Master of Business Administration- MBA Semester 4MU0015 –Compensation Benefits - 4 Credits

Assignment Set- 1

Q1. What are the factors to be taken into account to ensure an optimum compensation package for executives? Ans: Many issues are present in designing executive compensation. There are a lot of factors to be taken into account to ensure an optimum compensation package for executives. Some of the important criteria are elaborated as under:-

S t r at e gy c r it e r ion This refers to the correlation between the organisational strategy and the performance of its executives. The difficult work is to come out with a model which balances between organisational strategies and employee performance. One of the biggest expenses for an organisation could be the raising cost of employee compensation. On the other side, it cannot be neglected because the employee’s performance is directly related to compensation. Therefore, some of the important steps to be taken into account are:

Creating incentives based on the product life cycle. Relating compensation to organisational strategies. Following a simple compensation strategy.

Role cr i t er ion Hierarchical positions and organisational roles have a contributing effect on executive compensation design. Executives act as figureheads, and hence they should be compensated more than others in the lower rungs. However, organisations are now experimenting with structures to respond to the changing environment. It may be essential at times to sacrifice the traditional hierarchical structure. In such cases, executive compensation may not be aligned with the figurehead roles.Sometimes the pay is based on functional aspects and not on the role or position. For example, pilots are not paid a high compensation package for their position, but for their functional aspects. Therefore, the roles and responsibilities of the job is an important aspect in deciding the executive compensation.

B e h avio u r cr it er ion The actions and the processes followed by executives while performing their jobs reveal their behaviour. This criterion is associated with the monitoring mechanism, and executives usually try and do a subjective analysis of the business decisions. Hence executive compensation based on behaviour criterion is quite sensible. However, executive behaviour is difficult to measure and all the aspects of the observed behaviour cannot be expected to meet a specific outcome. Hence, behaviour criterion has not received much attention from the corporate world.

S ize There is a general opinion that the size of an organisation plays the most influencing role while designing executive compensation, while on the contrary, it is not. It is the performance of the organisation which is the most important criterion which influences executive pay package.

M a r k e t The marginal productivity theory of Roberts (1956) argues that a market forces, that is, supply and demand for executive talent determine executive pay. This theory considers the services of executives like any other input for running a business operation. The theory argues that the value of the input (executive compensation) is determined by the intersection of supply and demand in the labour market.

P e e r c o m p e n sation

The social comparison theory (O’ Reilly et al. 1988) assumes that the compensation of selected peers plays a role in designing executive pay. Often board members of an organisation consider themselves as a referral point in their executive pay recommendations.

Q2.How is employee benefit and labour market linked?

Ans: Labour markets function through the contact of employees and employers. Labour economics looks at the providers of labour services (employees), the demanders of labour services (employers), and attempts to understand the resulting model of wages, employment, and income. In other words, from the labour market point of view, wages necessarily depends on the prevailing supply-demand conditions of the labour market.

Earlier, the compensation management practices of Indian organisations focused on attracting, retaining, developing and compensation employees, not considering the labour market conditions. However, with the increase of economic activity and the subsequent increase in the competition between organisations, employee retention has taken the utmost priority. Moreover, globalisation has also contributed to the increased mobility of labour as talented and capable employees now change jobs more frequently, moving across the globe. Given the conditions, the demand and supply conditions in the labour market gain importance and organisations have to consider these factors while setting up the compensation policies. Designing compensation plans which keep pace with the demand and supply of labour is now becoming a corporate practice.

Q3.What are the factors that have to be determined before preparing the salary structure? Ans: The factors that have to be determined before preparing the salary structure are as under:-

Pay structure is the grouping of pay grades or pay bands. There can be more than one pay structure in a compensation plan. For instance, there may be one pay structure for service and maintenance positions, one for sales positions and one for managerial positions. Or, the organisation may have just one structure for all positions. The process of developing the pay structure deals with internal and external analysis to assess the compensation package for the specific job profile. J ob description provides in-depth knowledge about the job profile and its worth.

Pay structure helps in analysing the employee’s role, value and status in the organisation. It also helps in the assessment of incentives.

If the organisation is paying very less to employees, then it may lose valuable employees. If the organisation is paying high, then it may be unwisely spending company resources.

The main goal of developing a pay structure is to manage and demonstrate an organisation’s compensation philosophy and to reflect and support the advancement of the company’s culture. An effective pay structure also helps to attract and retain the efficient employees.

