Introduction
Compensation is a process which includes both the monetary as well as the non-monetary benefits provided to the employees by an employer. It refers to all forms of financial returns, tangible services and benefits employees receive as part of their employment.
Compensation Management can thus be defined as
“the process of designing and implementing total compensation package with a systematic approach to prove value to employees in exchange for their work performance”
Compensation management comes with a set of objectives which include:
- To establish a fair and equitable remuneration
- To attract competent personnel
- To recruit & retain qualified employees
- To improve productivity
- To control cost
- To improve job satisfaction
- To motivate employees
- To enhance the public image of the company
- To improve union management relations
Compensation is an essential feature of human resource management which helps in motivating the employees and improving organizational effectiveness. It can be viewed differently among different actors involved. Its interpretation and importance vary from the society, the stakeholders (employer companies), the employees and the managers. Employees may consider compensation as a major source of financial security, return in an exchange between employer and themselves, entitlement for being an employee of the company and finally as a reward for a job well done which in turn dictates their behavior and relationship with the company. Society sees compensation in terms of pay (as a measure of justice) and benefits (as a reflection of justice in the society) which impacts social standing and structure. According to stockholders’ linking executive pay to company performance theoretically increases stockholders & returns and for the managers, it is a means to influence employee behaviors and to improve the organization’s performance.
Compensation management has seen various upheavals with the passage of time, from the feudalism era to Fordism to finally multiple dimensional structures by multi-national conglomerates in today’s world. The following section aims to delve into the recent trends in compensation management by looking at various sectors and the biggest companies in these sectors.
Changing Trends
With a majority of the employee population being millennial in recent times, the traditional compensation plan needs to be modified to attract the best potential and also retain them.
The potential root issues that plagued the traditional compensation plans:
Goal Setting
- Expectations are unclear
- Undefined Goals/Lack of Definite goals
Feedback
- Insufficient Feedback
- Feedback intervals are
Coaching
- Lack of focus on career development
- Lack of transparency
New Trends in Compensation Management:
- Group Mediclaim /Insurance Scheme
- Personal Accident Insurance Scheme
- Company Leased Accommodation
- Recreation/ATM facilities
- Corporate Credit Cards
- Club Membership
- Educational Benefits
- Wedding Gift/Birthday Gift
- Cultural Programs
- Employee referral Scheme
- Mobile Phone/Laptop
- Loans
Work-life balance:
- Flexi-time
- Compressed Worksheet
- Job sharing
- Telecommuting
- Part-time work
- Modified retirement
- Employee assistance programs
- Childcare and eldercare assistance
Pay Transparency:
- Fosters trust in the organization
- Improves employee engagement
- Creates a competitive advantage
- Encourages employees to put in extra effort
Broad banding includes consolidation of grades and ranges in few bands providing flexibility in assignment of employees in different domains.
Variable Pay (Incentive Pay):
- Piecework incentive
- Pay-for-performance
- Pay-for-person
- Merit Pay
- Bonuses
- Sales incentive
- Profit sharing
- Employee stock ownership Plan-provides employees ownership of the stocks of the company
Flexible benefits:
- Modular Plans-predesigned benefit package
- Core-plus options- list of core benefits and an option to add more benefits to the core elements
- Flexible spending accounts-plans that enable employees to spend specified amount for particular services like dental or health care
Personal fulfillment and freedom in the workplace are the key needs of the millennials, and the incentives and benefits that enable this are most attractive management plans for millennials. Salary being the most attractive component of the compensation plan it is important to know the market value of the position offered to an employee, as they are well aware of the salary ranges of various positions based on experience and location. In addition to a suitable remuneration, incentives and flexible benefits are the best way to satisfy individual needs helping them to be engaged and motivated. Some of the successful new additions of untraditional benefits that make office a very comfortable place to work in are fridges/kitchen stocked with snacks and coffee, sleeping couches, unrestricted dress code, Car wash, DVD rental, Bike repairs, Haircuts, Social gatherings/cultural celebrations, wellness programs like discounted gym membership, bike commuter subsidies, in-office yoga, Zumba classes, Marathons. (Naveen, 2009)
Traditional trends
Current Trends
Legacy Compensation Programs (longevity, shift, PAT vacation)
Focus on employee engagement in health, energy, employer strategic goals
Non-consumer engaged employee health benefits
Skill and Knowledge attainment
Paper-based delivery of services
Emphasis on total compensation
Compensation based on services rather than skills and performance
Flexibility in work schedules
compliance
Productivity through business simplification and technology
Banking and Financial Services Sector
