Corporates need growth to sustain their activities and increase their profits. What is known in financial jargon as Top Line Growth is the increase in revenues that happens because of growth that the corporate actualizes during a given year.

In contrast, what is known as Bottom Line Growth is the net result of revenues minus costs of doing business and taxes paid apart from other items in the income statement that result from an outflow of funds.

In other words, a corporate is profitable when its bottom line is positive meaning that the difference between revenues or the inflows and the expenditure or the outflows is positive. This is the cardinal rule under which any corporate functions and usually, most corporates increase their bottom line through increased revenues and cutting costs that result in more top line growth (increased revenues) and better bottom line growth(as a result of increased top line and decreased expenditure).

During recessionary times (like the one that is now underway in the world, corporates find it difficult to grow their top lines because of sluggish demand, consumer purchases and spending decreasing because of lesser disposable incomes, and an overall bearish sentiment that results in lesser revenues.

In this scenario, corporates usually focus on cutting costs as a means to sustain their bottom line growth. Remember that the bottom line can grow even in the absence of more profits by cutting costs and rationalizing expenditures which reflect in the income statement as decreased expenses and hence, additions to the bottom line.

Strategies to beat the Downturn

This brings us to the strategies that corporates pursue during recessionary times to increase their bottom lines. These strategies usually entail cutting costs wherever and however possible.

As salaries and benefits given to employees are a major source of expenditure to corporates, layoffs are the typical reactions to recessions. Apart from layoffs, the other strategy that the corporates pursue is through rationalizing the costs, which means that no salary hikes, no bonuses, and a trimming of employee benefits. These are typical reactions to a no growth or a slow growth external environment.

Further, many corporates cut down on costs by focusing their energies on critical and performing operations and activities. This usually results in shuttering of loss making business units and phasing out of activities where the costs are high and the revenues are less.

Moreover, corporates also resort to increasing profitability that can actualize by increased profitability, greater returns on existing processes through efficiency, and a focus on getting more bang for the buck, which means that corporates employ strategies that are intended to extract more revenues from the operations and reduce costs from the same.

Innovation, Automation, and Increased Productivity

Increased productivity is usually actualized through innovation, automation, and increased demands on employees to spend their time productively.

Among the three methods:

1. The performing corporates usually resort to innovation as a strategy to beat the downturn.

2. Next are those who automate their processes to a greater degree and layoff the redundant employees.

3. Third are those who make more demands on their employees by asking them to work more hours, spend lesser time in breaks from work, and generally asking them to be more productive.

It needs to be mentioned that among these strategies, the best companies usually combine elements from all the three to actualize more profitability.

Cutting Slack and Trimming Flab is the Answer to fitness for individuals and Corporates Alike

We have discussed how corporates react to decreased revenues by cutting costs. The key aspect about these strategies is that they all focus on cutting slack or trimming the costs.

An example would be an overweight person who has to be fit if he or she has to remain in contention for work and healthy living. This means that this individual has to cut the extra fat and generally lead a healthier life by cutting down on excess consumption.

Similarly, the bottom line for corporates to better their bottom lines is through trimming the flab and increasing the fitness of the organization.

To attract the best talent available, the IT sector designs the compensation packages in ways that can be termed innovative and path breaking as they bundle the basic compensation components and perks and benefits in novel and unique ways.

This article looks at some of the ways in which the IT sector provides compensation for its employees.

Innovative Compensation Packages

A hallmark of the compensation packages in the IT sector is their reliance on non standard components that are the characteristic of the old economy or the traditional sectors. In comparison, the so-called “new economy” companies make it a point to include additional components like variable pay, performance linked incentives over and above the base pay that they give out to their employees. With the aura surrounding the IT sector, many employees have come to take for granted the high pay along with the attractive perks and benefits that these companies give.

ESOP’s

The IT sector pioneered the introduction of ESOP’s or Employee Stock Options plans for the employees as a means of ensuring that employees take more ownership and responsibility for their work by making them partners in the growth of the company.

The rationale for giving stock options to employees is that once they feel a sense of ownership with the company in which they are working, their performance levels go up due to increased motivation and satisfaction that such a practice tends to inculcate in the employees.