An organisation's pay structure is a visible demonstration of its compensation philosophy and plan. Pay structure is a tool, which is developed logically and communicated effectively to make the employees more motivated towards the job.

The following three factors have to be determined while developing a pay structure: The proper data for establishing the relative value of a particular job to the

organisation. The proper pay range for a job with the defined value to the organisation. The value of each job position within the specified pay range.

Once the above factors are determined, pay structures can be developed through the following steps:

1. Group the jobs with those that have a similar value in the organisation.2. Measure these groups to find out the number of pay ranges needed to group the jobs

on the basis of their value to the organisation.3. Create a salary range that has a minimum point, a mid-point and a maximum point for

amounts allotted within the range and determine the pay for each job grouping.

An organisation’s compensation philosophy and pay strategy determines the approach that should be taken to allocate pay across job ranges. Factors to be considered are:

Number of years of experience. Number of reporting staff members. Performance evaluation results. Hazardous working conditions. Undesirable shifts. Education and degrees. Professional certifications. Management opinions.

A successfully developed pay structure identifies career development in addition to promotion. It demonstrates and pays for the business results on which an organisation places value. An effective pay structure is worth the time and attention. It pays to get it right.

How an organisation structures its base salary program is basically a matter of organisational philosophy, although marketplace practices are very essential to consider in highly competitive situations. In structuring this base pay program, several options are available:

Organisations can use a single rate structure in which the employees performing similar jobs will receive the same pay rate.

Organisations can use a tenure based approach which focuses on from how long an employee has been employed in a particular job.

Organisations can also use a combination of a tenure-based plan and a merit-based plan. For example usually employees begin their job at a fixed rate, and then progress to higher rates during their first year based on the number of years spent in the job, then any additional pay increase is awarded only on the basis of performance.

Organisations can use a pay system based on productivity. An example for this would be an employee who is paid only a sales commission.

An increasingly popular option is some form of base pay with an incentive opportunity, either based on individual, team, unit, or company performance.

Q4.Describe Mintzberg 5 P’s of strategy.

Ans:- The word "strategy" has been used implicitly in different ways even if it has traditionally been defined in only one. Explicit recognition of multiple definitions can help people to manoeuvre through this difficult field. Mintzberg provides five definitions of strategy:

Plan Ploy Pattern Position Perspective.

P lan

Strategy is a plan - some sort of consciously intended course of action, a guideline (or set of guidelines) to deal with a situation. By this definition strategies have two essential characteristics: they are made in advance of the actions to which they apply, and they are developed consciously and purposefully.

P loy

As plan, a strategy can be a ploy too, really just a specific manoeuvre intended to outwit an opponent or competitor.

P a t t e r n

If strategies can be intended (whether as general plans or specific ploys), they can also be realised. In other words, defining strategy as plan is not sufficient; we also need a definition that encompasses the resulting behaviour: Strategy is a pattern - specifically, a pattern in a stream of actions. Strategy is consistency in behaviour, whether or not intended. The definitions of strategy as plan and pattern can be quite independent of one another: plans may go unrealised, while patterns may appear without preconception.

Plans are intended strategy, whereas patterns are realised strategy; from this we can distinguish deliberate strategies, where intentions that existed previously were realised, and emergent strategies where patterns developed in the absence of intentions, or despite them.

P osition

Strategy is a position - specifically a means of locating an organisation in an "environment". By this definition strategy becomes the mediating force, or "match", between organisation and environment, that is, between the internal and the external context.

P e r s p ec ti v e

Strategy is a perspective - its content consisting not just of a chosen position, but of an ingrained way of perceiving the world. Strategy in this respect is to the organisation what personality is to the individual. What is of key importance is that strategy is a perspective shared by members of an organisation, through their intentions and / or by their actions. In effect, when we talk of strategy in this context, we are entering the realm of the collective mind - individuals united by common thinking and / or behaviour.

Q5. How does compensation effect employee satisfaction?

