Compensation
-An analysis on Manufacturing Firms

Group 5, Batch A
Amrita Vivekanand MBA09005

Anju Achuthan MBA 09011

Kiruthigha E B MBA 09053

S Veena MBA 09085

Sankar Rajan MBA 09091

Shanti Sharma MBA 09095

COMPENSATION ANALYSIS IN MANUFACTURING INDUSTRIES

INTRODUCTION

The compensation package comprises of monetary and non-monetary benefits that includes
salary, special allowances, house rent allowance, travel allowance, mobile allowance,
employee stock options, club memberships, accommodations, retirement benefits and other
benefits.

It may include a number of other benefits, including insurance, extended leaves and
retirement programs.

Why…

Why do companies need to give monetary or non monetary benefits to employees? What will
they get in return? Will it have a positive effect on the organizations performance? If yes,
then how?

Compensation; both monetary and non-monetary is considered to be important by the

organization and employees for various reasons such as:

• Increasing employee morale and motivation

• Improving performance of the employees
• Increasing productivity
• Enhancing employee efficiency
• Reducing employee turnover
• Commitment
• Retaining best employees
• Loyalty gained
• Helps dealing with union issues
• Organizational citizenship behaviour

Compensation can be divided into two components:

• Fixed
This component takes care of Basic Pay, HR Allowance (HRA) and Dearness
Allowance (DA).
• Flexible
Under Flexible/ Variable compensation we have the following:
¾ City Compensatory Allowance (CCA)
¾ Other Allowance
¾ Mobile Reimbursement / Month
¾ Educational Allowance
¾ Travel Allowance
¾ Gross per Month = Sum of all the above.
¾ Gross per Annum= 12*Gross/Month
 ¾ PF Contribution= 12% of Basic/Annum
¾ Gratuity
¾ ESI Contribution (ESIC)= 4.75% of Gross/Annum
¾ Medical = The Mediclaim facility provided to an employee who are not
covered under Employee State Insurance (ESI).
¾ EX-Gratia/Bonus

The total cost hence is as follows:

Annual Fixed Gross Cost (AFGC) = Gross/Annum+ Ex-gratia

Annual Total Cost = AFGC + PF+ ESIC

Annual total cost is also called as CTC the compensation an employee would receive from
the organization.

In this report five manufacturing companies based in India and abroad would be covered.
These five are:

¾ Larsen and Toubro

¾ Mahindra and Mahindra
¾ Caterpillar
¾ Nokia
¾ Tata Motors

Larsen and Toubro:

L&T’s engineering & construction track record consists of implementation of turnkey

projects in major core and infrastructure sectors of the Indian industry including many of the
country's prized landmarks - its exquisite buildings, tallest structures, largest industrial
projects, longest flyover, highest via ducts - have been built by ECC .

ECC recognizes that people are the real source of competitive advantage. These values are
reflected in our Human Resources practices which have earned national recognition several
times.

ECC-ites go through a process of continuous learning, assisted by training programmes.

Apart from on-the-job training and technical training, over 100 programmes on general
management and behavioral topics are conducted each year.

COMPENSATION

The governing theme in this organisation is the well being of employees. The salary and
benefits offered are on par with the best available in Construction Industry.
A few important perquisites & welfare schemes are highlighted below:

Special Facilities for Site employees are provided. These special facilities include:

• Subsidized accommodation,
• Part furnishing of accommodation provided
• Free transport facilities for work.

Special Medical Insurance Scheme

This scheme is in addition to other medical benefits available to employees. Employees have
the option of covering their parents, aged upto 85 years under this scheme.

Retirement Benefits

All staff members are covered under Provident Fund and Gratuity Scheme.

L&T Institute of Technology, Mumbai is an exclusive facility for L&T employees' children.
The Institute conducts four-year industry-integrated diploma courses in Mechanical
Engineering and Electronics Engineering. On successful course completion, students are
awarded diplomas by the Directorate of Technical Education, Maharashtra to which LTIT is
affiliated.

Prize Money for Academic Achievement: To acknowledge and motivate meritorious wards
of employees, the Welfare Department of L&T presents cash awards to students who have
scored high percentage marks.