Given the fact that most IT stocks zoom ahead in value after the IPO or the Initial Public Offering is announced and retains their valuations well into the company’s existence, IT companies that offer ESOP’s are much sought after by many employees.

Other Perks and Benefits

The IT sector provides additional benefits like transportation, medical allowance and allowances for furnishing one’s house. With an emphasis on all round welfare as opposed to paying the employees what is the minimum, IT companies ensure that their employees are taken care of well.

Many companies in the IT sector are quite liberal in insuring their employees and their families under group medical insurance which provides adequate cover to the employees and their families in case of illness and surgeries as well as accidents and other unanticipated contingencies.

Further, some IT companies go a step further and provide for recreational allowances that ensure their employees’ vacation expenses are also taken care of.

Given the innovative ways in which IT companies provide for their employees, it is not surprising that this sector ranks among the most preferred employers and the companies that make up this sector is the destination of choice for many a grad fresh out of college.

Further, globalization has created a “global village” where people in different parts of the world are able to not only participate in global supply chains but also partake of the wonders of cultural exchange and assimilation. This has created aspirational values among large sections of people in the developing countries who now demand better compensation at par with their counterparts in the advanced economies of the West.

Hence, corporates need to be aware of the complexities of the issue of how much compensation and in what form that is to be paid to the employees taking into account all the factors.

Given the fact that most companies in the West outsource to countries like China and India because of the cost advantage where lower wages in these countries provide cost savings, the reckoning of higher wage demands and wage parity that occurs because of economic factors might obviate the advantage enjoyed by these countries as far as the outsourcing phenomenon is concerned.

In this context, it is worth noting that corporates world over are feeling the pinch of the ongoing global economic crisis and this has led to depressed wages as well as lower hikes for the employees in the last two years. Hence, the added challenge of keeping the workforce happy in these gloomy times is something that HR managers must take into account as well.

The globalized workforce that participates in the global supply chain creates its own set of challenges with many expatriates being paid “hardship allowances” to entice them to work abroad in developing countries.

Further, the native workforce in these transnational corporations earn higher wages than those of the average workers in their countries leading to ethnic tensions and demand for inclusion of the less qualified workers. All these factors need to be addressed by the managers of corporations when they decide on the compensation.

Finally, the very real phenomenon of attrition because of poor compensation continues to haunt the corporates and the challenge of retaining quality workers while retrenching poor performers remains a key imperative for companies. Hence, compensation management has aspects other than those that were discussed so far in this module and this article is meant to highlight some of them. It is hoped that the world economy recovers quickly and the boom years where workers and corporates were happy working together come back to the advantage of everybody.

— Jack Welch

Most of us would have heard the term “compensation” in the context of getting paid for the work that we do. The work can be as part of full time engagement or part time in nature. What is common to them is that the “reward” that we get for expending our energy not to mention the time is that we are compensated for it.

From the perspective of the employers, the money that they pay to the employees in return for the work that they do is something that they need to plan for in an elaborate and systematic manner. Unless the employer and the employee are in broad agreement (We use the term broad agreement as in many cases, significant differences in perception about the employee’s worth exist between the two sides), the net result is dissatisfaction from the employee’s perspective and friction in the relationship.

It can be said that compensation is the “glue” that binds the employee and the employer together and in the organized sector, this is further codified in the form of a contract or a mutually binding legal document that spells out exactly how much should be paid to the employee and the components of the compensation package. Since, this article is intended to be an introduction to compensation management, the art and science of arriving at the right compensation makes all the difference between a satisfied employee and a disgruntled employee.

Though Maslow’s Need Hierarchy Theory talks about compensation being at the middle to lower rung of the pyramid and the other factors like job satisfaction and fulfilment being at the top, for a majority of employees, getting the right compensation is by itself a motivating factor. Hence, employers need to quantify the employee’s contribution in a proper manner if they are to get the best out of the employee. The provision of monetary value in exchange for work performed forms the basis of compensation and how this is managed using processes, procedures and systems form the basis of compensation management.

As the module progresses, readers would be introduced to other aspects of compensation management like the components of compensation management, types of compensation, inclusion of variable pay, the use of Employee Stock Options etc. The aspect of how skewed compensation management leads to higher attrition is discussed as well. This aspect is important as studies have shown that a majority of the employees who quit companies give inadequate or skewed compensation as the reason for their exit. Hence, compensation management is something that companies must take seriously if they are to achieve a competitive advantage in the market for talent.