Ans: Linking employee satisfaction to compensation is being practised since long time in most of the organisations. Compensation designs based on this link usually measure performance from a relatively objective side, such as sales or revenues, stock price, productivity gains and so on. The example of this effort in recent times is embedded in labour contracts recently negotiated at United Airlines (UAL). The unions were able to push for a major new approach in part because they own 65 percent of UAL’s stock. Under the terms of agreement more than half of the bonus pay received by the top 625 UAL managers was determined by criteria like time performance and employee satisfaction. While time performance is clearly an objective measure of performance, employee satisfaction is less objective and more unusual. In fact, only a small handful of other firms use satisfaction to determine executive pay. Employee satisfaction has to be measured and evaluated before a new compensation plan can be implemented. Usually, an outside survey firm is hired to perform the annual survey for employees. The results of this survey is shared throughout the company. Thus, the top management will get to know how employees feel about the compensation. Employee satisfaction towards compensation is the most important discourse for any company, because it is directly related to the performance that can be achieved by employees. The more an employee is satisfied and happy with their compensation, the better they perform. In turn, this will influence the company performance too. Thus companies should strive to bring in a fair compensation plan so as to increase employee satisfaction. Employee satisfaction with respect to compensation and rewards depends on the level of intrinsic and extrinsic results and how the employee views those results. These results have different values for different employees. For most of the employees, a responsible and challenging job may have neutral or even negative value depending on their education and previous experience by work providing intrinsic results. These employees might have a higher value for monetary rewards, whereas for a few others, a responsible and challenging position or the learning involved in the job may have very high positive values. Appropriate type of compensation plans, rewards and benefits are important for employees. Financially, the employees must be satisfied that their salaries are justified and are according to their contribution to the company. In this respect, both employees and employer basically work towards the same goal for mutual benefit. Non financial rewards should also be given to employees for their contributions. For example, paid time off, recognition, employee of the month programs, nominations to training programs, career growth opportunities and so on.

To provide incentives, these models support the existence of reward systems that structure compensation so that the employees expected value increases with observed employee productivity. Thus compensation can take many various forms, including appreciation from managers and co-workers, implicit promises of future promotion opportunities, feelings of self-esteem that come from superior achievement and recognition and current and future cash rewards related

to performance.

Q6. Ms. Deepa Mehra is the VP-HR of Induslink Network. She is assigned the task of finding a new CEO for the company and fixing the compensation. What are the trends that she will have to look into before finalizing the compensation package for the CEO?

Ans. Ms. Deepa Mehra will have to look into the following trends before finalizing the compensation package for the CEO:-

Though we have a lot of literature based on extensive research available on CEO compensation, most of these efforts are focused on the UK and the USA. Very little is known about the trends in India.

One thing that is evident from this research is that CEO compensation in India is positively related to the age and organisational abilities of the CEOs. However, it is found that family ownership is negatively related to CEO pay. Further, it was found that CEO duality and proportion of insider directors had no significant bearing on CEO compensation in family-owned firms but did play a key role in non-family organizations.

In countries such as India, societal norms accord a great deal of respect for age since it is believed to be related to wisdom (Esterby Smith et. al. 1995, Lawler/Jain/Ratnam/Atmiyanandana 1995). It is therefore considered an important qualification and largely determines an executive's progress up the corporate hierarchy (Dutta 1997, Kuppuswamy 1993, Sinha/Sinha 1995). Thus, in the Indian context it can be hypothesized that:-

The chronological age of the executive will be positively related to his/her compensation.

The length of an executive's tenure in the organization will be positively related to his/her compensation.

In countries like India, wisdom is always measured based on the age. Based on Becker postulates, the level of executive compensation is linked to age first. In addition, many researchers found that there is a positive relationship between age and compensation. Hence, age is considered as one of  the important qualification and is used as a key component to determine the compensation.

The other major link for chief executive compensation is on the tenure of CEO engagement. This is because a CEO who has worked for a very long time would have built the necessary base for the organisation. Organisations give importance to tenure because it is a reflection of the CEO’s knowledge which is accumulated over time with experience.

The total compensation in CEO pay includes the sum of the executives salary, current bonuses, long term incentive plans, and stock options. They also receive defined benefit plans, various perquisites, and severance payments in case of international assignments. Today’s bonuses are generally part of the variable pay, which are based on annual accounting performance. Long term incentives are usually based on multi-year performance. The rewards are given based on years of service and also according to their performance either by cash or by stock.

Ghemawat and Khanna (1996) report that roughly 60% of all business activity in India is conducted by organisations that are either family owned or family controlled. Another recent study by Dutta (1997) reports that roughly 70% of the largest firms in the country are family businesses. Reflecting its developing nature, the Indian economy has grown as a result of the remarkable impetus provided by an investor class of individual families.

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