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Definition of 'Fringe Benefits' A collection of various benefits provided by an employer, which are exempt from taxation as long as certain conditions are met. Any employee who receives taxable fringe benefits will have to include the fair market value of the benefit in their taxable income for the year, which will be subject to tax withholdings, and social security benefits payments. Investopedia explains 'Fringe Benefits' Fringe benefits commonly include health insurance, group term life coverage, education reimbursement, childcare and assistance reimbursement, cafeteria plans, employee discounts, personal use of a company owned vehicle and other similar benefits. supplemental wages business definition Wages paid by an employer that are not paid at a regular hourly rate or in a predetermined fixed amount. Supplemental wages include bonuses, commissions, sick pay, noncash fringe benefits, and other irregular payments. An employer may choose to report tips and overtime pay as either regular wages or supplemental wages. Compensation received from employment that is in addition to theregular, ordinary salary or wages. Supplemental wages may include commissions, overtime earnings, awards, bonuses, retirement matching programs, or payment for unused vacation days. job analysis is the formal process of identifying the content of a job in terms activities involved and attributes needed to perform the work and identifies major job requirements. Job analysis was conceptualized by two of the founders of industrial/organizational psychology, Frederick Taylor and Lillian Moller Gilbreth in the early 20th century.[1] Job analyses provide information to organizations which helps to determine which employees are best fit for specific jobs. /organizational psychologists are often the professionals who on the attributes need in a prospective employee to perform the job successfully. The Occupational Information Network (O*NET) is an online website which provides analyses of a variety of jobs.

Job Analysis Process

Identification of Job Analysis Purpose: Well any process is futile until its purpose is not identified and defined. Therefore, the first step in the process is to determine its need and desired output. Spending human efforts, energy as well as money is useless until HR managers don’t know why data is to be collected and what is to be done with it.  Who Will Conduct Job Analysis: The second most important step in the process of job analysis is to decide who will conduct it. Some companies prefer getting it done by their own HR department while some hire job analysis consultants. Job analysis consultants may prove to be extremely helpful as they offer unbiased advice, guidelines and methods. They don’t have any personal likes and dislikes when it comes to analyze a job.  How to Conduct the Process: Deciding the way in which job analysis process needs to be conducted is surely the next step. A planned approach about how to carry the whole process is required in order to investigate a specific job.  Strategic Decision Making: Now is the time to make strategic decision. It’s about deciding the extent of employee involvement in the process, the level of details to be collected and recorded, sources from where data is to be collected, data collection methods, the processing of information and segregation of collected data.  Training of Job Analyst: Next is to train the job analyst about how to conduct the process and use the selected methods for collection and recoding of job data.  Preparation of Job Analysis Process: Communicating it within the organization is the next step. HR managers need to communicate the whole thing properly so that employees offer their full support to the job analyst. The stage also involves preparation of documents, questionnaires, interviews and feedback forms.  Data Collection: Next is to collect job-related data including educational qualifications of employees, skills and abilities required to perform the job, working conditions, job activities, reporting hierarchy, required human traits, job activities, duties and responsibilities involved and employee behaviour.  Documentation, Verification and Review: Proper documentation is done to verify the authenticity of collected data and then review it. This is the final information that is used to describe a specific job.  Developing Job Description and Job Specification: Now is the time to segregate the collected data in to useful information. Job Description describes the roles, activities, duties and responsibilities of the job while job specification is a statement of educational qualification, experience, personal traits and skills required to perform the job. Thus, the process of job analysis helps in identifying the worth of specific job, utilizing the human talent in the best possible manner, eliminating unneeded jobs and setting realistic performance measurement standards.


A job evaluation is a systematic way of determining the value/worth of a job in relation to other jobs in an organisation. It tries to make a systematic comparison between jobs to assess their relative worth for the purpose of establishing a rational pay structure. Job evaluation needs to be differentiated from job analysis. Job analysis is a systematic way of gathering information about a job. Every job evaluation method requires at least some basic job analysis in order to provide factual information about the jobs concerned. Thus, job evaluation begins with job analysis and ends at that point where the worth of a job is ascertained for achieving pay equity between jobs.

Features The purpose of job evaluation is to produce a defensive[clarification needed] ranking of jobs on which a rational and acceptable pay structure can be built. The important features of job evaluation may be summarised thus: It tries to assess jobs, not people. • The standards of job evaluation are relative, not absolute. • The basic information on which job evaluations are made is obtained from job analysis. • Job evaluations are carried out by groups, not by individuals. • Some degree of subjectivity is always present in job evaluation. • Job evaluation does not fix pay scales, but merely provides a basis for evaluating a rational wage structure.


[edit]Process of job evaluation The process of job evaluation involves the following steps: Gaining acceptance: Before undertaking job evaluation, top management must explain the aims) and uses of the programme to the employees and unions. To elaborate the programme further, oral presentations could be made. Letters, booklets could be used to classify all relevant aspects of the job evaluation programme. • Creating job evaluation committee: It is not possible for a single person to evaluate all the key jobs in an organisation. Usually a job evaluation committee consisting of experienced employees, union representatives and HR experts is created to set the ball rolling. • Finding the jobs to be evaluated: Every job need not be evaluated. This may be too taxing and costly. Certain key jobs in each department may be identified. While picking up the jobs, care must be taken to ensure that they represent the type of work performed in that department. • Analysing and preparing job description: This requires the preparation of a job description and also an analysis of job needs for successful performance . • Selecting the method of evaluation: The most important method of evaluating the jobs must be identified now, keeping the job factors as well as organisational demands in mind.