Considering that the current trend in many sectors (particularly the knowledge intensive sectors like IT and Services) is to treat the employees as “creators and drivers of value” rather than one more factor of production, companies around the world are paying close attention to how much they pay, the kind of components that this pay includes and whether they are offering competitive compensation to attract the best talent.

In concluding this article, it is pertinent to take a look at what Jack Welch had to say in this regard: As the quote (mentioned at the beginning of this article) says, if the right compensation along with the right kind of opportunities are made available to people by the firms in which they work, then work becomes a pleasure and the manager’s task made simpler leading to all round benefits for the employee as well as the employer.

Hertzberg’s Hygiene theory refers to how certain factors are necessary to maintain “Hygiene” or ensure that the employees are not dissatisfied.

• These factors alone do not contribute to “quantum” jumps in employee satisfaction. Rather, the absence of these factors makes employees dissatisfied.

• The point here is that if a fair and just compensation is provided, the employee has the “baseline” requirements met which ensures that he or she is now in a position to go for higher things like job satisfaction and fulfilment.

• However, if compensation is found to be lacking, the employee might very well be unhappy and dissatisfied with the company leading to attrition and other such negative outcomes.

• Hence, having the right compensation is the first step in getting the best of employees.

If we take a look at the components of a compensation system, we find that employers decide on what is the right compensation after taking into account the following points.

1. The Job Description of the employee that specifies how much should be paid and the parts of the compensation package.
   1. The Job Description is further made up of responsibilities, functions, duties, location of the job and the other factors like environment etc.

   2. These elements of the job description are taken individually to arrive at the basic compensation along with the other components like benefits, variable pay and bonus.
      • It needs to be remembered that the HRA or the House Rental Allowance is determined by a mix of factors that includes the location of the employee and governmental policies along with the grade of the employee.

      • Hence, it is common to find a minimum level of HRA that is common to all the employees and which increases in proportion to the factors mentioned above.

2. The Job Evaluation that is a system for arriving at the net worth of employees based on comparison with appropriate compensation levels for comparable jobs across the industry as well as within the company.
   1. Factors like Experience, Qualifications, Expertise and Need of the company determine how much the employer is willing to pay for the employee.

3. It is often the case that employers compare the jobs across the industry and arrive at a particular compensation after taking into account the specific needs of their firm and in this respect salary surveys and research results done by market research firms as to how much different companies in the same industry are paying for similar roles.

The components of compensation that have been discussed above are the base requirements for any HR Manager who is in charge of fixing the compensation for potential employees.

There are other variables as well that would be discussed in subsequent articles. This article has introduced several concepts around the topic of components of compensation and these concepts are crucial for HR professionals as well as those aspiring management professionals who want to make a career in the corporate world.

Before concluding this article, it needs to be remembered that exit interviews have shown that over 70% of employees who quit their jobs do so because they are dissatisfied with the compensation that they are getting. Hence, all HR professionals and managers must take this aspect into account when they determine the compensation to be paid to employees.

To take the first component that is common to all packages at all levels (hence the term basic – however, it is not the same for all levels).

• Basic pay is the base on which the compensation package rests. This is the equivalent of the base of the pyramid and the other components are usually fixed as a percentage of the basic pay. It is common to find components like HRA (House Rental Allowance) and Additional Pay as a certain percentage (say 20% or 30%) of the Basic.

• There are many companies that have introduced the concept of Variable Pay where this particular component of the compensation is not fixed, but is a percentage of the Basic that is paid out according to the performance of the company, group and the individual. Hence, the term performance linked pay is also used for variable pay.

  If we take the three sub-components of the Variable Pay –

  1. The company performance linked pay is as the term implies paid out as a percentage of the Basic that is tied to the performance of the company as a whole. So, if a company performs exceedingly well in the given quarter, then the employee might get a large percentage (say 100% or 150%) of the base of the component. If a company does do not well or does only moderately better, then the employee might get a lower percentage of the base (say 50% or 75%).

  2. The group performance linked pay is paid out in a similar manner but the point of reference in this case is the performance of the group or the division in which the employee works.

