MBA --- semster IV--- compensation and benefits -- managerial remuneration-- notes

 

 

MASTER OF BUSINESS ADMINISTRATION

SEMESTER 4 

COMPENSATION AND BENEFITS

      

Unit 10

Managerial Remuneration

 

Table of Contents

 

SL No	Topic		Fig No / Table / Graph	SAQ / Activity	Page No
1	Introduction		-	-	4
	1.1	Objectives	-	-
2	Managerial Remuneration – Concept and Elements,		1, 2, 3, 4, 5, 6	1, I	5 - 14
	2.1	Computation             of              managerial remuneration	-	-
	2.2	Types of managerial remuneration	-	-
	2.3	Principles of managerial remuneration	-	-
	2.4	Compensable factors of managerial
		remuneration	-	-
	2.5	Important           features               of                 executive compensation	-	-
	2.6	Elements of managerial remuneration	-	-
	2.7	Limits of remuneration	-	-
3	Executive Compensation :Methodology		-	-	15
4	CEO-to-worker pay ratio		-	2, II	16
5	Rewarding – A New Approach		-	3	17 - 18
6	Remuneration Ceilings		-	4	19 - 20
7	Remuneration Ceilings under Chapter XIII		-	5	21 - 23
	7.1	Applicability of remuneration ceiling Schedule	-	-
	7.2	XIII New ceiling limits	-	-
	7.3	Three sections of remuneration ceiling under Section XIII	-	-
	7.4	Term of service of MD, whole time Director and Manager	-	-
8	Benchmark Compensation Package as per the Industry Standards		7, 8	6 , III	23 - 27
9	Summary		-	-	28
10	Glossary		-	-	29
11	Terminal Questions		-	-	29
12	Answers		-	-	30 - 31
13	Case Study		-	-	32 - 33

 

1.     INTRODUCTION

In the previous unit, you have studied various concepts of compensation strategies as an integral part of HRM and its policies with respect to reward excellence, individualising the system of remuneration, factors affecting the compensation strategies. You also studied the relevance of compensation strategies as an integral part of HRM and the compensation policies.

Managers have become the most critical asset to the success of an organisation. As competition is at a high peak, firms are now challenging each other in order to motivate, attract and retain the competent managers for their strategic needs and requirements. Thus, the demand of such managers have increased manifold after opening up of the economy.

In this unit, you will learn about the concept and elements of managerial compensation, it’s rewarding approach, remuneration ceilings under Section XIII and the benchmark package of compensation as per the Industry standards.

1.1 Objectives:

After studying this unit, you should be able to:

❖  Discuss the concept and elements of Managerial Compensation

❖  Explain rewarding as a new approach

❖  Describe the remuneration ceilings under section XIII

❖  Explain compensation package as per the Industry standards

 

2.     MANAGERIAL REMUNERATION – CONCEPT AND ELEMENTS

Managerial remuneration is the salary or the compensation paid to the employees at the managerial level in an organisation. Section 197 of Companies Act 2013, contains the provisions related to the compensation of the managers or executives. The compensation and benefits are kept confidential by the organisation. The scheme of compensation of top managers or executives must reflect the responsibility and thus, aims at providing top executives the security to use personal responsibility and taking decisions courageously.

Now you will understand this with the help of a case study:

Case Let

Surging Pay Packs (in India) Still Short of Global Mark

Despite rising salaries in India, emulating global benchmarks still remains a far cry. Senior finance, marketing and human resource (HR) executives in India earn less than a fifth of their counterparts in the US in terms of base and annual total cash, says a study of salaries in 15 countries by Mercer Human Resource Consulting.

In finance functions, India clearly falls in the lower end of the salary spectrum along with Hungary. The two receive less than half of the 15-country average for this position, earning approximately $60,000 and $55,700, respectively.

US-based finance directors are the highest paid, earning base pay of $248,700 on average, followed by those in the UK and Canada, who receive around $201,500 and $190,900, respectively. Their counterparts in Germany, Hong Kong and Brazil also earn high base pay at $170,000, $164,300 and $161,200, respectively. Annual total cash for finance directors follows the same pattern as base pay.

The highest paying country for marketing directors in Asia is South Korea, with an average base pay of $176,200. Hong Kong and Japan are in a similar range to each other, paying $136,200 and $132,000 respectively. Singaporean marketing director can expect an average base pay of $121,400 slightly behind the above mentioned Asian countries.