Classifying jobs: The relative worth of various jobs in an organisation may be found out after arranging jobs in order of importance using criteria such as skill requirements, experience needed, under which conditions job is performed, type of responsibilities to be shouldered, degree of supervision needed, the amount of stress caused by the job, etc. Weights can be assigned to each such factor. When we finally add all the weights, the worth of a job is determined. The points may then be converted into monetary values.


[edit]Installing the programme Once the evaluation process is over and a plan of action is ready, management must explain it to employees and put it into operation. [edit]Reviewing periodically In the light of changes in environmental conditions (technology, products, services, etc.) jobs need to be examined closely. For example, the traditional clerical functions have undergone a rapid change in sectors like banking, insuranceand railways, after computerisation. New job descriptions need to be written and the skill needs of new jobs need to be duly incorporated in the evaluation process. Otherwise, employees may feel that all the relevant job factors - based on which their pay has been determined - have not been evaluated properly. For job evaluation to be practicable it is necessary: that jobs can be easily identified • that there are sufficient differences between different jobs; and • that agreements no the relative importance or worth of different jobs can be negotiated between the enterprise and its employees and/or their representatives..


[edit]Benefits The pay offs from job evaluation may be stated thus: It tries to link pay with the requirements of the job. • It offers a systematic procedure for determining the relative worth of jobs. Jobs are ranked on the basis of rational criteria such as skill, education, experience, responsibilities, hazards, etc., and are priced accordingly. • An equitable wage structure is a natural outcome of job evaluation. An unbiased job evaluation tends to eliminate salary inequities by placing jobs having similar requirements in the same salary range. • Employees as well as unions participate as members of job evaluation committee while determining rate grades for different jobs. This helps in solving wage related grievances quickly. • Job evaluation, when conducted properly and with care, helps in the evaluation of new jobs. • It points out possibilities of more appropriate use of the plant's labour force by indicating jobs that need more or less skilled workers than those who are manning these jobs currently.


[edit]Job evaluation methods There are three basic methods of job evaluation: (1) ranking, (2) classification, (3) factor comparison. While many variations of these methods exist in practice, the three basic approaches are described here. [edit]Ranking method Perhaps the simplest method of job evaluation is the ranking method. According to this method, jobs are arranged from highest to lowest, in order of their value or merit to the organization. Jobs can also be arranged according to the relative difficulty in performing them. The jobs are examined as a whole rather than on the basis of important factors in the job; the job at the top of the list has the highest value and obviously the job at the bottom of the list will have the lowest value. Jobs are usually ranked in each department and then the department rankings are combined to develop an organizational ranking. The variation in payment of salaries depends on the variation of the nature of the job performed by the employees. The ranking method is simple to understand and practice and it is best suited for a small organisation. Its simplicity however works to its disadvantage in big organisations because rankings are difficult to develop in a large, complex organisation. Moreover, this kind of ranking is highly subjective in nature and may offend many employees. Therefore, a more scientific and fruitful way of job evaluation is called for. [edit]Classification method According to this method, a predetermined number of job groups or job classes are established and jobs are assigned to these classifications. This method places groups of jobs into job classes or job grades. Separate classes may include office, clerical, managerial, personnel, etc. Following is a brief description of such a classification in an office. Class I - Executives: Further classification under this category may be Office Manager, Deputy office manager, Office superintendent, Departmental supervisor, etc. • Class II - Skilled workers: Under this category may come the Purchasing assistant, Cashier, Receipts clerk, etc. • Class III - Semiskilled workers: Under this category may come Stenotypists, Machineoperators, Switchboard operator etc. • Class IV - Unskilled workers: This category comprises Daftaris[clarification needed], File clerks, Office boys, etc.


The job classification method is less subjective when compared to the earlier ranking method. The system is very easy to understand and acceptable to almost all employees without hesitation. One strong point in favour of the method is that it takes into account all the factors that a job comprises. This system can be effectively used for a variety of jobs. The weaknesses of the job classification method are: Even when the requirements of different jobs differ, they may be combined into a single category, depending on the status a job carries. • It is difficult to write all-inclusive descriptions of a grade.


The method oversimplifies sharp differences between different jobs and different grades. • When individual job descriptions and grade descriptions do not match well, the evaluators have the tendency to classify the job using their subjective judgements.


[edit]Factor comparison method A more systematic and scientific method of job evaluation is the factor comparison method. Though it is the most complex method of all, it is consistent and appreciable. Under this method, instead of ranking complete jobs, each job is ranked according to a series of factors. These factors include mental effort, physical effort, skill needed, responsibility, supervisory responsibility, working conditions and other such factors (for instance, know-how, problem solvingabilities, accountability, etc.). Pay will be assigned in this method by comparing the weights of the factors required for each job, i.e., the present wages paid for key jobs may be divided among the factors weighted by importance (the most important factor, for instance, mental effort, receives the highest weight). In other words, wages are assigned to the job in comparison to its ranking on each job factor. The steps involved in factor comparison method may be briefly stated thus: Select key jobs (say 15 to 20), representing wage/salary levels across the organisation. The selected jobs must represent as many departments as possible. • Find the factors in terms of which the jobs are evaluated (such as skill, mental effort, responsibility, physical effort, working conditions, etc.). • Rank the selected jobs under each factor (by each and every member of the job evaluation committee) independently. • Assign money value to each level of each factor (example: consider problem solving is one of the factor, what level of problem solving is required {basic, intermediate or advance}) and determine the wage rates for each key job. • The wage rate for a job is apportioned along the identified factors. • All other jobs are compared with the list of key jobs and wage rates are determined. An example of how the factor comparison method works is given below:


After the wage rate for a job is distributed along the identified and ranked factors, all other jobs in the department are compared in terms of each factor. Suppose the job of a 'painter' is found to be similar electrician in skill (15), fitter in mental effort (10), welder in physical effort (12) cleaner in responsibility! (6) and labourer in working conditions (4). The wage rate for this job would be (15+10+12+6+4) is47.j [edit]Point method This method is widely used currently. Here, jobs are expressed in terms of key factors. Points are assigned to each factor after prioritising each factor in order of importance. The points are summed up to determine the wage rate for the job. Jobs with similar point totals are placed in similar pay grades. The procedure involved may be explained thus: 1. Select key jobs. Identify the factors common to all the identified jobs such as skill, effort, responsibility, etc.