The financial sector has not stayed stagnant in its approach to employee compensation systems. Banks which form an important category in the financial sector have significantly modified their compensation strategies. The trend has been inspired by changing market sentiment and increased competition for talent. It has been observed that small banks, especially in the US, with assets worth $1 billion or less adopt a dynamic attitude in compensating to their employees. This behavior is guided by the motive to retain the employees and prevent them from switching to larger banks. Moreover, the annual salary increments at smaller banks have been higher than those at larger banks. Both large and small banks now place a strong focus on performance-based compensation. The annual salary increments are significantly different among average, above-average and under-average employees. (Cole & Reimink, 2015) According to the Deloitte report, banking and financial services sector projected the highest average variable pay at 19.4% against the overall average of 17.4%. (Annual Compensation and Benefits Trends India FY 2015-16, 2015) Salaries and increments at JPMorgan are determined by firm’s financial status, customer or client objectives, employee performance and leadership skills. Morgan Stanley rewards its employees on the basis of numerous factors like contribution to revenue, management and technical skills, inculcation of company values, policies and principles, and teamwork. (Butcher, 2017)
Pay trends in the finance and insurance industry from 2006-17 (Finance and Insurance Industry Pay Trends, 2017)
There have also been notable increases in the health and retirement compensation packages. The efforts have subsequently led to stability within the industry. The reduced turnover rates among the
employees indicate their happiness from the financial organization they work for. (Cole & Reimink, 2015)
Apart from performance-based salary increment policy, banking and financial services sector is also moving towards offering other compensation types. Bonuses are largely determined by the performance of the organization and that of the employees, the industry trend, and the competitor strategy. Employees at Bank of America in Europe receive bonuses based on their results and behavior, scoring a rating on each. At Citi Bank, incentives beyond salary are decided by the individual’s dedication towards a common purpose, client base, and leadership. (Butcher, 2017) An additional attention has been paid to attracting talent to the firm. Companies are attracting talent through the introduction of referral benefits and awards programs. Other measures involve some sort of equity compensation where employees can buy company stocks, performance shares and units, phantom stocks, etc. Some firms extend the usual benefits like life insurance, medical insurance, etc. to parents, spouse and children. (KPMG in India’s Annual Compensation Trends’ Survey 2017-18, 2017) Another strategy that firms take up is to invest in programs to manage workforce health instead of spending large sums on medical insurance for employees. (Oliver, 2014) Thus, the banking and financial services sector is trending in the current compensation systems.
To attract talent, firms (for example, Financial Adviser Industry) may differentiate among different categories in terms of compensation and benefits offered (Lewis, 2015)
Technology & Allied Services
The technology sector, Information Technology industry in particular, has significantly transformed its employee compensation systems. The sector has invested in innovative incentive systems for the employees. Take the example of Google. Google provides many benefits to its employees, including a physical fitness gym, healthy eating options, dry-cleaning and alteration facilities, car-wash, repairs for bikes, salons, movies, etc. (Ramkumar, 2013) M Moreover, IT firms initiated the trend of ESOPs, Employee Stock Options Program. Under the scheme, employees take ownership in the company by buying out company shares. This is seen as a major motivation towards employee retention as it imbibes in them a sense of company ownership instead of a transactional approach towards their work. This directly connects them with the company objectives and enhances their performance. (Team) In 2016, companies such as Google, Amazon, Microsoft, Facebook, and Twitter topped the list in providing high stock-based compensation options to their employees. (Downie, 2016) These measures clearly form an attractive package for the employees in addition to the salary and other benefits. Firms in the technology sector offer high salary packages to attract talent in current times of competition. This is suggested by the highest average salary increments for new technology employees with relatively fewer years of work experience. (Miller, Salaries, Bonuses Jump for Tech Pros and Newbies, 2016)
Pay trends in the Technology sector from 2006-17 (Tech Industry Trends and Treats, 2017)
The companies follow other new trends in compensation management like variable pay, performance-based incentives, non-monetary recognitions, etc. Over the years, Microsoft has transformed its performance rating criteria. As of 2011, it measures employee performance based on annual employee achievements v/s year-start goals and comparisons with peers, behavior adopted while achieving the results, and employee’s long-term performance record. It also hosts an intranet portal that allows the employees to get updates on their performance ratings. (Miller, Integrating Performance Management and Rewards at Microsoft, 2012) While provision for medical insurance applies for the employee and family, some companies may even pay specifically for severe illnesses, surgeries, dental and vision check-ups, etc. (Herner, 2017)
Additionally, companies may provide transportation services, restaurant coupons, allowances for recreation, home furnishing allowances among others. (Miller, Salaries, Bonuses Jump for Tech Pros and Newbies, 2016) Thus, firms in the technology sector take efforts in caring for its employees from different angles while they intend to attract the skilled talent from the marketplace.