The best-paid HR directors in Asia are in South Korea and Hong Kong, where their average base-pay is $175,800 and $157,400 respectively. Singapore at $11,800 and Japan at $129,100 also have relatively high base-pay compared to other countries in Asia.

“We find higher than average salaries for HR directors where their role is more strategic and business focused,” added David Conroy, UK Leader of Reward at Mercer. “Examples are where HR directors are driving through change programs for their employer and taking a leadership role in M&A activity.”

Source: Compensation Management, 1st Edition, B.D Singh, Excel Books

The remuneration of managers is to focus on the performance in short term as well as sustainability of organisational development in long run. Hence, the managerial reunion aims at motivating top executives or managers to research for potentials in cost cutting and focusing in performance growth and sales from the prospective of long-run. This helps the shareholders understand the benefits of getting involved in the organisation. Thus, you may find managers at different level in the organisation as shown in the below figure 10.1:

 

Source: Compensation Management, 1st Edition, Er Soni Shyam Singh, Excel Books

Figure 10.1: Diagram of Different Class of Executives

Hence, there are different levels of manager who are regarded as key players of an organisation. The main objective here is to achieve the goals of the organisation as well as to cultivate the best labour force to maximise the profitable returns on investment.

             

2.1   Computation of Managerial Remuneration

As per the needs of Schedule V of the SEBI (LODR) Regulations, 2015 , the remuneration structure of the managers is categorised as follows:

•      Salary

•      Commission

•      Allowances

•      Contribution of superannuation, gratuity and provident funds

•      Monetary value of different perks

There are several other benefits or perks which are given by the organisation to their managers/executives. Some of them are as follows:

•      Any expense which is incurred by the organisation in creating insurance on the life of the managers.

•      Concessional emoluments

•      Any expense which is incurred by the organisation by giving them an annuity or free rent accommodation

•      Any expense with respect to any commitment paid.

2.2   Types Of Managerial Remuneration

Due to financial crises in the last two decades, the remuneration part of the managers has changed drastically which affect their compensation structure. Thus, managerial remuneration comprises of two important pays which are as follows:

1.      Short term pay: The short term remuneration is related to the bonuses (short term) and the base pay which are usually paid to the managers according to their performance in the organisation. This type of pay is totally cash based managerial remuneration component and over a certain period of time these bonuses become deferred.

2.      Long term pay: The long term remuneration comprises of stocks which are restricted, stock options, salary which depend on the performance against the index and shares.

These long term remuneration elements are used by the shareholders in order to protect the organisation’s value as well as gaming control of the top level managers on the rising value of the firm in the marketplace.

According to the latest report, Table 10.1 shows  the figures of managerial remuneration in India:

Name (Mr.)	Company	Designation	Compensation (` in Lakh)
Mukesh D. Ambani	Reliance Industries	CMD	2,451.00
Brijmohan Munjal	Hero Honda	Chairman	1,558.23
Pawan Munjal	Hero Honda	MD & CEO	1,522.31
Naveen Jindal	Jindal Steel & Power	Exec. VC & MD	1,354.21
Sunil B. Mittal	Bharti Airtel	CMD	1,267.59
Miki Yamamoto	Hero Honda	Joint MD	1,263.69
Takao Eguchi	Hero Honda	Whole Time Director	1,255.17
Kalanithi Maran	Sun TV	CMD	1,113.00
Kaveri Kalanithi	Sun TV	Joint MD	1,026.00
A.J. Agarwal	Mercator Lines	Joint MD	1,007.25

Source: Compensation Management text and cases, 1st Edition, Tanmoy Deb, Excel Books

Table 10.1. Managerial Remuneration in India

2.3   Principles Of Managerial Remuneration

Now you will be able to understand various principles of managerial compensation which are as follows:

•      Company must focus on the generation of profits

•      The scheme of remuneration must be for the long term

•      Risk management

•      Motivate executives by giving them high and attractive bonuses and perks

•      The scheme of remuneration must comprise of a Balance Scorecard

•      Non-cash emphasis on remuneration (share phantom, stock options and shares schemes)

2.4   Compensable Factors Of Managerial Remuneration

The remuneration packages which are decided by the organisations comprise of certain factors which are shown in figure 10.2:

 

Source: Compensation Management text and cases, 1st Edition, Tanmoy Deb, Excel Books

Figure 10.2: Diagram of Factors affecting Executive Compensation

Thus, above figure depicts that under certain conditions the compensation system of the managers rely upon proxies like price of the share or profit of corporate in order to evaluate the executive performance under certain factors such as transition in the nature of work, efficient benchmarking so as to ascertain the going rate of managerial remuneration, investor’s confidence, retaining and attracting high performers, compensation system of managers must drive the right manager behaviours which can withstand the questions of governance and scrutiny of the stakeholder.