2. Divide each major factor into a number of sub factors. Each sub factor is defined and expressed clearly in the order of importance, preferably along a scale. The most frequent factors employed in point systems are (i) Skill (key factor); Education and training required, Breadth/depth of experience required, Social skills required, Problem-solving skills, Degree of discretion/use of judgement, Creative thinking (ii) Responsibility/Accountability: Breadth of responsibility, Specialised responsibility, Complexity of the work, Degree of freedom to act, Number and nature of subordinate staff, Extent of accountability for equipment/plant, Extent of accountability for product/materials; (iii) Effort: Mental demands of a job, Physical demands of a job, Degree of potential stress The educational requirements (sub factor) under the skill (key factor) may be expressed thus in the order of importance. 3. Find the maximum number of points assigned to each job (after adding up the point values of all sub-factors of such a job). This would help in finding the relative worth of a job. For instance, the maximum points assigned to an officer's job in a bank come to 540. The manager's job, after adding up key factors + sub factors points, may be getting a point value of say 650 from the job evaluation committee. This job is now priced at a higher level. 4, Once the worth of a job in terms of total points is expressed, the points are converted into money values keeping in view the hourly/daily wage rates. A wage survey is usually undertaken to collect wage rates of certain key jobs in the organisation. Let's explain this: [edit]Merits and demerits The point method is a superior and widely used method of evaluating jobs. It forces raters to look into all key factors and sub-factors of a job. Point values are assigned to all factors in a systematic way, eliminating bias at every stage. It is reliable because raters using similar criteria would get more or less similar answers. The methodology underlying the approach contributes to a minimum of rating error (Robbins p. 361). It accounts for differences in wage rates for various jobs on the strength of job factors. Jobs may change over time, but the rating scales established under the point method remain unaffected. On the negative side, the point method is complex. Preparing a manual for various jobs, fixing values for key and sub-factors, establishing wage rates for different grades, etc., is a time consuming process, According to Decenzo and Robbins, "the key criteria must be carefully and clearly identified, degrees of factors have to be agreed upon in terms that mean the same to all rates, the weight of each criterion has to be established and point values must be assigned to degrees". This may be too taxing, especially while evaluating managerial jobs where the nature of work (varied, complex, novel) is such that it cannot be expressed in quantifiable numbers. [edit]Limitations of job evaluation 1. Job evaluation is not exactly scientific. 2. The modus operandi of most of the techniques is difficult to understand, even for the supervisors. 3. The factors taken by the programme are not exhaustive.

4. There may be wide fluctuations in compensable factors in view of changes in technology, values and aspirations of employers, etc. 5. Employees, trade union leaders, management and the programme operators may assign different weight to different factors, thus creating grounds for dispute. [edit]Concept of job design What is job design? As we just explained, job analysis provides job-related data as well as the skills and knowledge required for the incumbent to perform the job. A better job performance also requires deciding on sequence of job contents. This is called 'job design'. Job design is a logical sequence to job analysis. In other words, job design involves specifying the contents of a job, the work methods used in its performance and how the job relates to other jobs in the organisation. A few definitions on job design are produced here with a view to help you understand the meaning of job design in a better manner. Michael Armstrong11 has defined job design as "the process of deciding on the contents of a job in terms of its duties and responsibilities, on the methods to be used in carrying out the job, in terms of techniques, systems and procedures, and on the relationships that should exist between the job holder and his superiors, subordinates and colleagues". Mathis and Jackson I2 have defined job analysis as "a process that integrates work content (tasks, functions, relationships), the rewards(extrinsic and intrinsic), and the qualifications required (skills, knowledge, abilities) for each job in a way that meets the needs of employees and organisations." Popplewell and Wildsmith13 define job design in these words: "......involves conscious efforts to organise tasks, duties, and responsibilities into a unit of work to achieve certain objectives". Having gone through the above definitions of job design, it can now be described as a deliberate attempt made to structure both technical and social aspects of the job to attain a fit between the individual (job holder) and the job. The very idea is that job should be designed in such a way as to enable employees to control over the aspects of their work. The underlying justification being that by doing this, it enhances the quality of the work life, harnesses the potential of the workers in a more effective manner and thereby improves employee performance.

Compensation may be in the form of financial returns, tangible services, and benefits received by employees as part of their employment. It does not include other forms of rewards such as recognition and interpersonal relationships etc. Compensation Strategy is the organization’s plan for how compensation decisions on the types and amount of pay are made, based on the interests of the employees and keeping with the organization’s mission and competitive position in the market. External Competitiveness is the comparing of compensation rates of one organization to those of its competitors. Extrinsic Rewards are rewards that an employee receives because of the job itself, including cash compensation, benefits, promotions and job security. Internal Equity is the fairness in the employment contract or compensation programs when compared with other employees within the organization. Intrinsic Rewards come from the work environment and are valued internally by the employee. Job satisfaction, self-esteem, achievement, growth, and professional and personal development are some examples of intrinsic rewards. Labour Market is the geographical area from which an organization recruits employees and where individuals seek employment. Market Rate is the rate of pay established for a “benchmark job” outside of the organization. It is determined though the collection of pay data gleaned from surveys of many organizations.

