Vidyavardhinis Kedarnath Malhotra (Vartak) College of Commerce

Compensation Management
Group No. 8 members: Pratiksha Balekar Dipti Patil Deepal Solanki Ulpesh Solanki 03 29 40 41

Submitted to: Prof. Bhavana Chauhan - Lad

Certificate
This is to certify that the project work entitled Compensation Management for the subject Human Resource Management submitted by the group no. 8 members viz. Miss. Pratiksha Balekar Roll no. 3, Miss. Dipti Patil, Roll no. 29, Miss. Deepal Solanki, Roll no. 40, & Mr. Ulpesh Solanki, Roll no. 41, for the partial fulfilment of T.Y.BMS (fifth semester) offered by Vidyavardhinis Kedarnath Malhotra College of Commerce (Vartak College), during the academic year 2013-14 is an original work carried out by the students and has been successfully submitted on completion.

Date: 12th August, 2013

Head of the Department (BMS)

Principal

Examiner

Acknowledgement

I would like to acknowledge that this hard copy is a result of complete team effort, based on the survey and research conducted by my team. The subject of this hard copy and the presentation is to illustrate Compensation management, which is a part of the human resource management in our curricular. I would like to thank and congratulate my team for coming together as a unit and for shaping the presentation, the way it is, secondly I would like to thank Mr. Hardik Kotecha, CA, Kotecha Associates for his support in the research work. Lastly, I would like to express my special thanks to Prof. Bhavana Chauhan Lad, for her immense support and guidance for the accomplishment of this assignment.

Regards, Ulpesh Solanki (Team Leader)

Preface
I feel really delighted to present this hard copy, as it is an outcome of my teams effort and can be considered resourceful as it covers majority of aspects related to the topic. This hard copy is based on Compensation management, which is a part of the Human resource management function in an organisation. The purpose of this hard copy is to highlight the importance of compensation management from just being payment of remuneration, to a management tool, which motivates the employees to bring their full potentials into their jobs and also to help the organisation in developing the talents of the employees into fruitful outputs. References are being extracted from the internet from various research papers, extracts from textbooks of various business schools, business essays and from interviews and blogs of famous business Professionals. I would like to thank my team for coming together and putting in their efforts and for shaping this presentation, the way it is; Our parents, for supporting us through-out the learning process and for providing the correct exposure to us to find our ways to collect data and for believing in us and trusting our potentials always; Last but not the least, I would like to express a cordial thanks to Prof. Bhavana Chauhan - Lad for her immense support and guidance to prepare this hard copy. Hope we have achieved success in providing quality content, reviews are most welcomed.

Regards, Ulpesh Solanki & team

Table of Contents
Sr no

Title introduction Meaning of compensation Compensation management objective components Evolution Of Compensation Change in Compensation Systems Importance of Compensation Management Factors Affecting Compensation System Types of Compensation Direct Compensation Indirect Compensation Compensation Management Process Case study based on compensation management in Tata Consultancy Services Conclusion Bibliography

1 2 3 3.1 3.2 4 4.1 5 6 7 7.1 7.2 8 9 10 11

Page No. 5 6 7-10 7 10 11 12 13 14 16-19 16 17 19 20 25 26

Introduction.
If you pick the right people and give them the opportunity to spread their wings - and put compensation and rewards as a carrier behind it - you almost dont have to manage them. Jack Welch. Most of us would have heard the term compensation in the context of getting paid for the work that we do. The work can be as part of full time engagement or part time in nature. What is common to them is that the reward that we get for expending our energy not to mention the time is that we are compensated for it. From the perspective of the employers, the money that they pay to the employees in return for the work that they do is something that they need to plan for in an elaborate and systematic manner. Unless the employer and the employee are in broad agreement (We use the term broad agreement as in many cases, significant differences in perception about the employees worth exist between the two sides), the net result is dissatisfaction from the employees perspective and friction in the relationship. It can be said that compensation is the glue that binds the employee and the employer together and in the organized sector, this is further codified in the form of a contract or a mutually binding legal document that spells out exactly how much should be paid to the employee and the components of the compensation package. Since, this article is intended to be an introduction to compensation management, the art and science of arriving at the right compensation makes all the difference between a satisfied employee and a disgruntled employee. Though Maslows Need Hierarchy Theory talks about compensation being at the middle to lower rung of the pyramid and the other factors like job satisfaction and fulfilment being at the top, for a majority of employees, getting the right compensation is by itself a motivating factor. Hence, employers need to quantify the employees contribution in a proper manner if they are to get the best out of the employee. The provision of monetary value in exchange for work performed forms the basis of compensation and how this is managed using processes, procedures and systems form the basis of compensation management. As the module progresses, readers would be introduced to other aspects of compensation management like the components of compensation management, types of compensation, inclusion of variable pay, the use of Employee Stock Options etc. The aspect of how skewed compensation management leads to higher attrition is discussed as well. This aspect is important as studies have shown that a majority of the employees who quit companies give inadequate or skewed compensation as the reason for their exit. Hence, compensation management is something that companies must take seriously if they are to achieve a competitive advantage in the market for talent.