 

2.5   Important Features Of Executive Compensation

The important features of the executive compensation are as follows:

1.      The comparison cannot be made between executive compensation and salary and wage schemes which are meant for the employees of non –managerial position in the firm.

2.      Managers refused to take the privilege of having collective bargaining and union and also their contribution and competencies are regarded as their motivational strength for maintaining their salary packages.

3.      One of the most important features in managerial remuneration is maintaining the secrecy because no two executives within the same firm in the same grade receive the same salary in the private firms.

4.      Compensation of executives is guided by pay surveys, job description, pay grade, and job evaluation.

5.      The pay of the executive is not meant to be the measurement of the individual performance but rely relatively on the performance of organisation. Thus, this is only due to the executive’s own performance which can be directly reflected in measuring and evaluating performance of the corporate.

2.6   Elements Of Managerial Remuneration

Managerial remuneration are associated with the people who have attained top level managerial positions such as Directors, Presidents, General Manager, Vice President etc. Now you will able to understand the main elements of managerial remuneration which are as follows:

1. Base salaries: It is the first element of the managerial remuneration which is analysed with the help of Job Evaluation and also serves as incentives also. While evaluating the salary, Job Evaluation is just a part of it. An executive is compensated on the basis of his competencies and also the performance of his/her work. CEO’s base salary is determined with the help of benchmarking which is based on the Industry Salary Surveys. Size is usually calculated with the help of revenues of the organisation.

Managerial Compensation may varies from –

❖  industry type

❖  job type

❖  region of the country

❖  organisation size

2.      Special package of perquisites and benefits: Managers also enjoy all kinds of benefits and perquisites which the organisations offer to their employees. Therefore, in order to maximise the availability of time to key managers from the purpose of business perspective, various other facilities are also offered to them such as connection of internet, connection of cell phone and so on.

3.      Profit sharing bonus: In today’s global competitive scenario, in the programme of executive payments, Profit sharing bonus plays a very important role. This type of bonus is usually based on the profit sharing or performance.

4.      Short term bonuses: Such type of bonuses ranges from 50% of the base salary to 10 or more times of the base salary are offered when firm a very good year had by recognising the financial indicators.

5.      Long term performance bonus: Here the payment of cash to the corporate managers is similar to that of the short term bonuses. The only difference you may find is in the time period for receipt is 2 years or more into the future and the award size is based on the multiyear achievement of established performance related objectives.

6.      Stock options: Now a day many firms offer “stock equivalences” in the form of share appreciation rights/phantom shares. Here recipients are compensated with a stock increased value that is further determined by the base valuation which is prepared when share appreciation rights/phantom shares are given.

7.      Severance packages: These types of packages are also known as Golden Handshake which is financial remuneration and incentive packages which if given to those employees in the organisations who are retired or laid off. This package includes:

❖  life and health insurance

❖  retirement benefits

❖  stock options

❖  remuneration for vacation days or unused sick

❖  Assistance for job placement

Now you will be able to understand with the help of following example the “Executive

Compensation at Infosys Technologies”

Example: “Executive Compensation at Infosys Technologies”

Particulars of compensation and other incentives provided to key management people (Directors and Statutory Officers) during the year ended March 31, 2007 and 2006 are shown in Table 10.2 below.

Name	Salary	Contributions to provident & other funds	Perquisites and incentives	Total  remuneration (` In crores)
Chairman & Chief Mentor N.R. Narayana Murthy	0.05 0.13	0.02 0.03	0.21 0.26	0.28 0.42
CEO & MD Nandan M. Nilekani	0.14 0.13	0.04 0.03	0.33 0.25	0.51 0.41
President, COO & JMD S. Gopalakrishnan	0.14 0.13	0.04 0.03	0.34 0.26	0.52 0.42
Whole time director K. Dinesh	0.14 0.13	0.04 0.03	0.33 0.25	0.51 0.41
Whole time director S.D. Shibulal	0.13 0.70	0.04 0.01	0.29 0.31	0.46 1.02
Whole time director T.V. Mohandas Pai	0.24 0.19	0.08 0.04	0.60 0.53	0.92 0.76
Whole time director Srinath Batni	0.21 0.17	0.06 0.04	0.51 0.47	0.78 0.68
CFO V. Balakrishnan	0.17 0.13	0.05 0.03	0.56 0.38	0.78 0.54

Source: Infosys Annual Report 2006 – 07

Table 10.2 Particulars of Compensation

2.7   Limits Of Remuneration

The following table 10.3 shows the limits of remuneration of managers.