A Pay Commission is a panel of members of the Union Cabinet of India for review and revision of the salaries of government employees. It was set up by the Central Government in 1965 and as an administrative committee to determine the salaries of central government employees. Six pay commissions have been set up till date

First Pay Commission The first pay commission was constituted in May 1946, and had submitted its report in a year. and the importance is on the report. chairman was Srinivasa Varadachariar wef The first pay commission was based upon the idea of “living wages” to the employees, this idea was taken from the Islington Commission and the commission observed that “the test formulated by the Islington Commission is only to be liberally interpreted to suit the conditions of the present day and to be qualified by the condition that in no case should be a man’s pay be less than a living wage." The commission emphasised on the idea of the living wages and stated that the government which is going to introduce the minimum wages legislation for the workers of the private industry should also follow the same principle for its own employees. The commission basically recommended that the lowest rung employee should at least get minimum wages.[2] [edit]Second Pay Commission The second pay commission was set up in August 1957, 10 years after independence[2] and it gave its report after two years. The recommendations of the second pay commission had a financial impact of Rs 396 million. The chairman of the second pay commission was Jaganath Das.The second pay commission reiterated the principle on which the salaries have to be determined. It stated that the pay structure and the working conditions of the government employee should be crafted in a way so as to ensure efficient functioning of the system by recruiting persons with a minimum qualification. [edit]Third Pay Commission The third pay commission set up in April 1970 gave its report in March 1973 i.e. it took almost 3 years to submit the report, and created proposals that cost the government Rs. 1.44 billion. The chairman was Raghubir Dayal. The third pay commission added three very important concepts of inclusiveness, comprehensibility, and adequacy for pay structure to be sound in nature.The third pay commission went beyond the idea of minimum subsistence that was adopted by the first pay commission.the commission report say that the true test which the government should adopt is to know weather the services are attractive and it retains the people it needs and if these persons are satisfied by that they are getting paid. [edit]Fourth Pay Commission Constituted in June 1983, its report was given in three phases within four years and the financial burden to the government was Rs.12.82 billion.[3] This commission has been set up on dated 18.3.1987, Gazette of India (Extra ordinary) Notification No 91 dated 18.3.1987, The chairman of fourth pay commission was P N Singhal.

[edit]Fifth Pay Commission The Fifth Pay Commission was set up in 1994 at a cost of Rs. 17,000 crore. The chairman of fifth pay commission was Justice S. Ratnavel Pandian. [edit]Financial Impact of Fifth pay commission With the implementation of the Fifth Pay commission a huge burden was taken up by the central government. It declared hike in salary of about 3.3 million central government employees. Further, it also insisted on pay revision at the state government level. The Fifth pay commission disturbed the financial situation of both the Central and the State Governments and led to a hue and cry after its implementation. The Central government's wage bill before the implementation of the commission’s recommendations was 218.85 billion in 1996-1997 which also included pension dues and by 1999 it shoot up by about 99% and the burden on the exchequer was about to Rs 435.68 billion in 1999-2000.With regard’s to the state government the bill went up by 74%. The state governments which paid about Rs 515.48 billion in 1997 as salaries, had to pay Rs 898.13 billion in 1999 as salaries. This clearly indicates the burden on the state and the central government. Many economists[who?] say that about 90% of the revenue of the state went in as salaries[verification needed]. 13 states of India were not in a position to pay salaries to its employees due to the hike and hence the central government’s help was sought[citation needed]. [edit]Other recommendations of the Fifth pay commission One of its recommendations was to slash government work force by about 30%. It also recommended to reduce the number of pay scale from 51 to 34 and to not recruit to about 3,50,000 vacant position in the government. None of these recommendations were implemented.
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[edit]Criticisms of World Bank on fifth pay commission The World Bank criticized the Fifth Pay commission, stating that the Fifth Pay Commission as the 'single largest adverse shock' to the public finance of the nation. It also said that the number of employees of the government was 'not unduly' large, but there was a 'pronounced imbalance' in the skills. It noted that about 93% of the employees were of 3rd or 4th grade. [edit]Sixth Pay Commission Main article: Sixth Central Pay Commission In July 2006, the Cabinet approved setting up of the sixth pay commission. This commission has been set up under Justice B.N.Srikrishna with a timeframe of 18 months. The cost of hikes in salaries is anticipated to be about Rs. 20,000 crore for a total of 5.5 million government employees as per media speculation on the 6th Pay Commission, the report of which is expected to be handed over in late March/early April 2008. The employees had threatened to go on a nationwide strike if the government failed to hike their salaries. Reasons for the demand of hikes include rising inflation and rising pay in the private sector due to the forces of Globalization. The Class 1 officers in India are grossly underpaid with an IAS officer with 25 years of work experience earning just Rs.55,000 as his take home pay. Pay arrears are due from January 2006 till September 2008. Almost all the Government employees received 40% of the pay arrears in 2008 and balance 60% arrears (as promised by Government) has also been credited in

Government employees account in 2009. The Sixth Pay Commission mainly focused on removing ambiguity in respect of various pay scales and mainly focused on reducing number of pay scales and bring the idea of pay bands. It recommended for removal of Group-D cadre. [edit]Controversy Several government services, most notably the armed forces have complained bitterly of downgradation due to pay commissions exceeding their brief, and introducing anomalies in the relative scales of pay of government services. At present, the armed forces have represented to the government for the removal of anomalies which it is felt that the civil servants on the commission have deliberately introduced to upgrade themselves vis-a-vis service officers in the defence forces.