  3. Finally, the most important sub-component is the Individual Performance Linked Pay that is paid out according to the performance of the employee and hence is entirely tied to the way in which the employee performs as determined by the rating that he or she gets at the end of the performance cycle.

The rationale for these components is that an employee would be better motivated to perform individually, contribute to the group to which he or she belongs and finally, perform well keeping in view the overall growth of the company. Hence, these sub components of compensation have been designed to spur the employee to excel not only in an individual capacity but as a team member and finally, a responsible employee of the company. The idea here is to discourage silo based performance and instead concentrate on all round performance.

In the articles to follow, we shall look at how employees can negotiate their compensation by following some tips that we shall provide.

Jobseekers and aspiring and working professionals as well are usually curious about their employers design compensation plans.

Indeed, given the fact that we all work for money as well as other things such as job satisfaction and fulfillment, it is imperative that employers and employees alike are convinced about the compensation being fair and adequate as well as reflecting the potential and the contributions of the employers.

Further, research has shown that most employees who quit organizations do so because they feel that their contributions and talents are being wasted and hence, the dissatisfaction and the disappointment as well as the frustration boils over leading them to quit their jobs.

In addition, organizations usually do not want to lose key employees and high performers and hence, they do need to design effective compensation plans that take a balanced and fair approach.

Moreover, compensation plans should also not result in the employers and employees alike thinking that they have compromised and hence, this is more the reason for the HR (Human Resources) Managers and the Middle Managers who are usually part of the compensation designing team to work out a compensation plan that leaves everybody happy.

The Challenges of Designing Effective Compensation Plans

Having said that, it is always not easy to design the perfect compensation plan as can be seen from the fact that most compensation plans are judged to be skewed in favor of the employers.

A typical employee compensation plan or package in most reputed organizations would have a fixed component or the base salary that is paid irrespective of the performance and the contributions of the employees.

In addition, there is the variable pay that is linked to employee performance and the standard allowances such as HRA or House Rent Allowance, Medical Allowance, and Transport Allowance.

Apart from this, there are bonuses that are usually paid based on the ratings in the performance appraisal.

Of course, the variable or the flexible pay and the bonuses sometimes are taken as equivalent in most organizations where these components are usually linked to the ratings and the other factors such as revenues accrued due to the employee.

In other words, it is the variable or the bonus component that is crucial since designing this often is a challenge as most employees often protest and lodge complaints with the HR or the Middle Managers to get this rectified.

Dwindling Social Safety Nets and a Pension-Less Future

In recent years, the challenges in designing employee compensation plans have increased as it is no longer the case that social security nets and the medical and other allowances are enough or sufficient for the employees to feel motivated and secure in the knowledge that their employer would take care of their retirement and the medical needs of theirs and their families.

Indeed, in the United States, there is an intense debate over dwindling Social Security Benefits going forward as well as concerns that the 401(k) plans that are supposed to be the retirement Nest Eggs of employees are not being funded adequately.

In other words, with the future looking bleak for older workers, there is much agitation among them about their future. In other countries such as India, there are legitimate concerns that pensions would become a thing of the past or have already become so except for the present pool of workers who retired in the last decades.

This is being reflected in the anxieties about PF or Provident Fund Contributions and how both the government and the employers are perceived to be denying workers their fair share when they retire.

The same goes for medical allowances as President Trump is trying to undo Obamacare or the Healthcare Act that is supposed to be friendly to the poor.

Part Time Work, the Gig Economy, and Compensation Plans

Thus, from the discussion so far, it is evident that the HR managers have a tough task on their hands when they design the compensation plans. Indeed, given the prevailing uncertainties over the layoffs and automation caused job losses, it remains to be seen as to how effective compensation plans would be going forward.

This is the reason why most firms and corporates worldwide are tending to hire temporary or contractual workers who need not be paid social security and medical benefits.

Whether this is a positive trend for employers is debatable since while it allows them to save money, it also leads to decreased employee productivity and morale that can have cascading effects on the way in which workplace and organizational culture ensues.

Having said that, this trend is also amplified by the increasing instances of Freelance or Gig Workers who work on a per project or task basis and hence, remove the added layer of benefits that are paid to the temporary or the contractual workers.

What this means is that employees in the future would have a tough time dealing with so many cuts to their paychecks.

