Compensation and Benefits

How much should you pay an employee? In what forms should you pay him/her?

In this post I will talk about a few key compensation and benefits related terms, viz- internal parity, external parity, salary surveys, non-financial rewards, variable pay, total rewards.

Traditionally C&B has been considered to consist of 3 components- pay, financial benefits, and non- financial benefits.

Pay is salary you pay to an employee. In pay, think about:

1) What's ratio of fixed to variable pay you want to pay an employee. Startups/smaller companies might prefer a higher proportion of variable pay. But do also note that fixed pay needs to be at least competitive with market. Else you might face employee attrition and face difficulty in attracting candidates to join your company.

2) What should be different pay components? Usually these are influenced by country specific legislation and market practices.

3) You need to have a periodic (usually annual) salary survey exercise in place. This will enable you to ensure salary you are paying for different jobs is competitive with market (external parity). Choose your comparator companies carefully. They usually will consist of competitors in your industry, companies you have attrites to, and companies you usually attract employees from.

4) You have to ensure there is adequate differentiation in compensation between roles of different complexities/values inside organization. This is called internal parity. For this you will first need to conduct a job evaluation exercise. There are a number of job evaluation models available in market.

Financial Benefits are monetizable components, besides pay, that you provide to employees, eg - life/medical insurance covers, bill supported reimbursements (e.g .- continuing education/child care),

Non-financial benefits are non monetizable component, rather benefits that employee can avail of, e.g.- housing, car facility, & sports facility.

How can you bring all of these components together?

Think of what is rewards strategy of your organization? This will encompass pay, benefits (financial and non-financial), and linkage of performance and rewards.

Think total rewards - entire gamut of rewards you are providing your employees.

Think how your total reward strategy links to and adds value to your business and employee value propositions.

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Sourav

An Individual Salary Scale

'We are good paymasters. We have provided x% salary increases every year for last y years.'

'We are competitive paymasters. Our salaries are at x percentile of the market.'

These are some usual statements I have heard companies make to showcase to employees/prospective employees the external parity of their salaries.

I often felt these statistics revealed necessary but not sufficient data for a ‘particular employee’. On second thoughts, that’s obvious given that statistics are calculated on basis of a ‘representative employee’.

Hence a particular employee might still be left with a question – ‘so how competitive is my salary wrt market? Is external parity of my salary high, medium, or low?’.

Managers usually respond to such questions by sharing ‘representative employee’ data. But employees also compare their particular situation to anecdotal evidence e.g. – what their friends are earning in other companies, what exiting employees are being offered.

Manager may well counter anecdotal evidence by sharing compensation benchmarking data. Frankly, that’s the best a manager can possibly do.  But compensation benchmarking data is still for a ‘representative employee’.

Can an employee find some compensation comparison data point which is more specific/particular to his/her situation?

A few years back I formulated a relevant methodology specific/particular to an employee. I must share that this makes more sense from an Indian market perspective – given the consistently high salary growth rate in India over last decade.

An employee could look at ' his salary grows y times in how many years’.

For e.g - let's take y as 2. Hence metric is ' your salary doubles in how many years'.

If your salary is doubling every 5 years, your salary is growing annually at 15% (calculate it for yourself J)  That’s a little higher than annual salary growth rate in India for last decade. So you probably are doing well for yourself.

If it’s doubling every 4 years, your salary is growing annually at 19%. If that’s the case, you are doing really good for yourself.

If it’s doubling every 3 years, your salary is growing annually at 26%. If that’s the case, you possibly are doing damn good for yourself.

Do a quick math and check for yourself what rate your salary has been growing at. L

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Sourav