Institutes related to compensation
1. Wage board: private sector

2. Pay commission: public sector

knowledge-based pay A system of payment where employees are compensated based on their individual skill level and education attainment. Under this system, employees are rewarded for reaching certain goals in education, training and skill development. Knowledge-based pay systems provide incentive for employees to improve their skill set and education Knowledge-Based Pay: A salary differentiation system that bases compensation on an individual’s education, experience, knowledge, skills or specialized training. Also referred to as skill-based pay’ Compensation that is a function of an employee's skill and knowledge as well as the job being performed. For example, public school systems typically pay teachers based on their educational level as well as number of years of service. Organizations offering knowledge-based pay often absorb the expense of additional training.

Team Compensation Overview Team compensation is typically used when teamwork is mission critical. In technical fields such as software development, there may be several interdependent teams creating a final deliverable. These teams are judged corporately as to speed and accuracy, assuming each member of the team is required to complete the task on time and at budget. The compensation of the group is typically scaled in percentages of the maximum pay scale depending on when or how well the team completes the task. Individual Compensation Overview Individual compensation, the norm in many industries, pays wages strictly based on individual performance. It can be comprised of hourly wages, sales commissions and subjective periodic reviews. While tasks may be intertwined among the members of a team, every employee is typically measured and compensated based on his contribution to the team, not the team's final deliverable. The positions most likely to receive this kind of compensation are commission sales, assembly and non-technical labor positions among many others. Team Compensation Advantages In team compensation, employees may perform better in hopes of not letting down the team. This is especially so in project-based jobs which require every team member to complete a task before the rest of the team can advance to the next stage of work. Information is shared more freely when teams are reviewed and compensated as a group because the incentive to withhold information for personal gain is reduced. A 2010 study by University of California, Santa Barbara, states workers will try to perform in a way may make them "willing to make sacrifices for teammates ("take one for the team") that they would not otherwise make." Individual Compensation Advantages Individual compensation pays specifically based on individual performance regardless of team performance. This provides more pay to higher-achieving employees and less pay to lowerachieving ones. It allows for competition among employees for prestige and pay which provides a strong incentive to perform. It also avoids punishing employees based on the poor performance of fellow team members, resulting in better morale for the individuals. This compensation may also seem more personal, especially to higher-performing employees. Team Compensation Disadvantages Team compensation can lead to individual employees carrying too much burden and others being compensated for poor performance. Arguments among the team in these cases may diminish morale and harm the quality of the deliverable. Power struggles for credit when a task goes well or blame when it goes poorly can arise in a group compensation model. Individual Compensation Disadvantages Individual compensation can breed unethical competition as in commission sales when staff members fight over a customer or a sale. Employees posturing for a better positions or rankings at the exclusion of teamwork can come from this method. Information and work techniques may pool with motivated employees to the exclusion of those who need to be trained.

What is competency-based pay? In addition to variations in language and the ways that terms are applied, gaining an understanding of what is meant by competency-based pay is also complicated by the variety of different pay arrangements that are given the label. Some of these systems are indistinguishable from skills-based pay, in that they involve payment on the acquisition of knowledge or skills seen as necessary for the effective delivery of a job role. Others are basically performance-related pay by another name, in that they measure and reward competency in terms of the performance that competency produces. For the remainder of this paper, the focus will be on systems that in some way reward the use rather than the acquisition of competency. Systems that reward the acquisition of competency are best described as skill-based pay and have been covered in an earlier Research Network paper. In principle, there is also a clear distinction between competencybased pay and individual performance-related pay. Suff (2001), citing Armstrong and Baron, gives the following as some of the distinguishing features of competency-based pay: z it is based on an agreed framework of competencies

z it is not based on the achievement of specific results, such as targets or projects completed. However, it is concerned with the attainment of agreed standards of performance. The difficulty of getting an agreed description of competencybased pay is reflected in Brown and Armstrong‘s (1999) definition: ‘Competency-based pay can be defined as paying for the development and application of essential skills, behaviours and actions which support high levels of individual, team and organisational performance.’ Here we see the use of not just behaviours, but also ‘skills’ (akin to harder competencies?) and actions. The latter is hardly

The tax implications of compensating executives with alternative ownership For executive employees looking to either join a company or stay with one, an important differentiator is compensation. A generous salary and benefits package will no longer suffice. Executive employees are looking beyond the company car, adoption assistance, and retirement plan funding to a potentially more advantageous perk: a stake in the business through direct ownership or economic incidents of ownership. Prior to offering ownership compensation, businesses should consider the tax consequences. The IRS reviews executive compensation arrangements in routine exams and focuses on the matching of income and deduction between the employee and employer. For most compensation arrangements, specific requirements must be met to ensure the most efficient tax consequences to both the employer and the employee. Discussed below are a few of the compensation options available as well as their potential tax implications. First, however, a business should determine whether executive employees should have actual ownership versus an ownership-like vehicle. Key considerations include:

• • • • •

What does the executive employee bring to the table? Is this a person that could be easily replaced or someone who is instrumental in the overall success to the organization? Is the executive employee someone who may eventually buy the entire company? How does the executive employee fit into the company’s succession plan? Is the executive employee viewed as a business partner? Do you want the employee to have all the legal rights of ownership? Are you comfortable, as the business owner, with the changes to your rights and obligations to the company and the executive?