Table 10.3: Limits of Remuneration of Managers

Maximum Limit	According to companies Act 1956 Section 198, any private or public organisation which is a subsidiary of public company must pay 11% of its net profit of any financial year executive remuneration to its directors which comprises of any manager and whole time or managing director.
Minimum Limit	According to Section 269 of schedule XIII of Companies Act 1988 in case An organisation in financial year has no profits or inadequate profits, an organisation will not pay to its directors which comprises of any manager and whole time or managing director any remuneration except the one which is previously approved by the Central Government.

 Now you will able to understand the maximum limit of the compensation which is paid to the managers with the help of following table 10.4:

Table 10.4: Maximum Limit of Managerial Remuneration

Condition	Limit
If there is only one managing director	11%
If more than one managing director	5%
If there is only one MD	10%
If there is only part time directors only and has no MD	3%
If there is pert time directors and also have one or more MD	1%
If there is manager	5%

Source:           http://www.lexvidhi.com/article-details/managerial-remuneration-undercompanies-act-1956-26.html

 

 

 

 

 

 

 

 

 

 

  

 

 

 

 

 

3.    EXECUTIVE COMPENSATION: METHODOLOGY

 

For companies with no CEO, the president or similar top executive is used. Where two names appear, the company has co-CEOs.

Salary is base salary.

Bonus is the annual cash incentive payment.

Per Cent Change is the change from 2010’s total salary and bonus. No number is shown if the CEO was not in the same position for all of the years.

Other includes all other payments and the cash value of perquisites and benefits.

Share-Based Awards is the total value of shares, share units, trust units or similar long-term incentive plan grants.

Option-Based Awards is the estimated value of stock options or similar trust unit rights granted in current year.

Pension Value is the additional annual value of the pension benefit earned by the CEO in current year.

Per Cent Change is the change from current year total compensation. No number is shown if the CEO was not in the same position for all of previous year and current year.

Unexercised In-The-Money Options is the value of stock options held by the CEO at the end of the fiscal year.

Unvested Share-Based Awards is the value of share units or similar compensation that has not yet met time or performance conditions required for payout.

Value Of CEO’S Equity is the value of all equity held by the CEO, including shares and vested share units, but excluding unexercised stock options.

Accrued CEO Pension Obligation is the estimated value of a company’s total cost to provide the CEO’s defined benefit pension.

4.    CEO-TO-WORKER PAY RATIO

 

To calculate the CEO-to-worker pay ratio for a firm we divide the compensation of the firm’s CEO by the estimated annual compensation for the typical worker in that firm’s key industry.

There are two possible approaches to obtaining the CEO-to-worker compensation ratio for the group of the 350 largest firms. The first is by computing the average CEO compensation and then dividing this by the average annual compensation of typical workers in those firms’ key industries. This might be called the “ratio of the averages” method. The second approach is to average the ratios computed for each firm, which can be labeled the “average of the ratios” method. This method is only available if one has the firm-level data.

 

        Activity II

Some MNC of Canada wish to start its subsidiary at capital of MP, for which executive mix

 

is proposed to be a technical expert from Canada, Marketing head from America, manufacturing professionals from Canada, India and supervisors from MP. Salaries of

 Americans and Canadians at Canada are 5000 and 4500 U.S. Dollars, respectively, while counter parts in India at Indian industries are drawing ` 35,000.

 

Executive levels operating from MP can be made available @ ` 10,000 and maximum 20,000.

  Product cost when manufactured at Bhopal is going to cost 45% of the cost at Canada in terms of rupees. Company has hired you as HR consultant and wish to design a suitable  compensation structures to ensure cross cultural and intercontinental harmony. What packages to be offered to Americans, Canadians and

        Indian executive to avoid disputes?