Considering that the current trend in many sectors (particularly the knowledge intensive sectors like IT and Services) is to treat the employees as creators and drivers of value rather than one more factor of production, companies around the world are paying close attention to how much they pay, the kind of components that this pay includes and whether they are offering competitive compensation to attract the best talent. In concluding this article, it is pertinent to take a look at what Jack Welch had to say in this regard: As the quote says, if the right compensation along with the right kind of opportunities are made available to people by the firms in which they work, then work becomes a pleasure and the managers task made simpler leading to all round benefits for the employee as well as the employer.

Meaning of Compensation.[1]
Compensation is the total amount of the monetary and non-monetary pay provided to an employee by an employer in return for work performed as required. Compensation is based on:

Market research about the worth of similar jobs in the marketplace, Employee contributions and accomplishments, The availability of employees with like skills in the marketplace, The desire of the employer to attract and retain a particular employee for the value they are perceived to add to the employment relationship, and The profitability of the company or the funds available in a non-profit or public sector setting, and thus, the ability of an employer to pay market-rate compensation.

Compensation also includes payments such as bonuses, profit sharing, overtime pay, recognition rewards and checks, and sales commission. Compensation can also include non-monetary perks such as a company-paid car, stock options in certain instances, company-paid housing, and other non-monetary, but taxable, income items.

Compensation Management.[3]
Compensation Management is an organized practice that involves balancing the work-employee relation by providing monetary and non-monetary benefits to employees. Compensation includes payments such as bonuses, profit sharing, overtime pay, recognition rewards and sales commission. Compensation can also include non-monetary perks such as a company-paid car, company-paid housing and stock options. Compensation is an integral part of human resource management which helps in motivating the employees and improving organizational effectiveness.

Objectives of Compensation Management.[3]

The objectives of compensation management are to help the organization achieve strategic success while ensuring internal and external equity. Internal equity ensures that more demanding positions or better qualified people within the organization are paid more. External equity assures that jobs are fairly compensated in comparison with similar jobs in the labour market. Sometimes these objectives conflict with one another, and trade-offs must be made. Objectives such as: 1. Acquire qualified personnel. Compensation needs to be high enough to attract applicants. Pay levels must respond to the supply and demand of workers in the labour market since employers compete for workers. Premium wages are sometimes needed to attract applicants already working for others. 2. Retain current employees. Employees may quit when compensation levels are not competitive, resulting in higher turnover. 3. Ensure equity. Compensation management strives for internal and external equity. Internal equity requires that pay be related to the relative worth of a job so that similar jobs get similar pay. External equity means paying workers what comparable workers are paid by other firms in the labour market. 4. Reward desired behaviour. Pay should reinforce desired behaviours and act as an incentive for those behaviours to occur in the future. Effective compensation plans reward performance, loyalty, experience, responsibility, and other behaviours. 5. Control costs. A rational compensation system helps the organization obtain and retain workers at a reasonable cost. Without effective compensation management, workers could be overpaid or underpaid.

6. Comply with legal regulations. A sound wage and salary system considers the legal challenges imposed by the government and ensures the employer's compliance. 7. Facilitate understanding. The compensation management system should be easily understood by human resource specialists, operating managers, and employees. 8. Further administrative efficiency. Wage and salary programs should be designed to be managed efficiently, making optimal use of the HRIS, although this objective should be a secondary consideration compared with other objectives.