There are several additional benefits at Managerial Levels. Several attractive benefits are
available including

• Provision of company car,

• Loans for furniture, housing
• Children’ higher education
• Purchase of Personal Computer,
• Membership of Superannuation scheme
• Reimbursement of expenses on club membership

Source: www.larsenandtoubro.com, www.lntecc.com
Mahindra and Mahindra:

COMPENSATION RULES AND DESIGN GUIDELINES

Monthly Components Guidelines

Basic Minimum Basic figure for skilled, semi skilled and un skilled
employees is a minimum of Rs.2650, 2950 and 3250/-.
However on the safer side, Basic figure less is not less than
Rs.3500/- p.m.
Income Tax Benefit: NIL
House Rent Allowance (HRA) Maximum 50% basic (Metro cities) 40% basic (non metro
cities).
Income Tax Benefit:
Excess of Actual rent paid over 10% of Basic salary OR
Maximum HRA allowed (50% or 60% of basic) OR Actual
Rent Paid – whichever is lower is Exempt from Tax.
Transport Allowance Conveyance allowance meant for transportation between office
and residence only.
Income Tax Benefit:
Exempt maximum up to Rs.800/- per month. No proof required.
Children’s education allowance Income Tax Benefit:
Rs.100 per child subject to max 2 children.
Hence maximum Rs.200/- is exempt
Special Allowance Balancing figure – after choosing all the above components
with respect to their maximum limits absorbed, remaining
amount can be named as Special Allowance. It is fully taxable.
Medical Reimbursements Pay against medical bills
Income Tax Benefit:
Maximum Rs.1250/- p.m. (Rs.15000 p.a.)
is exempt only if Original Bills are provided
Food Coupons Non cash component, exempt up to
Rs.1000/- p.m.
Provident Fund (Retrials) Employer’s contribution (this is given to RPFC directly.
However employee’s contribution is deducted from his
Monthly salary above and sent to RPFC. Hence total deduction
works out to be 12+12 = 24% of Basic.
Income Tax Benefit:
Employee’s contribution of 12% is eligible for Deduction from
Taxable income. It can be treated as exempt investment.
Gratuity(Retirals) It is an annual component. 15 days monthly
basic per year.
Leave Travel Allowance / Journey within India primarily by Rail – 2nd A/c class for
Concession (Annual) employee and his immediate family (spouse, children, parents,
siblings).
Gift Vouchers Non cash component, these coupon companies like Sodexho
Pass provide attractive Gift Vouchers, which is given on Diwali
Festival Occasion. For junior employees amount can be lower,
for seniors, amount can be higher up to Rs.5000 or so.
PERQUISITES For Senior Management Employees only
Rent Free Accommodation Income Tax effect:
Taxable perquisite – Value of rent free accommodation is
considered to be taxable for the period of house occupied is
either of the following:
10% of Salary (for metro cities) or (7.5%
for non metro cities) + Excess of Fair Rent
Value (market rent) over 60% of salary
(i.e. Market Rent – 60% of salary) = Total taxable value of rent-
free accommodation
Car (For personal) Income Tax effect:
Owned by the Employer Taxable Value includes the following – Actual Running &
Maintenance expenditure incurred by the employer + Driver’s
Salary
+ Depreciation – any amount charged by employer to employee
for personal use of the car.
Employee Stock Employee exercises the option plan by buying out the shares
Option Plan during the exercise period however tax liability occurs only
when an employee sells the shares on the value of sale made
under the Capital Gains head of income.
OTHER BENEFITS
Personal Accident Insurance For employee only
Scheme
Medical Insurance Scheme (For employee & dependents which can be spouse,
first two children, parents or in-laws (either of them) etc.
Performance linked insurance The Performance Linked Incentive Plan is based on employee’s
plan Performance Ratings during the Annual Performance Appraisal
Plan in the month of March / April each year. Each employee
would be eligible for a performance based incentive plan based
on following guidelines.
Maximum Potential Incentives under PLIP will be 30% of
Total Monthly Salary. OR up to Rs.75000/- p.a.

Source: Depth Interview with an employee from Mahindra & Mahindra

Caterpillar:

Caterpillar offers incentives that give employees the opportunity to impact their
compensation for achieving targeted corporate and business unit results. Caterpillar's
incentive plans also ensure that employees continue to consider the outcome of their
decisions on the company, as well as their individual business unit.

Retirement

To encourage employees to save for their future and maintain financial stability after
retirement, the Indian Government and the Companies have chalked three retirement plans,
including the Provident Fund, Gratuity and Superannuation Fund.

Provident Fund

This is mandate as per the Indian Law. Employee contributes 12% of his/her basic pay
towards this fund and the employer makes equal contribution. Both the employer and
employee have no option but to contribute for this fund.

Gratuity

This plan is again a mandate as per the Indian Law. Any employee who works in the
organization or within the same group of companies for a minimum of 5 years is eligible for
this fund. The amount for this fund is contributed completely by the employer and the
employee makes no contribution to this fund. The employee cannot withdraw this amount
until he/ she retires or resigns from the company. The minimum service period must be
continuous; in case of discontinuity the employee will not be eligible for the fund.

Superannuation Fund

This fund is not a mandate by the Indian law, however Caterpillar provides this fund to its
employees, to be consistent with the market-based practice. This is more like a loyalty bonus
for employees who work in the company for more than 2 years. The employer wholly
contributes the amount and the employee makes no contribution to this fund.