 

 

Self-Assessment Questions - 2

 

4.      The ___________   comprises of stocks which are restricted, stock options, salary

 

which depend on the performance against the index and shares.

5.      Secrecy must be considered as one of the important factor while maintaining the managerial remuneration. (True/False)

 

5.    REWARDING – A NEW APPROACH

 

Nowadays, rewarding is considered as one of the most powerful and new approach of retention strategy. In such a competitive environment, where there is high growth, many doors of opportunities have opened for the employees to switch job from one organisation to another. This leads to increase in the cost and complexity of retaining the competent employees in the organisation.

The following are some features of rewarding:

1.      New ways of pay: Due to competitive scenario, many organisations are connecting their Variable Pay Plans (VPPs) to the organisation’s individual and team performance. The nature and degree of connection may vary from level to level within the firm itself. Many firms have effectively and lucratively implemented the Variable Pay Plans (VPPs) which includes team or individual performance which is based on Stock Options, productivity based company’s benefits, profit sharing etc. As short term is benefits are regarded as a good method to connect the goals of the organisation with the rewards of the individuals whereas on the other hand benefits for long term are usually given to the senior level executives’ within the firm.

2.      Emerging trends: Modifications in the roles and responsibilities of middle level management have become the most emerging trend for the organisation. Lack of personnel in the organisation makes its impact on the remuneration structures. Therefore, this has led the firms to communicate, understand and articulate the middle management’s role and opportunities for the development of their career.

3.      Pay for performance: In India, the remuneration part of the top executives is tied up with the corporate and individual performances. Boards of Directors (BOD) are continuously paying as per their performances. Thus, they are exercising tight controls over the remuneration that is from the guidelines of stock ownership to the convent which helps in preventing the managers from gaining the stock options. Now the organisations are shifting the remuneration for their top level managers from their basic pay to stock options grants and bonuses. Organisations have started trimming the pay that is offered to the top executives by the components of Pay for Performance.

4.      Equity over cash: In the compensation package, “Equity” is regarded as one of the most common form of stock options where equity is given in the type of outright awards of stock as well as restricted stock.

Example: 60% of the compensation package in KPMG’s Chinnagos is given in the form of equity. Their compensation part breaks down as –20% of base salary, 20% benefits/incentives which is given more in cash rather than in Stock and 60% of stock options.

 

 

 

 

 

 

6.    REMUNERATION CEILINGS

 

According to Section 198 (1), the remuneration ceiling is the total maximum executive compensation in case of inadequate or absence of profits. The total executive remuneration is offered by the private or public firms to its directors on account of any financial year which shall not exceed 11% of the organisations net profit for that particular year.

Director’s Remuneration will not be deducted from the gross profits. Thus, compensation is payable to all the whole time/managing director or managers or directors in any capacity. Therefore, it comprises of the compensation for the services which is served by him/her in any other capacity rather than that of the Directors.

Following are the ceilings and regulations of the managerial remuneration which are as follows:

1.      To raise the compensation which is payable to the organisation’s executive personnel

2.      To offer increased compensation without approval by the government

3.      To fix compensation of whole- time and managing director

4.      To raise the sitting fees of the top level executives (Directors) beyond given limits for attending the Board or Committee meetings.

5.      To pay as well as appoint the managerial personnel without taking the approval from government

6.      To compensate Directors by offering 1% or 3% of the organisations net profit.

7.      To pay compensation in excess of 1% or 3% from the organisations net profit to the top level executives

8.      To compute depreciation for reaching the net profits for purposes of executive compensation.

9.      To remunerate the Director or whole time/managing director for holding the manager’s office for loss of office etc.

10.  To compensate the Directors with a transfer of shares in case of loss of office etc.

11.  To pay compensation in excess of the normal ceiling to the expatriate director under the guidelines of the Executive Remuneration.

12.  To pay minimum compensation to the whole time/managing director or managers or directors in case when organisation is sick.

 

 

7.    REMUNERATION CEILING UNDER SECTION XIII

                  

Remuneration ceiling under Section XIII of the Companies Act 1956 was established with the primary goal of finding the approval by the Central government in order to offer compensation to their whole time/managing director. It deals with the compensation limits of the Executive Personnel which are underwent with amendment in order to facilitate the fixation of liberalised limits of the remuneration without Central Government approval.

Managing Director must be entrusted with the power either by Article of Association or a resolution passed at a board or general meeting or by an agreement.