Components of Compensation:[1][2]
Monetary compensation package of employees generally consists of the following components: 1. Wage and Salary: Wage and salary are the most important component of compensation and these are essential irrespective of the type of organisation. Wage is referred to as remuneration to workers particularly, hourly-rated payment. Salary refers to as remuneration paid to white-collar employees including managerial personnel. Wages and salary are paid on the basis of fixed period of time and normally not associated with productivity of an employee at a particular time. 2. Basic Pay. The primary part of pay package is basic pay. For blue-collar workers basic wage may be based on work done (price wage system) but for whit-collar employees, supervisory staff and managers, basic salary is generally time bound. Basic pay is generally determined through job evaluation which is the process of systematically ascertaining the relative worth of a job. Benefits: Alternatively known as indirect compensation, Benefits constitute a substantial portion of international compensation ( approx. one third of compensation for regular employees is benefits). Benefits include a suit of programmes such as: Entertainment, Festival celebrations, Gifts, Use of club facilities, provision of hospitality including food and beverage, employee welfare, use of health club, Conveyance tour and travel, Hotel Board and Lodging, vehicles, telephone and other telecommunication facilities, Sponsorship of children.
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 Basically an employee tends to join and stay with an org. which guarantees an attractive benefits programme. Vacation along with holidays and rest breaks help employees mitigate fatigue and enhance productivity during the hours employees actually work. 3. Allowances. It is an inevitable feature of International compensation. The most common allowance relates to the cost of living an adjustment for different in the cost of living between the home country and foreign country assignment. This allowance is designed to provide the expatriate with the same standard of living that he or she enjoyed in the home country. Spouse assistance, housing allowance, home leave allowance, relocation allowance and educational allowance are the popular in expats. These allowances are often contingent upon tax equalization policies and practices in both the home and the host countries. Several allowances are paid in addition to basic pay. Some of these allowances are given below: a) Dearness Allowance. This allowance is given to protect real income against inflation. Generally, dearness allowance (DA) is paid as a percentage of basic pay. b) House Rent Allowance. Employers who do not provide living accommodation pay house rent allowance (HRA) to employees. This allowance is calculated as a percentage of basic pay (30 per cent of basic pay in case of government employees). c) City Compensatory Allowance. This allowance is paid generally to employees in metros and other big cities where cost of living is comparatively high. City compensatory allowance (CCA) is generally a fixed amount per month. d) Transport Allowance/Conveyance Allowance. Some employers pay transport allowance (TA) to their employees. A fixed sum is paid every month to cover a part of traveling charges. In some cases, medical allowance, education allowance for children, tiffin allowance, etc. are also paid.

4. Incentives. Incentive compensation is performance-linked remuneration paid with a view to inspire employees to work hard and do better. Both individual incentives and group incentives are used. Bonus, profitsharing, commission on sales are some examples of incentive compensation. An additional payment (or other remuneration) to employees as a means of increasing output. Increasingly, MNCs these days are designing special incentive programmes for keeping expatriates motivated. In the process, a growing number of firms have dropped the on-going premium for overseas assignments and replaced it with a one time, lump-sum premium. The lump sum payment has at least three advantages: First, expatriates realizes that they are paid this only once and that too when they accept an overseas assignment. So the payment tends to retain its motivational value. Second: costs to the company are less because there is only one payment and no future financial commitment. This is so because incentive is a separate payment, distinguishable from a regular pay, and it is more rapidly for saving or spending. Third, less chances for pre mature repatriation. 5. Fringe Benefits/Perquisites. Several types of benefits are paid particularly to senior managers. Provident funds, pensions, gratuity, encashment of earned leave, company house, company car, leave travel concession (LTC), medical aid, interest free loan, holiday homes, entertainment, stock options, etc. are examples of such benefits.

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Evolution Of Compensation [5]

Todays compensation systems have come from a long way. With the changing organizational structures workers need and compensation systems have also been changing. From the bureaucratic organizations to the participative organizations, employees have started asking for their rights and appropriate compensations. The higher education standards and higher skills required for the jobs have made the organizations provide competitive compensations to their employees. Compensation strategy is derived from the business strategy. The business goals and objectives are aligned with the HR strategies. Then the compensation committee or the concerned authority formulates the compensation strategy. It depends on both internal and external factors as well as the life cycle of an organization.