The above funds and proper investment planning would support the employees in their sunset
years.

The Compensation Committee assists the board of directors in fulfilling its responsibilities in
connection with the compensation of company directors, officers and employees. It performs
this function by establishing and overseeing compensation programs, recommending to the
board the compensation of directors who are not officers of the company, administering the
company's equity award stock option plans and options and restricted stock grants,
furnishing an annual Compensation Committee Report on executive compensation and
approving the filing of a Compensation Discussion & Analysis section.

Employee and Management Compensation

The Committee reviews the Company's salaried and management compensation practices,
including the methodologies for setting employee and officer salaries, and fixes the salary
and other compensation of all officers of the Company. The Committee also ensures that
compensation is competitive and rewards performance, taking into account compensation
levels and practices at comparable companies.

Compensation Plans and Programs

The Committee approves and recommends standards for the company's compensation
programs and plans including various incentive compensation

Director Compensation

Caterpillar management periodically reviews with the Committee the status of independent
director compensation relative to comparable companies.

Source: www.india.cat.com
TATA MOTORS

(i) Gratuity
The Company has an obligation towards gratuity, a defined benefit retirement plan covering
eligible employees. The plan provides for a lump sum payment to vested employees at
retirement, death while in employment or on termination of employment of an amount
equivalent to 15 to 30 days salary payable for each completed year of service. Vesting occurs
upon completion of five years of service.
The Company makes annual contributions to gratuity fund established as trust. The Company
accounts for the liability for gratuity benefits payable in future based on an independent
actuarial valuation.

(ii) Superannuation
The Company has two superannuation plans, a defined benefit plan and a defined
contribution plan.
Employees who are members of the defined benefit superannuation plan are entitled to
benefits depending on the years of service and salary drawn. The monthly pension benefits
after retirement range from 0.75% to 2% of the annual basic salary for each year of service.
The Company accounts for the liability for superannuation benefits payable in future under
the plan based on an independent actuarial valuation. With effect from April 1, 2003, this
plan was amended and benefits earned by covered employees have been protected as at
March 31, 2003. Employees covered by this plan are prospectively entitled to benefits
computed on a basis that ensures that the annual cost of providing the pension benefits would
not exceed 15% of salary. The Company maintains a separate irrevocable trust for employees
covered and entitled to benefits. The Company contributes up to 15% of the eligible
employees’ salary to the trust every year. The Company recognizes such contributions as an
expense when incurred. The Company has no further obligation beyond this contribution.

(iii) Bhavishya Kalyan Yojana (BKY): BKY is an unfunded defined benefit plan. The
benefits of the plan accrue to an eligible employee at the time of death or permanent
disablement, while in service, either as a result of an injury or as certified by the Company’s
Medical Board. The monthly payment to dependents of the deceased / disabled employee
under the plan equals 50% of the salary drawn at the time of death or accident or a specified
amount, whichever is higher. The Company accounts for the liability for BKY benefits
payable in future based on an independent actuarial valuation.

(iv) Post-retirement Medicare Scheme

Under this scheme, employees get medical benefits subject to certain limits of amount,
periods after retirement and types of benefits, depending on their grade and location at the
time of retirement. Employees separated from the Company as part of Early Separation
Scheme, on medical grounds or due to permanent disablement are also covered under the
scheme. The liability for post-retirement medical scheme is based on an independent actuarial
valuation.

(v) Provident Fund

The eligible employees of the Company are entitled to receive benefits under the provident
fund, a defined contribution plan, in which both employees and the Company make monthly
contributions at a specified percentage of the covered employees’ salary (currently 12% of
employees’ salary). The contributions as specified under the law are paid to the provident
fund and pension fund set up as irrevocable trust by the Company or to respective Regional
Provident Fund Commissioner and the Central Provident Fund under the State Pension
scheme. The Company is generally liable for annual contributions and any shortfall in the
fund assets based on the government specified minimum rates of return or pension and
recognises such contributions and shortfall, if any, as an expense in the year incurred.

(vi) Compensated absences

The Company provides for the encashment of leave or leave with pay subject to certain rules.
The employees are entitled to accumulate leave subject to certain limits, for future
encashment. The liability is provided based on the number of days of unutilised leave at each
balance sheet date on the basis of an independent actuarial valuation.

Some other benefits advanced to the permanent employees are:

• Allowances like Transport allowance, Education allowance, Sanitation allowance,
Leave and travel allowance etc.
• Annual Performance linked Payment
• Free Medical facility for family
• Company loans & advances

Source: www.tatamotors.com
NOKIA

Nokia is the world leader in mobility, driving the transformation and growth of the
converging internet and communication industry. Nokia started its operations in India in 1995
and since then has played a pioneering role in the growth of cellular technology in India.
Today it is the leading brand in the mobile devices market in India with one of the largest
distribution networks.