Manager must be in charge of the whole management and exercise the powers which are conferred on him as a subject to direction, superintendence and control of the Board of the company. Whole time Director includes a director in the employment of whole time of the organisation and spends his lifetime in the management of the organisation.

7.1   Applicability of Remuneration Ceiling Schedule XIII

Under Section198 and 269, the provisions related to Section XIII are applicable only to Private firms and Public firms. The provisions made under Section XIII are not applicable to Government organisations. Schedule XIII is divided into 3 parts which are as follows:

1.      Deals with appointment and qualification of the executive personnel

2.      Deals with the remuneration payable

3.      Deals with the needs and requirements such as approval of shareholders and certificate of compliance which is to be obtained from Company Secretary or Auditor.

7.2   New Ceiling Limits

Various conditions which are discussed for applying various limits of ceiling in Section II of the Schedule XIII are broadly comprised of the following:

(a)  Cases where neither Special Resolution nor approval from Central government is essential: Here the maximum compensation paid by an organisation which has inadequate profits or no profits depend on the capital which shall not exceed ` 2 Lakhs per month or ` 24 Lakhs per annum.

(b)  Cases where the approval from Government is not mandatory but approval through special resolution is required for the remuneration payment: Here eligible organisations are entitled to fix the higher limits of ceiling.

(c)   Cases where the approval from both special resolution and Central Government is required

7.3   Three Sections of Remuneration Ceiling Under Section XIII

There are three sections of remuneration ceiling under Section XIII. These are as follows:

Section 1: Compensation by the organisation having profits (where there is one executive person then maximum limit will be 5% of the net profit; on the other hand, where there are more than one executive then maximum limit will be 10% of the net profit)

Section 2: Compensation by the organisations which are having inadequate or no profits

Section 3: The compensation and appointment of the executive personnel is subject to the approval from the shareholder’s at the time of general meeting.

7.4   Term of Service Of MD, Whole Time Director And Manager

 According to remuneration ceiling under Section XIII the term of service of MD, Whole time Director and Manager are as follows:

Managing Director (MD): According to Section 317 requires maximum 5 years at a time

Whole time Director: According to Company’s Act 1956 no limit is predetermined Manager: According to Section 388, maximum 5 years at a time

 

 

 

 

 

 

 

 

 

 

 

8.    BENCHMARK COMPENSATION PACKAGE AS PER THE INDUSTRY

             

Benchmarking of compensation package as per the industry standards establishes the grades or ranges, standardised method of appraisal, payment and valuation and the central systems. This helps in reducing the scope of conflicts and disputes as well as also helps in managing the remuneration smoothly.

Thus, benchmarking the compensation package helps in establishing the most acceptable and minimum elements of remuneration by keeping in mind the criteria involved in Government Legislation, competitive requirement and ability of the organisation to pay.

Thus, following essentials are required in benchmarking:

Wage and salary survey benchmarking

 Before planning or conducting any salary/wage surveys, the firm must benchmark:

•      Evaluation method

•      Survey objective

•      Collection of data

Job benchmarking

Job benchmarking is the minimum possible differentiation in the firm with respect to the stabilisation and standardisation. Firms must interpret the eligibility, designations and authorities for different management levels. Therefore, here is the responsibility of the employers to make them aware of the job contents which help in reducing conflicts and disputes. Thus, benchmarking related to the compensation, compensation policy as well as job stabilise the demand and supply of jobs in the marketplace and hence, helps in making survey easier for pay comparison. This can be seen in table 10.5.

 

 

 

             

Table 10.5: Job benchmarking

Mgt. Level	Executive Level	Administration Level	Manufacturing Level	Workers Level
Top	•    President •    Vice-President	•   CEO •   Ch. Admn.	•           Works Mgr. •    Project Mgr.	•    Highly skilled •    Job setters
	• CEO	• Project Mgr.	•    GM (works)
Middle	•    Sr. Mgrs. •    Div. Mgrs.	•   Admn. Mgr. •   Security Mgr.	•      Production Mgr. •      Engg/Design Mgr.	•    Skilled •    Semi-skilled
	• Mgrs.		•    Quality Mgr.
Operating	• Sr. Exe. • Supervisors	•   Data Processor •   Word processors	•      Inspectors •      Shop Supervisor	•    Unskilled •    Casual
	• Executives	• Peons/messengers	•    Section Heads