Some Tips for Working Professionals

Therefore, if you are a professional just starting out in your career or are aspiring to be one or even have been working for a decade or so, it is our suggestion that you remain alert and vigilant to all these trends and ensures that you get a good deal in the process.

Indeed, negotiating and bargaining for a fair compensation is your right that nobody can take away from you and hence, do not hesitate to follow what your intuition says.

Having said that, learn to draw a line as well and back down if the negotiations look like they are becoming bitter.

To conclude, a fair compensation plan goes a long way in ensuring that both employees and employers achieve a win-win situation.

Attrition can be voluntary and involuntary, where the former is the employee quitting the company out of his or her own volition and the latter is the company asking the employee to quit for a number of reasons ranging from non-performance to violation of rules and regulations.

In this article, we consider the voluntary attrition and the linkage between inadequate compensation and attrition.

Low compensation and Attrition

The exit interviews conducted by the HR professionals to ascertain the reasons behind an employee’s exit usually reveal that low compensation is a major factor behind the employee’s decision to quit the company.

Research into the phenomenon of attrition has found that many employees (particularly at the entry and the middle management levels) leave companies because they have been offered better compensation at another company.

On the other hand, the senior management personnel quit to take up challenging roles that pay well as well as provide self actualizing drives to them.

Hence, it can be construed that compensation is a major factor behind an employee’s desire to quit a particular company and join another company.

Compensation as a Hygiene Factor

Hertzberg’s theory of motivation lists hygiene factors as those conditions when absent cause an employee to be dissatisfied. The point about this theory is that factors like adequate compensation, a congenial working environment and additional benefits are necessary to motivate the employee and they ought to be present to keep the employee happy. The absence of such factors makes the employee lose focus and drive and hence the lack of “hygiene” makes it difficult for the employee to continue.

How to Manage Compensation Expectations

The appraisal time or the time of the year when employees are graded on their performance is usually the time when employees put forth their aspirations and expectations regarding the compensation and other aspects of their job.

Hence, the line managers and the HR managers must make it a point to “manage” the expectations of the employees during this period.

The attrition is usually the highest when employees are handed their raise letters that specify how much their compensation is increased. This is because the employees might expect more than what they have been awarded which leads to dissatisfaction.

Though compensation in recent years has ceased to be the “be all” of employee satisfaction with the nature of work and the responsibilities that an employee has becoming more important in determining job satisfaction, it still is one of the most important factors behind an employee’s decision to quit a company.

Hence, it is incumbent upon HR professionals and the senior management that they devise compensation plans keeping in mind the various factors that drive an employee’s psyche.

Only when an employee is satisfied with his or her condition in a company can they perform at the desired levels.

All of us work for monetary and non-monetary benefits and there is no denying the fact that the former is more important for many (if not all) than the latter. Therefore, employees in organizations need to understand the components of the Payslip as this determines how much they are earning (gross and net) as well as a peep into the various sub-headings in which their salary and other benefits/perks are divided.

For those starting their careers and those aspiring to a career in the corporate world (and even the government and public sector), it is very important that they know how much each component adds up to and how much tax they have to pay.

This article is intended to walk you through the format of a Payslip and the format that is explained here is a generic one and can vary from organization to organization.

However, care has been taken to ensure that a proper representation of the components is provided and it can be said that the format listed here is followed by many reputed organizations like IBM, Fidelity, and Microsoft.

Basic

As the name implies, this is the base component or the basic that employees are entitled to and this component is used to calculate the other benefits as a percentage of the basic. For instance, it is common to calculate the PF (Provident Fund) deduction based on the basic in Asian countries and this component of the Payslip in the West is similar except that the social security component is known as 401(k) in the United States.

Variable Pay/Bonuses

In recent years, many Asian companies have introduced the component of variable pay, which indicates the extent to which individual; team, group, and organizational performance are reflected in the amount of money paid to the employees.

For instance, if you have achieved the highest rating possible, then your individual variable pay would reflect your superlative performance. Similarly, if your team/group/division has done well, then you are entitled to monetary benefits that are a percentage of the total amount at the disposal of these entities.

Next, if your organization has done well, then there are chances that you might be rewarded for your contribution to its success in the same way in which you have been rewarded for your team/group/divisions’ performance.

