Question 1- Discuss the elements of compensation package.

Answer: The primary elements of a compensation package are: Base pay: Base pay is the fixed rate of compensation that an employee receives for performing the standard duties and assignment of a job. Employers need to ensure that base-pay programs are designed to reveal market practices within their identified competitor group. Pay structures typically consist of a series of pay ranges or bands that reveal competitive rates of pay for specific jobs, as well as allowing room for salary growth. Variable pay: Performance-based variable pay continues to achieve momentum as a more successful way to identify and reward employee performance. Also known as pay-perperformance, variable pay is popular in todays corporate world. By including a percentage of variable pay in the compensation plan, organisations ensure that two people with different efficiency levels do not get the same benefits. By doing this, the company rewards productivity and hard work and motivates the under-performers to work hard. Skill and competency-based pay: Skill-based pay offers employees extra compensation when they have new skills specially recognised by the company as essential to achieve a competitive advantage. Skill-based pay can be particularly useful for employees who like their current jobs but are looking for new challenges. Long-term incentive compensation: Long-term incentive compensation vehicles, such as stock-option plans and other deferred-compensation plans, which are not usually used to reward performance, are achieving desirability among employees. These long term incentive compensation plans appreciate employees based on company performance over a long term that is typically three to five years. Stock-option plans are a common form of long-term compensation at public organisations. In most private companies, incentives that reflect stock plans are used for key employees. Elements of benefits Company benefits can include a wide range of offerings from standard medical insurance to more modern benefits like prepaid legal services, and applicants who are comparing job offers often narrow their choices down to those that offer the most generous benefits package. Some of the benefits are discussed below: Training: For most of the employees, training means more than money. Companies typically answer to this interest by sending workers to outside conferences and seminars, repaying employees for tuition, offering managerial training and supporting employees in degree programs. Health care: The benefits that get the most attention from employers today are health care benefits because of the high costs involved in getting good healthcare facilities and the increasing concern about staying healthy. In the past, health insurance plans included only medical, surgical and hospital expenses. Pensions: Employees have ranked retirement or pension plans as second to medical coverage. However, many employers offer no pension coverage to their employees. Approximately half of the private-sector workforce is not covered for pension by the employer. Stock options: Stock options give employees a chance to buy stock in their company at a predetermined price during a limited time period. In todays strong economy, employers have found it increasingly essential to provide stock options to attract the most valued workers. 1

Question 2 - List and explain various economic theories of wages. Answer: The Various Economic Theories of Wages are: Subsistence theory Subsistence theory, also known as the Iron Law of Wages was proposed by David Ricardo. According to this theory, employees should be paid towards their labour in producing goods so as to enable them to survive, thereby neither increasing nor diminishing the human race. In other words, wages cannot fall below subsistence level because without subsistence, labourers will be unable to work. On the contrary, if the compensation increases beyond the subsistence level, then the number of employees would also increase, because the employees will be in a better position to support larger families. Wages fund theory This theory was proposed by Smith. This theory assumes that every organisation has a fixed fund of capital to pay wages. The inventory of goods or capital is termed as the wages fund, and its source is the savings of the industrialists. The size of the labour force and the wages fund, the wage rate is determined as: Wage rate= wages fund/labour force. Surplus value theory This theory was proposed by Karl Marx. According to this theory, an employee was an article of commerce, which could be purchased on payment of the subsistence price. The price of any product and the time needed for producing it was determined by an employee. An employee was not paid in proportion to the time spent on work, but was paid much less, and the surplus was utilised for paying other expenses. Residual claimant theory The residual-claimant theory states that, after all other factors of production have received compensation for their contribution to the process; the amount of money left over will go to the remaining factors like wages. Smith suggested this theory for wages, since he assumed that rent would be deducted first and profits next. Marginal productivity theory According to marginal productivity theory, the rate of wages paid to the employees tends to be equal to the marginal net product of employees employed at the margin. This theory assumes that all units of the factors are homogeneous. The factors used can be continuously varied. This theory is based on the law of falling marginal returns. Bargaining theory of wages Bargaining theory of wages was developed by Davidson. According to this theory, wages are determined by the relative bargaining power of workers, the trade unions and employers. When a trade union is involved, basic wages, benefits, job differentials and employee differences tend to be determined by the relative strength of the organisation and the trade union. A neoclassic competitive theory The neoclassic economic theory argues that it will be good if employees can choose their own wage benefits among various alternatives. Further, if employees are sufficiently compensated, then the economic welfare of society as a whole is increased. The basic idea for this argument is that employees can decide what is best for them. However, in matters of employee benefits, wages or compensation, there are several rules which define the range of choices.