Source: Compensation Management, 1st Edition, Er Soni Shyam Singh, Excel Books

Compensation elements/components benchmarking

Before designing the elements of the compensation as well as their significance, the criteria for each element of the remuneration/compensation must be benchmark by an organisation which is shown in following table 10.6:

Table 10.6: Elements of Compensation and Benchmarking

Compensation components		Basic benchmarking criteria
• Basic	•	Min. as per legislation and Job worth
• DA	•	Based on local CPI
• City compensatory allowance	•	Matching std. of living and purchasing power
• HRA	•	Rental values a nd accommodation to suit status of the employee
• Conveyance Allowance	•	Taxi rates of city
• Other Perks & Fringes	•	As per co.’s policy and strategy.

Source: Compensation Management, 1st Edition, Er Soni Shyam Singh, Excel Books

 

Clarifying and Obtaining Commitments

The main objective of the compensation management is proper utilisation of its personnel in order to ensure industrial peace and harmony as well as earn prestige and profits for the organisation. Remuneration is regarded as a very crucial matter not only from the employer’s point of view but also from the employees. Thus, in order to be effective, commitment from both the sides is required for attaining the goals of the organisation.

Commitment from employer: It includes the following:

•       understandable and clarity in the policy of compensation

•       economic and social well – being of the employees

•       justifiable and fair salary/wage structures

•       accurate and transparency assessment for appraisal

•       opportunities to learn more as when required Commitment from employee: It includes:

•       being loyal and honest to the firm

•       providing worth at place of work

•       sharing responsibilities for organizational and self growth and development

 

 

 

 

 

9.    SUMMARY

Let us recapitulate the important concepts discussed in this unit:

•      The compensation part of the top Managerial positions is precise and special compensation and benefits are kept confidential by the organisation.

•      Managerial remuneration are considered for those people who have attained top level managerial positions such as Directors, Presidents, General Manager, Vice President etc.

•      Rewarding is regarded as one of the most powerful and new approach of retention strategy.

•      According to Section 198 (1) states the remuneration ceiling as the total maximum Executive Compensation in case of inadequate or absence of profits.

•      Remuneration ceiling under Section XIII of the Companies Act 1956 was established with the primary goal of finding the approval by the Central government in order to offer compensation to their whole time/managing director.

•      Benchmarking of compensation package establishes the grades or ranges, standardised method of appraisal, payment and valuation and the central systems.

 

10.      GLOSSARY

Employee stock options: A common stock which is offered by an organisation to its employees as a part of his/her compensation package.

Job benchmarking: The minimum possible differentiation in the firm with respect to the stabilisation and standardisation.

Managerial remuneration: Long term as well as short term financial as well as non – financial rewards which are given to the top level managers under certain contractual and legal mandate.

Remuneration ceiling: Compensation limits of the Executive Personnel which are underwent with amendment in order to facilitate the fixation of liberalised limits of the remuneration without Central Government approval.

Severance package: Also known as Golden Handshake which is financial remuneration and incentive packages which if given to those employees in the organisations who are retired or laid off.

11.      TERMINAL QUESTIONS

1.      Explain managerial remuneration. Highlight its limit and factors affecting the managerial remuneration.

2.      What are the types of managerial remuneration?

3.      List out main components of managerial remuneration.

4.      “Rewarding is regarded as one of the most powerful and new approach of retention strategy.” Explain.

5.      Explain some of the ceilings of the managerial remuneration.

6.      Elucidate the new remuneration ceiling limits under Schedule XIII.

7.      What are the essentials required by the industry in benchmarking the compensation package?

 

12.      ANSWERS

 

Self Assessment Questions

1.        a. Special package of perquisites and benefits

b. Profit Sharing Bonus

c.. Short term Bonus

d. Stock Options

2.        pay surveys, job description, pay grade, and job evaluation

3.        Logical intricacy

4.        Long term remuneration

5.        True

6.        Variable Pay Plans (VPPs)

7.        True

8.        Equity

9.        False

10.    To compensate Directors by offering 10% of the organisations net profit

11.    Compensation

12.    Deals with Retirement

13.    Central Government

14.    False

15.    Clarity in compensation policy

16.    Job Benchmarking

17.    True

Terminal Questions

1.      The compensation part of the Top Managerial positions is precise and special compensation and benefits are kept confidential by the organisation. For more details, refer to section 2.