Education, Life-Sciences & Healthcare sector
These sectors are combined because they have traditionally been non-commercial and instead focus on the value addition or quality to human life. Further, there is a certain element of social service and inherent job satisfaction that is a part of these sectors. In other words, generally, professionals linked to academia & medicine are more motivated than other blue/white-collar jobs. However, with increasing private players in each sector, the compensation trends in these sectors have also seen a huge upheaval, and these trends are summarized as under:
The education sector in India can be classified under two subheads, one is the private sector and another is the government sector. The education sector has seen numerous boosts in terms of government budgets as well as private investments as more and more development of human capital is prioritized to cater to an ever-increasing population.
The most common professions counted in the education sector are that of school teachers and college lecturers. Their salaries vary according to the rank and type of institutes. In some private colleges, the lecturer and the professors are enjoying competitive salaries and other fringe benefits consummate with corporate professionals of similar experience. Same is the case with school teachers, the private schools are generally facilitating their teacher with huge salaries and other fringe benefits to improve and maintain the upper-level quality in the education system provided by them.
According to KPMG in India’s Annual Compensation Trends Survey 2017-18, the average increment in the healthcare and pharma sector in terms of fixed compensation was 11.7% while it is projected to grow at the rate of 11.4% in 2017-18. In the case of variable pay component, the increase was 17.1% for 2016-17 while for 2017-18 there is a projected hike of 17.4%. The most prevalent pay plans are Team awards, special recognition awards, functional/ business unit level, and individual performance awards. Salary package is the core aspect for attracting and retaining employees. The immense growth in the sector has caused the compensation packages in the industry increase at a rapid pace. The various components of compensation in the healthcare industry at senior level include basic salary, paid vacations, special allowances, housing, conveyance allowance, travel leaves, paid vacations, dearness allowances, bonus and furnishing allowances. The special benefits that are being provided to the healthcare and pharma professionals include variable pay, employee stock options(ESOP), performance bonuses and house/ car loans. For the entry-level people in this sector, the pay packages are the important part apart from this certain monetary and non-monetary benefits are given like such as allowances, accommodations, and insurances, etc. (Tandon & Behki, 2014)
Manufacturing Sector
After the opening up of the Indian economy in the 90’s, there was a huge push towards manufacturing and rapid industrialization. This combined with the influx of foreign capital markedly changed the compensation structure in the manufacturing sector.
Primarily, the compensation structure in the manufacturing industry entails two domains:
- the labor wages of the operators working on the machines.
- the compensation structure of employees supervising the workers.
First, analyzing the structure of labor wages, one major indicator driving it is the labor productivity. As the productivity increases, labor wages are expected to increase. However, the gap between the productivity and wages has only widened since the 1970s. This increase can be due to the variety of factors. But one important factor is the technological advancement. Productivity has gone up as the machines have become more efficient, automation helping in cutting down the time losses. Hence, the firms are spending more on the technology to increase productivity rather than attributing this efficiency to workers by increasing their wages.