There are several different compensation mechanisms related to ownership and ownership-like vehicles, including stock options, profits-only partnership interests, stock appreciation rights (SARs), and phantom stock plans. Stock options Compensating executive employees using stock options allows the employees to share in the growth of the company by providing an avenue to actual ownership. Stock options may be used by corporations (both C and S corporations), partnerships, and limited liability company (LLC) interests. The date the company provides the executive employee with a contractual right to purchase the stock at a specified price is known as the grant date. Stock options may have a period of time before the executive employee may exercise this right, known as a vesting period. Once the right is exercised, the executive would pay the company for the shares. Executives sometimes exercise and hold the stock, and other times, they opt to exercise and immediately sell the stock. Finally, if an executive does not exercise the options in the allotted time frame, the option is said to lapse. The tax consequences to the company and the executive will be determined based on whether the option qualifies as an incentive stock option (ISO). If the option does not qualify as an ISO, the option is a nonqualified stock option (NQSO). To be an ISO, the stock option must meet several specific statutory requirements, including that the ISO grantee is an employee (and not a director or independent contractor) and the exercise price being equal to or greater than the fair-market value of the stock on the date of grant. If the stock option is an ISO, the company does not receive a deduction and the employee does not receive income on the grant date or the exercise date (except as an alternative minimum tax item). When executives dispose of the ISO, they receive capital gain treatment assuming they meet the statutory requirements. The company would not receive a deduction for the stock option nor would the executive be subject to federal income tax withholding (FITW), Federal Insurance Contributions Act (FICA) tax, or Federal Unemployment Tax Act (FUTA) tax. If the stock options lapse, there is no income tax impact to either the company or the employee.

If the stock option is an NQSO, the company receives a deduction to the extent the exercise price is less than the fair market value; the executive is compensated to the same extent and subject to FITW, FICA, and FUTA. Also, when executives dispose of the stock, they receive ordinary tax treatment rather than capital gain treatment, assuming that the executive exercises the option and then immediately sells the option. Typically, most NQSOs are exercised and sold at a liquidity event, such as an acquisition of the company. Most executives prefer to receive ISOs whereas most businesses prefer NQSOs. Like an ISO option, if the NQSO lapses, there is no income tax impact to either the company or the employee. Profits-only partnership interests Another equity-like compensation arrangement is a profits-only partnership interest. A profitsonly partnership interest allows an executive to share in the upside of business, while not creating any current taxation, if structured properly. This technique may be used in a partnership, limited partnership (LP), a limited liability partnership (LLP), and LLC contexts. Depending on the partnership agreement or operating agreement, the profits-only partnership interest may have a right to participate in the management and overall strategic direction of the entity. For example, assume AB partnership has two equal partners, A and B, who want to provide C with a 10 percent profits-only interest. If the AB partnership has $100 of income, the income would be divided $45, $45, and $10, to A, B, and C, respectively. If the AB partnership has a loss of $100, the loss would be divided $50, $50, and $0, to A, B, and C, respectively. C has a strong incentive to make sure the partnership generates income in any given year and would only share in the upside of the business. The granting of a profits-only partnership interest is tax-free if it is structured properly. In order to be tax-free to the executive, the interest must meet the following criteria:
1. the partnership does not have a predictable income stream from a lease or debt security; 2. the interest is not disposed within two years; and 3. the interest is not a limited partner interest in a publicly traded partnership.

The company would not receive a deduction for the grant of the partnership interest if it is taxfree to the profits-only interest partner. If any of the above factors are not present, the fair market value of the interest at the time of the grant would be taxable to the executive and would be a deduction for the business. Stock appreciation rights/phantom stock plans Stock appreciation rights (SARs) and phantom stock plans provide businesses a way to let their key executives share in the growth of the company, while allowing the owners to maintain

undiluted ownership. Like stock options, both SARs and phantom stock plans allow the company to place a vesting period. SARs allow an executive to share in the growth in the stock price for a certain number of shares. The company would pay the executive when he or she exercises the right under the plan. The payment would be the difference between the current stock value less the stock value time at grant. Like SARs, a phantom stock plan provides the executive with a certain number of shares without any actual transference of ownership. Unlike a SARs plan, a phantom stock plan is for a specified time frame. The executive would receive a credit for any dividends that are paid on the outstanding shares of stock, and when the time frame expires, the executive would be credited with growth in the company’s stock value. Under both SARs and phantom stock plans, executives have ordinary income tax consequences when they receive cash from the plan. Upon the payment, the company would receive a deduction under the matching principle. The main difference between SARs and phantom stock plans relates to FICA and FUTA tax purposes. For SARs, the FICA and FUTA taxes are paid when the executive receives cash. For a phantom stock plan, FICA and FUTA payments are paid when the services are performed or the employee is vested in the plan. Before implementing the compensation arrangements described in this article, it is recommended that you consult your Baker Tilly tax advisor to make certain that the tax consequences to your company and the executive employees are understood.

Tax Efficient Compensation Package Under the tax efficient compensation package, the staff compensation is structured to make the remuneration components tax efficient within the provisions of the tax laws. The assignment takes the following order:
• • •

Reviewing the existing compensation package for tax efficiency Preparing a tax efficient compensation package Discuss the draft compensation package up till its finalization with the management

• •

Assist in preparing and designing all relevant personal file, payroll accounting documentation. Assisting in the implementation of the compensation package for the first three months of its introduction.

Layoff (in British[1] and American English), also called redundancy in the UK, is the temporary suspension or permanent termination of employment of an employee or (more commonly) a group of employees for business reasons, such as when certain positions are no longer necessary or when a business slow-down occurs. Originally the term layoff referred exclusively to a temporary interruption in work, as when factory work cyclically falls off. The term however nowadays usually means the permanent elimination of a position, requiring the addition of "temporary" to specify the original meaning. Many synonyms such as downsizing exist, most of which are euphemisms or doublespeak and more abstract descriptions of the process, most of which can also be used for more inclusive processes than that of reducing the number of employees. Downsizing is defined as the "conscious use of permanent personnel reductions in an attempt to improve efficiency and/or effectiveness".[2] Since the 1980s, downsizing has become increasingly common. Indeed, recent research on downsizing in the U.S.,[3] UK,[4] and Japan[5][6] suggests that downsizing is being regarded by management as one of the preferred routes to turning around declining organisations, cutting costs, and improving organisational performance,[7] most often as a costcutting measure.