Question 3 - What is pay structure? Explain why it is necessary to develop a proper pay structure. Explain the method to develop pay structure. Answer: Pay Structure: 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 Necessity to Develop a Pay Structure: Pay structure helps in analysing the employees 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 organisations compensation philosophy and to reflect and support the advancement of the companys 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. Method to develop Pay Structure: 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 organisations 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. Most of the organisations combine elements of these approaches to create their own formal program. The most common traditional pay structure involves grouping similar jobs into pay grades and assigning a salary range with a minimum, a midpoint, and a maximum.

Question 4 - Explain the components of wages. Answer: Wage payment in India consists of basic wage, Dearness Allowance (DA), bonus and fringe benefits. While the basic wage has some relation to the economics of the firm, the other wage components are much less influenced by internal than by external variables, such as government regulations and inflationary trends in the economics. As a result, managements do not possess a complete control over wage costs. The interference of external variable introduces a certain degree of uncertainty in creating an internal wage policy. Components of wages are as follows: Basic Wage: It can be defined as payment for labour or services to an employee, especially payment on an hourly, daily, or weekly basis. The wages of an employee are fixed depending on the following: A basic rate of wages in addition to special allowance (that is cost of living allowance). A basic rate of wages which may include either cost of living allowance or cash value of concessions for supplies of essential products.

A rate that includes basic rate, cost of living allowance and cash value of concessions.

Dearness allowance: The dearness allowance is a part of the total compensation employees receive for having performed their job. It is a part of the original salary. The percentage is re-evaluated and may be changed every six months. Bonus: It is an extra pay given to employees in appreciation to their performance. The advantage of bonus is that in case of low paid workers, such sharing increases their earnings and therefore, helps in bridging the gap between the actual wage and the need-based wage. Fringe benefits: The term fringe benefit refers to the extra benefits provided to employees, apart from the compensation paid in the form of wages or salary.

Question 5 - Describe Cost-to-Company and its components. Answer: Cost to Company (CTC) is the amount that you cost your company. That is, it is the amount that the company directly or indirectly spends on you because of employing you. Components of CTC The following are the components of CTC: Basic. Dearness Allowance (DA). House Rent Allowance (HRA). Medical allowance. Conveyance allowance. Special Allowance. Vehicle Allowance. Incentives or bonuses. Leave Travel Allowance or Concession (LTA / LTC). Telephone / Mobile Phone Allowance. CTC includes the salary directly paid to the employees, the benefits directly attributable to the employees such as companys contribution to the provident fund, pension funds, medical insurance premium, life insurance premium, cost of loans offered to the employees, telephone expenses for mobile phone connections and land-line connections, benefits offered for visiting the home country or hometown and so on. It is important to note that even a lower CTC might mean a higher take home pay than an offer with higher CTC, if the other components are arranged differently. Similarly, you must not infer that with increase in salary or position, your pay as percentage of salary will increase/decrease. We have to assess each offer separately. Most companies usually talk in terms of CTC as the figures look more impressive. However, they are often misleading. We should carefully look at their offer and calculate ourselves how much take home pay will be. After all, all deductions are based on fixed percentages and we can easily arrive at the right figure. Even the company will guide us on this. Sometimes, even a lower take home pay may be beneficial if the other payments are made against vouchers/bills (for example, telephones, cars, refreshment, and so on). This will ultimately lower our tax liability. Hence we should look at both CTC as well as take home pay while negotiating. We also have to look at certain other criteria like work timings, number of holidays, employee centric schemes for further education, and so on. These factors must not be ignored even though you cannot put a money value to these factors. The total compensation includes the value of all the perks and benefits the employee is offered by the company in addition to the employees salary. Calculating the annual CTC is important from the employees and the organisations perspective. This helps the organisation ascertain the HR cost and the employees understand what they are being offered, as they can benchmark their CTC with other comparable organisations. Employees can decide on other job offers depending on the CTC. For employees to decide on other job offers, it is very important that they understand how the CTC is calculated. However, it is difficult to arrive at the CTC as many components of the CTC considered by the company may not be considered as a part of total compensation package. Therefore, to arrive at a comprehensive CTC value, organisations need to be careful and add all the components of compensation or their equivalent cash value.

