate and dedicated law for payment of compensation.
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Payment of the Compensation to the employee is depended on the gravity of the injury he suffered but not according to the job position or job grade.
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Remuneration of the employee depends on the position of the job or grade of the job with respect to organization hierarchy.
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Payment of the compensation is one time settlement or for a certain period of time unitll employee recovers from suffering.
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Payment of the remuneration is paid as long as the employee work for the organization starting from appointment to retirement
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Payment of the Compensation varies from injury to injury suffered by the employee.
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Payment of the Remuneration varies from job to job position held by the employee in the organization.
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Payment of the compensation provision is same for all employees.
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Payment of the remuneration provisions is different from job to job.
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Generally payment of the compensation depends and varies from age of the employee.
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Payment of the remuneration of the employee depends and varies from the job title, job position or job experience
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There is no other name for the word employee compensation
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Other names for employee remuneration are wages or salaries.
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