[edit]Terminology Euphemisms are often used to "soften the blow" in the process of firing and being fired.[8] The term "layoff" originally meant a temporary interruption in work (and usually pay). The term became a euphemism for permanent termination of employment and now usually means that, requiring the addition of "temporary" to refer to the original meaning. Many other euphemisms have been coined for "(permanent) layoff", including "downsizing", "excess reduction", "rightsizing", "delayering", "smartsizing", "redeployment", "workforce reduction", "workforce optimization", "simplification", "force shaping", "recussion", and "reduction in force" (also called "RIF", especially in the government employment sector). "Mass layoff" is defined by the United States Department of Labor as 50 or more workers laid off from the same company around the same time. "Attrition" implies that positions will be eliminated as workers quit or retire. "Early retirement" means workers may quit now yet still remain eligible for their retirement benefits later. While "redundancy" is a specific legal term in UK labour lawWhen an employer is faced with work of a particular type ceasing or diminishing at a particular location,[9] it may be perceived[by whom?] as obfuscation. Firings imply misconduct or failure while layoffs imply economic forces beyond the employer's and

employees' control, especially in the face of a recession such as the one that began in the late 2000s. [edit]Common abbreviations for reduction in force RIF - A generic reduction in force, of undetermined method. Often pronounced like the word riff rather than spelled out. Sometimes used as a verb, as in "the employees were pretty heavily riffed". • eRIF – Layoff notice by email. • IRIF - Involuntary reduction in force - The employee(s) didn't voluntarily choose to leave the company. This usually implies that the method of reduction involved either layoffs, firings, or both, but wouldn't usually imply resignations or retirements. If the employee is fired rather than laid off, the term "with cause" may be appended to indicate that the separation was due to this employee's performance and/or behavior, rather than being financially motivated. • VRIF - Voluntary reduction in force - The employee(s) did play a role in choosing to leave the company, most likely through resignation or retirement. In some instances, a company may exert pressure on an employee to make this choice, perhaps by implying that a layoff or termination would otherwise be imminent, or by offering an attractive severance or early retirement package. • WFR - Work force reduction.


[edit]Unemployment compensation The method of separation may have an effect on a former employee's ability to collect whatever form of unemployment compensation might be available in their jurisdiction. In many U.S. states, workers who are laid off can file an unemployment claim and receive compensation. Depending on local or state laws, workers who leave voluntarily are generally ineligible to collect unemployment benefits, as are those who are fired for gross misconduct. Also, lay-offs due to a firm's moving production overseas may entitle one to increased re-training benefits. Some companies in the United States utilize Supplemental Unemployment Benefits.[10] Since they were first introduced by organized labor and the Department of Labor in the early 1950s, and first issued in a Revenue Ruling by the IRS in 1956, SUB-Pay Plans[11] have enabled employers to supplement the receipt of state unemployment insurance benefits for employees that experience an involuntary layoff. By establishing severance payments as SUB-Pay benefits, the payments are not considered wages for FICA, FUTA and SUI tax purposes, and employee FICA tax. To qualify for SUB-Pay benefits, the participant must be eligible for state unemployment insurance benefits and the separation benefit must be paid on a periodic basis. Certain countries (e.g. France and Germany), distinguish between leaving the company of one's own free will, in which case the person isn't entitled to unemployment benefits and leaving a company voluntarily as part of a reduction in labour force size, in which case the person is entitled to them. An RIF reduces the number of positions, rather than laying off specific people, and is usually accompanied by internal redeployment. A person might leave even if their job isn't reduced, unless the employer has strong objections. In this situation, it's more beneficial for the state to facilitate the departure of the more professionally active people, since they are less likely

to remain jobless. Often they find new jobs while still being paid by their old companies, costing nothing to the social security system in the end. There have also been increasing concerns about the organizational effectiveness of the postdownsized ‘anorexic organization’. The benefits, which organizations claim to be seeking from downsizing, centre on savings in labour costs, speedier decision making, better communication, reduced product development time, enhanced involvement of employees and greater responsiveness to customers (De Meuse et al. 1997, p. 168). However, some writers draw attention to the ‘obsessive’ pursuit of downsizing to the point of self-starvation marked by excessive cost cutting, organ failure and an extreme pathological fear of becoming inefficient. Hence ‘trimming’ and ‘tightening belts’ are the order of the day (Tyler and Wilkinson 2007)

What’s Inside an International Compensation Package? By Dona DeZube, Monster Finance Careers Expert Negotiating compensation can be tricky in the US, but if you’re offered an international job, compensation issues grow exponentially more complex. While packages differ by company, some items appear in most international employment offers: a housing allowance, help paying taxes, spousal employment help and trips home. Those extra items can more than double compensation. Missing a big-ticket item will lower your living standard thanks to the extra costs of international living, says Geoffrey Latta, executive vice president of ORC Worldwide, a New York City-based workforce consultancy. Location matters, too. “The way you negotiate your package and the things you put in your package are highly dependent on the countries where you go,” says Alain Verstandig, president of Net Expat, an Atlanta international relocation company. Here’s what might be in compensation packages of Americans sent to two popular destinations -London and Shanghai -- as well as negotiation advice: Salary Negotiation Culture influences how and when an international salary is negotiated. In the UK, whether the position is one with a new company or your current firm, start the conversation by talking about your place on a team, achievements and your added value, and then discuss salary. In Shanghai, attitudes toward pay are split. “Anyone over 40 would be against talking about money, but the younger generation is extremely direct about talking about money, so analyze the age group of the recruiter,” Verstandig says. Foreign-Service Premium