NOKIA’S COMPENSATION STUDY

• Nokia’s Total Compensation Package is tailored for each country.

• It typically consists of elements such as annual base salary, incentives, bonuses, possible
stock options or performance shares, flexible Work-Life balance solutions, and other
local benefits.
• Nokia rewards employees for good performance, competence development, and for
overall company success.
• This creates a positive and encouraging environment with opportunities for employees to
optimize their potential and be rewarded fairly.
• Higher performance and contribution leads to higher rewards. The Nokia global market
competitive rewards structure addresses the need for flexibility, personalization,
empowerment and commitment.

The basic salary is set to meet market conditions, the demands of the job and individual
competence and performance. The variable part may consist of incentives or bonuses and
other compensation, such as overtime pay and call-out pay.

Nokia provides compensation on competitive basis it provides employees with market

competitive rewards through a flexible global structure. The Compensation package consists
the following

• Basic pay, equity bonuses and incentives

• Health and welfare benefits
• Vacation and time off

The compensation also includes various benefits:

• Insurance (healthcare and life)

• Transportation (free buses)
• gifts on special occasions (e.g. birthday, marriage)
• Relocation support (need based)
• Work related mobile phone
• Education assistance
• Crèche support
Bonus System

Short-term incentive programs such as individual, team, project/program incentives and the
Nokia Connecting People Bonus allow Nokia to offer immediate rewards for employee and
team achievements. Eligibility for an incentive, bonus or stock option plans is defined by the
content and nature of each individual's job.

Local Benefits

Additional local rewards and benefits are also developed to complement the global programs
and to ensure that the local market conditions are met.

Annual Reviews

Nokia has implemented a global process, where the change in the pay level for each
employee is based on the results of the annual performance review.

Health

Nokia's Work-Life balance solutions provide health benefits and local retirement benefits are
tailored to individual needs according to factors such as tenure, contribution, performance,
roles and responsibilities.

Nokia offers services, programs and guidelines to support employees´ possibilities to

maintain work-life balance according to their changing needs and life situations. Typically
they include teleworking, mobile working, flexible working hours, sabbaticals, study leaves,
health care services as well as recreational activities and other activity clubs.

Flexible Working

Depending on the situation and needs, flexible working solutions can provide alternative
modes of working such as teleworking at home or at other locations (e.g. working at remote
sites).Nokia provide employees with innovative solutions aiming at having positive effects on
the overall quality of life, job satisfaction and job performance.

Flexi Time:

Depending on the local market conditions, employees may take advantage of flexi time
including flexible working hours and part-time working.

Time Off:

Nokia´s flexible working solutions include unpaid time off and sabbaticals. These solutions
support Nokia´s philosophy of Employee Personal Growth and Self-management and enable
employees to take extended leave from work.
Health-care Services

Nokia aims to maintain and improve the working environment and well-being of its
employees by offering medical check-ups, counselling and insurance programs to the
employees.

Volunteering

Nokia's global volunteer program Nokia Helping Hands gives employees a chance to
contribute their time and effort to worthy causes in their communities. Nokia employees can
use 1-2 working days per year for Nokia Helping Hands volunteering.

Other Services

Sporting, social and cultural activities and workplace relationships are promoted within the
company. These well-being services can also include laundry service, cafeteria, take-away
food, day care and on-site concierge services etc.

Source: www.nokia.co.in
Analysis

Each company is pioneer in their own way of producing their products and equally
compensating the employees.

TATA Motors, L&T and most companies have evolved from the traditional fixed pay and
more and more variable pay is introduced in every company. Nowadays we find that the
variable component is quite large as compared to the fixed one. There are huge advantages
due to a variable pay compensation which are as follows:

• Employee accountability
• Motivation to perform more
• Performance leading to rewards and recognition
• High self motivation to perform

However, critics have argued that such a pay structure would always put huge loads of
pressure on the employees and hence an employee is looked merely as a machine with no
emotions. Some of the disadvantages may be as follows

• Increased stress levels due to heavy expectations

• Performance anxiety
• Employee worn-out

Thus the five manufacturing companies are equally good in compensating the employees but
a heavy variable pay at M&M is a cause of concern. M&M should therefore motivate the
employees by giving other benefits which may include a tour holiday fully sponsored etc.
Such practices would not only give the employee a much needed break and also motivate
everyone to work. It should be noted that by giving only monetary benefits would not suffice
the needs of the employees as not everyone is motivated only by money. Nokia and
Caterpillar have this ideology of overall growth of an individual which is the best way to
compensate an employee

Thus the company should look after the overall growth of the individual, match his career
aims with the goals of the company.