2.      Due to financial crises in the last two decades, the remuneration part of the managers has changed drastically which affect their compensation structure. For more details, refer to section 2.

3.      Managerial remuneration are considered for those people who have attained top level managerial positions such as Directors, Presidents, General Manager, Vice President etc. For more details, refer to section 2.

4.      In such a competitive environment and also where there is high growth has open many doors of opportunities for the employees to switch job from one organisation to another. For more details, refer to section 3.

5.      The total Executive Remuneration is offered by the private or public firms to its directors on account of any financial year which shall not exceed 11% of the organisations net profit for that particular year. For more details, refer to section 10.4.

6.      There are various conditions under which various limits of ceiling in Section II of the Schedule XIII are defined. For more details, refer to section 5.

7.      Benchmarking of compensation package establishes the grades or ranges, standardised method of appraisal, payment and valuation and the central systems. For more details, refer to section 6. 

 

13.      CASE STUDY

Team-based Compensation: The HR Manager's Dilemma

Mr. Samrat Bhattacharya joined Forgewell Auto Ltd., New Delhi recently as HR Manager. Forgewell Auto Ltd. is a manufacturer and supplier of safety critical automotive components which finds application in steering and suspension assemblies of passenger cars. It supplies to major OEMs in India and abroad. The company has modest turnover of 40 crores annually and is in business for the last twenty years.

Samrat was very enthusiastic and wanted to bring about many changes in the HR policies and systems of the organisation. He began by studying the various systems and practices in place. During a conversation with Mr. S.N. Hassija, the head of production, he found that the productivity of the workforce was lower than its competitors. With this cue, he started looking at HR practices in place.

He noted that the compensation management in the organisation hovered around rewarding individual performance although the nature of work was team based. So, one of the first things Samrat wanted to do in his new position at Forgewell Auto Ltd. was to improve productivity through team work at every level of the organisation. As the new HR manager, Samrat set out to change the culture to accommodate the team-based approach to compensation. He had become so enthusiastic in his most recent position.

Samrat decided to change Forgewell’s long standing policy had been to give all employees the same annual pay increase but Samrat felt that in the new term environment outstanding performance should be the criterion for pay rises. After consulting with CEO Vikas Mohanty, Samrat sent a memo to all employees announcing the change to team based pay for performance.

The reaction was immediate and 100% negative. None of the employees was happy with the change. They complained that this will result in partiality in rewarding employees given that the performance appraisal system in the organisation is quite old and primitive. Some of the shop floor supervisors started suspecting the intentions of the new HR Manager as they thought that pay-for performance was a veil to disturb the harmony prevailing amongst the employees. Samrat and Vikas arranged a meeting for early the next morning in his office over their tea, they began a painful debate. Should the new policy be retracted as quickly as it was adopted, or should it be allowed to stand?

Questions

1.      Do you agree with Samrat’s idea of pay-for-performance plan? Why or why not?

2.      What advice would you give Samrat and Vikas as they consider their decision?

3.      What mistakes did they make in adopting and communicating the new compensation plan?

Source: Compensation Management text and cases, 1st Edition, Tanmoy Deb, Excel Books)

References:

•      B. D. Singh. (2007). Compensation and Reward Management. Excel Books Pvt. Ltd.

•      Mousumi S. Bhattacharya Nilanjan Sengupta. (2009). Compensation Management.

Excel Books Pvt. Ltd.

•      Er. Soni Shyam Singh. (2008), Compensation Management. Excel Books Pvt. Ltd.

E-References:

•      http://www.simplehrguide.com/executive-compensation.html/ Retrieved on 24 July 2012, Time: 01:50 PM.

•      http://www.lexvidhi.com/article-details/managerial-remuneration-undercompanies-act-1956-26.html Retrieved on 24 July 2012, Time: 04:25 PM.

•      http://www.citeman.com/13799-managerial-compensation.html  Retrieved on 25 July 2012, Time: 10:38 PM.

•      http://www.caclubindia.com/forum/managerial-remuneration-ceiling-a-useful-link112880.asp Retrieved on 25 July 2012, Time: 12:10 PM.

•      http://www.caclubindia.com/experts/managerial-remuneration-338615.asp Retrieved on 25 July 2012, Time: 02:49 PM.

•      http://220.227.161.86/11489p829-835.pdf Retrieved on 25 July 2012, Time: 04:21 PM.