About half of companies pay expatriate employees (expats) a foreign-service premium for taking the assignment, says Mary Ellen Myhr, senior manager at Associates for International Research (AIRINC), an international human resources consultancy. Going someplace tough to live? You could also get a location premium. “Most companies who pay the foreign-service premium pay the same amount -- either 10 or 15 percent -- to all employees, while the hardship premium varies by location,” she says. “In London, it would be zero. In Shanghai, it might be 5 or 10 percent.” Cost-of-Living Adjustment Cost-of-living adjustments are based on: The cost-of-living difference between your current and new locations. What a person with your size family and salary spends on goods and services annually. Housing costs. Suppose you earn $100,000 and have a four-person family estimated to spend $40,000 on goods and services. If it costs 30 percent more to live in the new city than in your hometown, you’d get a cost-of-living adjustment of $12,000, or 30 percent of $40,000.
• • •

Housing Allowance Housing is a huge issue in Asia, says Fred Schlomann, a Hong Kong-based managing director of AIRINC. “In Shanghai, there’s plenty of decent housing,” he says. However, areas where you can live near other expats and international schools are limited and in high demand, he says. In London, rental housing in good neighborhoods is expensive, according to Latta. You’ll likely have to choose between living in a smaller home in a central, upscale area and a bigger home with a longer commute or in less-appealing neighborhood. “Really looking carefully at housing options is the biggest single thing that will impact your well-being,” he adds. Family size and corporate rank determine the size of your housing allowance. If you can, visit the housing your allowance could cover to see if it’s suitable, Schlomann says. Tax Assistance When you work outside the US, you still have to pay US taxes. “There are credits and exemptions so you don’t end up with double taxes, but the UK is going to tax you and the US is going to require you to file a return, and the higher paid you are, the more likely it is you’ll be taxed twice,” Latta says. In Shanghai, you’ll pay substantial Chinese national taxes and possibly local taxes, but compensation can be structured tax-effectively, according to Schlomann. Ask your employer to pay for tax-return preparation and the cost of double taxes (referred to as “grossing you up”). Before accepting an offer, consult with an accountant familiar with

international compensation, Myhr suggests. Can’t get tax prep covered? Expect to pay a Big Four firm about $3,500 to prepare your foreign, US and state returns, plus more fees for advice about minimizing taxes, employee obligations or noncompany income. Health Insurance When you work in the UK, your family can get free national health coverage. Upper management professionals may get private coverage as well. In Shanghai, only Chinese nationals receive national health coverage. Some companies provide international health insurance. Ask how your family will get basic and emergency healthcare, especially in countries with areas that lack medical care, Schlomann advises. Retirement If you’re staying less than five years, you can typically opt out of paying into the host country’s retirement plan. Most companies will continue to pay your FICA so you stay in the US Social Security system, In Shanghai, the Chinese retirement system is only for Chinese nationals. Ask your company for an offshore retirement plan or an insured retirement program, Schlomann says. If you hop from one international assignment to the next, you could participate, but never vest, in several retirement plans, leaving you ineligible for any retirement benefits, Myhr adds. Spousal Assistance Just over half of companies will help your spouse find work, Verstandig says. If your working spouse is going to be unhappy stuck at home overseas, be sure to ask for this benefit. Spousal assistance also covers help with visa issues and getting the family settled in the new location. No Room to Negotiate The more employees a company moves around the globe, the more likely it is to have standardized compensation packages, which makes it less likely you’ll be able to negotiate upgrades or additional items. “The bigger companies try to avoid negotiation,” Latta says. “They feel it would be time consuming, and if they’re sending six people to London and create different arrangements, those people will talk to each other and compare.”

Expatriate Compensation As a Total Package Negotiating expatriate compensation is a bit more complicated than figuring local compensation for residents. There are many financial effects which a transferring employee will want to take into consideration and will expect their employer to compensate for one way or another. Learn more about our Expatriate Consulting Services. Learn more about our Global Mobility products. A company that decides to transfer an employee to another company such as Canada must be prepared to propose a compensation package that takes into account a number of elements such as cost of living, housing, education expenses and taxation and not just salary. Expatriation is an expensive option so the decision to use an expatriate requires careful evaluation of the benefits that the expatriate will bring. Though it may seem more expensive on the surface to create an expatriate compensation package, the fact is that it is often necessary from a business point of view because that specific skill is not available locally. But as currency values change, the cost of compensating employees who are transferred to foreign countries varies also.

Canadian Compensation…Both Ways The proximity of the USA and Canada to each other has created a situation where labor is often interchanged. US citizens are expatriates in Canada and visa versa. Either way the relocation works, your company employee will want to be kept whole financially. In other words, a Canadian will want to maintain the financial status they had as a citizen working in Canada. The USA citizen working in Canada will have the same goal in mind. This means the expatriate compensation package must be carefully assembled so that all factors are taken into consideration. Usually a relocation assessment is done which compares the cost of living in one country or city with the cost of living in another. The relocation assessment will review a number of financial areas. Of course one of the first ones is the salary paid to similar positions in the two countries. An employee does not want to lose buying power as a result of relocating. The cost of living differential between the two countries is evaluated also in conjunction with the salary ranges.

Salary Statistics Canada Style You can use salary statistics Canada makes available or purchase salary comparison data. Along with the salary review, you will also need to look at the income tax rules and any hardship compensation which should be paid. The hardship reimbursement is additional compensation paid for working in extraordinarily difficult conditions. But it can also be concerned with hardship placed on your family as a result of the move. When assembling a compensation package for an expatriate, you will want to consider all of the factors which can impact an employee’s financial status as a result of the move. Beginning with an evaluation of salary statistics is just the beginning. The overall purpose is to keep the employee whole while enabling him or her to maintain and equitable lifestyle.

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