HRA

HRA or House Rental Allowance is calculated on the basis of the category of the city in which your organization is located. For instance, Metropolises have a higher payout for HRA when compared to Tier II and Tier III cities and towns.

It is important to note that HRA is both a statutory requirement meaning that it is mandatory according to the labor laws and it is dependent on your role and rank in the hierarchy of the organization.

To explain this further, a basic amount of HRA is mandated by the government, this is compulsory, and organizations can “top it up” according to how they perceive your value to the organization.

Conveyance

This component reflects the amount of money that your company pays out for your conveyance. Though there are some governmental undertakings, which pay more if you have a car and compensate the others who do not have a car by providing for a car loan if possible, the private sector in general pays the conveyance allowance according to the employees’ place in the hierarchy and his or her role in the organization.

Medical Reimbursement

In recent years, many organizations have converted this component from reimbursement based on actual money spent on receipt of bills to a fixed component, which is again dependent on the parameters laid down and explained previously.

Further, there are many organizations that have done away with this component and instead, they have insured their employees under group medical insurance for them and their families (immediate dependants) subject to certain limits, which are again based on the seniority and value of the employee.

EPF/VPF Contribution

As mentioned in the section related to Basic, the EPF (Employee Provident Fund) contribution is a two-tiered component wherein the employee’s contribution is calculated as a certain percentage of the basic, which is mandated by the government. The amount thus deducted would be matched by the organization, which means that the employee can expect the double of what is deducted from his or her salary to be put away in social security.

However, many multinationals also deduct a few percentage points more than the mandated figure and also contribute a matching amount. As for VPF (Voluntary Provident Fund) component, as the name implies, it is purely voluntary on part of the employee to set aside a portion of their monthly salary and which the organization also contributes though not the exact amount like EPF and subject to governmental regulations.

Income Tax/Professional Taxes

For many employees, this is the component that does not sound like music as compared to the other components as this salary head indicates the amount that the employee has to pay to the government as Income and other taxes. After TDS or Tax Deduction at Source was introduced, organizations have been calculating the gross Income tax based on the salary of the employee and then apportioning it over the twelve months so that there is a monthly component, which the employee has to pay.

Arrears and other Deductions

This head usually encompasses some arrears that the organization owes to the employee carried over from previous months and similarly, any deductions that have been not done earlier. This component is usually not part of the Payslip each month unless there are arrears and deductions pending.

Miscellaneous

This is an umbrella component, which indicates any other deductions/payouts that the employee pays or receives, and usually this head indicates reimbursement for official lunches and other perks.

Of course, there are several kinds of negotiation with the employer. For instance, the employee can negotiate at the time of the hiring process or can negotiate at the time of the appraisal cycle. In this article, we consider the strategies available to the employee at the time of the hiring process.

There are several parts to the employee’s strategy to negotiate with the employer. Some of them are:

• Plan and Communicate: The most important part of the employee’s strategy must be to research the compensation trends in the market and then negotiate with the employer based on how much the other companies are willing to pay for a similar role combined with the fact that the company hiring him or her pays for the same role. Hence, it is advisable for the employee to keep in touch with compensation trends in the marketplace and also talk to other employees before he or she decides to communicate his or her expectations to the prospective employer.

• Timing makes the difference: In any negotiation process, time is the key element and hence timing the negotiation process is important. The best possible option for the employee would be to wait for the company to make an offer and then pitch in his or her expectations about the compensation. There is something called overkill which must be avoided and the employee must avoid going overboard. At the same time, the employee must also ensure that he or she does not start the negotiation process early on in order not to lose out on the offer. Hence the timing of the pitch makes all the difference.

• Consider the Alternatives: When you are deciding about prospective offers, ensure that you make the pitch for your expected compensation level after taking into account all the alternatives and not simply rush into something that does not value your experience and expertise adequately. At the same time, do not harangue the prospective employers though you might have several alternatives available to you.

  The point to be noted is that different companies react to compensation negotiations in different ways and hence you must play the field according to these points.

Many a time, prospective employees lost out on compensation either because they asked too high or asked too late. At the same time, they should also remember not to coerce the employers. The best possible strategy is where you are confident about yourself and your worth as measured by the employer must reflect your own sense of self worth. When there is a meeting point between these, then you can rest assured that you have arrived at the ideal compensation for yourself.