Next, moving on to the compensation structure of the management, general perception about the sector is that the increase in salaries is very minimal vis-a-vis other services sector. But, this is not always the case. The increase in salaries is majorly dependent on how the sector is doing. Hence, when the manufacturing industry as a whole is booming, there is a better increase in salaries in this sector compared to the services sector. Aon Hewitt Report on salary increases across sectors 2016 also reiterates this fact. Also, within the sector how different types of industries are doing also play a major role in determining the compensation trends. The illustration below gives us a snapshot of the different industries within the sector and trends in compensation structures for these industries. For instance, though automotive manufacturing has earned itself a spot in the middle in the rankings for compensation increase, the cement industry is among the bottom five in the same rankings. (Fleck, Glaser, & Sprague, 2011)
FMCG
The compensation and benefits structure in the FMCG companies is based on cost, competitiveness, innovation and mass-market nature of the product. The attrition rate in this sector (13.6% in 2014) is lower than the average attrition rate for India Inc (18.1% in 2014) So there is something about the compensation management that is going alright in this sector which we will take a look at.
In recent times, the traditional bell curve has taken a back seat in consulting and technical sectors, however, FMCG companies have not yet let go of the old performance management tool, however, they have altered the employee distribution curve.
It has been seen that FMCG sector has the most pronounced performance rewards and salary increment for key performers in comparison to the entire employee strength, designed to identify the top performers, high potential and critical roles, primarily because this sector is highly competitive. The top performers have salaries as high as 1.7 times the salaries of average performers, consciously linking the pay to the performance and investing in the key talent of the company. Through the years, the major portion of the salary is paid as variable pay comprising of annual bonus and incentives especially for the top management people, a way to retain them and motivate them to go beyond mediocre and reach higher professional goals.
Let’s us look into a comparative study of compensation and benefits in few FMCG companies:
Compensation:
HUL, Coca-Cola, Nestle, ITC offer a basic salary and a variable salary linked with the performance of the employee.
Benefits:
Medical benefits are provided by Nestle, HUL, Coca-Cola. Insurance benefits are provided by PepsiCo, P&G, and Nestle. Retirement benefits like gratuity are given by Coca-Cola, Pension Plan by Nestle, Provident Fund by HUL, ITC, Nestle, P&G, PepsiCo. Benefits for Personal growth and development are given by Nestle, P&G, and HUL, offering continuous learning and development. Company stock option and Tuition assistance programs are provided by HUL for helping employees to share benefits of company’s performance. Facilities like Leave Allowance is provided by PepsiCo, pick and drop is given by Coca-Cola. The biggest FMCG company, Procter& Gamble is focused on High performance towards the company. The ‘Work and Development Plan’ encourages: seniors to coach juniors, compare previous year’s performance with current year’s records, focus on the areas of growth and development and fulfill career interests and train for the year ahead.
The W&DP document is reviewed quarterly and receive 360-degree feedback by Forced Distribution method for the appraisal. The company provides a platform to enhance skill sets and knowledge throughout your professional career. One of the most attractive features is the work-life balance, a strategy called Flex@ work which enables alignment and balance between the needs of the employee and requirement by the company. Flex@ work includes work from home, flexible scheduling and personal leave of absence. Apart from the basic salary, the compensation program included medical insurance, life insurance, retirement plans, stock purchase programs, paid-time off, health-care benefits, wellness programs, retirement plan, flex Benefits and tuition reimbursements.
Conclusion
Compensation management has historically been very important across industries and rapid globalization along with accelerated growth in the corporate world has increased focus on it. Further, with multiple stakeholders involved and a renewed focus on personalizing employee-employer relationship, it has seen a massive shift in its approach. As a result, employee focus has also changed from monetary benefits to a more wholesome and holistic outlook including employee security, social life, work-life balance, etc. An in-depth analysis of various major companies including Google, Microsoft, Amazon (Technology), Bank of America, J.P. Morgan, Citibank (Finance), Procter & Gamble and Coca-Cola (FMCG) has revealed how the focus has shifted towards employee satisfaction and towards a more fulfilling employer-employee relationship. Compensation mechanisms have come a long way from salary to ownership options including ESOPs, club memberships, health and life insurance covers. An increasingly important facet is the change in workplaces – more and more companies are seeking to make their workplaces buzzing with activities linked to employee happiness through novel means including salons, sleeping pods, events, and activities with no tangible relation to the work an employee does. This has resulted in a change in employee thought processes towards their employers with a sustained increase in performance and ownership towards their deliverables. We can thus conclude that compensation management has seen a tectonic shift from employee compensation to a more exhaustive and qualitative experience that companies seek to personalize and imbibe as an inherent part of their culture. This has greatly affected the employer-employee dynamic in a multitude of ways.