Question 6 - What is Executive Compensation? Mention the different components of executive compensation. Answer: Executive compensation is the financial compensation that a top executive receives within a corporation. This includes basic salary, any and all bonuses, shares, options, and any other company benefits. The high level employees are company presidents, chief executive officers (CEOs), chief financial officers (CFOs), vice presidents, occasionally directors, and other upper level managers. Executive compensation often includes short term incentives and a share in the equity of the company. Components of Executive Compensation The process of selecting and hiring senior executives capable of motivating people and leading a company to its goal can be challenging. With concerned investors closely monitoring company performance, todays businesses are under tremendous pressure to retain qualified executives once they hire them. Executive Compensation is negotiated between the potential executive and the employer. In todays business world, executives enjoy more negotiating power than ever, as they can command a high salary and compensation plan owing to the tremendous need for capable candidates. The components of executive compensation can be divided into three broad groups. Below Depicts the Basic Components of Executive Pay: Components Base pay Long-term incentives Annual incentives Benefits Includes Cash salary, Flexible benefits, Statutory benefits Includes cash, shareholder value focus, referenced against peer group Includes delivery in cash, deferral, valueadded measures

Executive compensation includes: Base salary This is the basic salary paid to the executives excluding the bonuses. This is paid at the end of the month. Bonuses Bonuses are standardised in executive compensation plans, where there's often more pay for good performance. This is tied to the performance of the business area that the executive manages. Incentives such as stock options Executives would prefer a share in the equity of the company instead of cash. The amount of stock options given to senior-level employees will depend on the type of the industry and the valuation of the companys stock. Some companies offer executives a higher percentage of equity each year, based on company performance or shareholder return. This is issued as a form of non-cash compensation, and a call option on the common stock of a company. This is offered to management as part of their executive compensation package. Deferred compensation plan This refers to a plan established by an employer to provide benefits to an employee at a later date, such as after the employee's retirement. This is highly beneficial for the employees, with respect to tax burden. Severance package 7

This is an executive benefit which includes sick leave, an additional pay for the month of service and medical, dental or life insurance. Signing bonus Signing bonus is a sum of money paid to an employee to join the company. This is paid exclusively to full time employees of a company. Flexible work schedules This includes compressed working hours, communication facilities through any part of the world, part-time work, job sharing, and time off. This is very important in encouraging the top level employees of the organisation. Prepaid compensation This is a compensation given to the employees three or five years earlier than it actually gets payable. For example, this is similar to the prepaid balance in the mobile. It is paid in advance to retain the employees in the organisation. Perquisites This includes home entertainment allowance, club memberships, travel clubs, extra vacation, personal expense account, credit cards, medical expense and holiday gifts and so on. Some common executive perks paid in India are: Transportation: company car or car allowance, first class air travel or company airplane usage. Financial/legal assistance: financial planning, low interest loans, tax planning and tax preparation and legal counselling Club memberships: membership in Country Club or a Health Club, Luncheon Club and so on.