Evolution of Strategic Compensation

Traditional Compensation Systems In the traditional organizational structures, employees were expected to work hard and obey the bosses orders. In return they were provided with job security, salary increments and promotions annually. The salary was determined on the basis of the job work and the years of experience the employee is holding. Some of the organizations provided for retirement benefits such as, pension plans, for the employees. It was assumed that humans work for money, there was no space for other psychological and social needs of workers.

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Change in Compensation Systems[5]

With the behavioural science theories and evolution of labour and trade unions, employees started asking for their rights. Maslow brought in the need hierarchy for the rights of the employees. He stated that employees do not work only for money but there are other needs too which they want to satisfy from their job, i.e. social needs, psychological needs, safety needs, self-actualization, etc. Now the employees were being treated as human resource. Their performance was being measured and appraised based on the organizational and individual performance. Competition among employees existed. Employees were expected to work hard to have the job security. The compensation system was designed on the basis of job work and related proficiency of the employee.

Maslows Need Hierarchy Todays Modern Compensation Systems

Today the compensation systems are designed aligned to the business goals and strategies. The employees are expected to work and take their own decisions. Authority is being delegated. Employees feel secured and valued in the organization. Organizations offer monetary and non-monetary benefits to attract and retain the best talents in the competitive environment. Some of the benefits are special allowances like mobile, companys vehicle; House rent allowances; statutory leaves, etc.

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Importance of Compensation Management:[1]

A good compensation is must for every business organization and helps in the following way:

It tries to give proper return to the workers for their contributions to the organization. It imparts a positive control on the efficiency of employees and encourages them to perform better and achieve the specific standards. It forms a basis of happiness and satisfaction for the workforce that minimizes the labour turnover and confers a stable organization. It augments the job evaluation process which in turn helps in setting up the more realistic and achievable standards. It is designed to comply with the various labour acts and therefore does not result in disputes between the employee union and the management. This builds up a peaceful relationship between the employer and the employees. It arouses an environment of morale, efficiency and cooperation among the workers and provides satisfaction to the workers. It stimulates the employees to perform better and show their excellence.

It provides growth and advancement opportunities to the deserving employees.

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Factors Affecting Compensation System [1][2]

The primary objective of a compensation system is to administer an effective and equitable pay system. It can be affected by various factors which are as follows:

1. Organizational Provisions Organizational provision states that the level of compensation largely depends upon organizational operating policies and procedures. It is because the policies serve as a guideline for formulating and implementing compensation plans and programs. Moreover, organizational regulations, plans, objectives, ability for pay etc. also affect the level of pay. 2. Government Regulations In order to protect the working class from wage exploitation by strong employers, the government enacts various laws and judicial decisions. Such laws and regulations affect compensation management. Because, they emphasize on minimum wage rate, overtime rate, working hours, equal pay for equal work, payment of bonus, etc. So, an organization has to design its pay system as per the government rules and regulations. 3. Equity Considerations Equity considerations hold the philosophy that the compensation system should be fair and equitable. It means the compensation system should be similar for the same type of work within the organization. Similarly, it should be fair relative to what other people get for the similar job in another organization. It is important because any imbalance between what the employees contribute and what they obtain as return would lead to greater job dissatisfaction, employee turnover and absenteeism. 4. Union Pressure Labour unions are pressure groups that work in the interest of the workers. Such unions lobby the management for the formulation of fair compensation plans. These organized unions can ensure better wages for employees. 5. Job Analysis and Evaluation Report Job analysis is a method through which necessary information about the contents and the contexts of the job is made available to determine the value of each job. The job evaluation is a process of determining the value/worth of a job so that a payment system can be specified. Job analysis and job evaluation determine the relative worth of job which ultimately assist for compensation management. Hence, it is regarded as an important factor of compensation management.

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6. Cost Of Living Compensation is concerned with an overall return that an employee obtains from the organization for rendering contributions towards organization objectives. Therefore, the payment should be adequate to maintain the cost of living of the employees. Hence, the employer should manage compensation viewing the cost of living of each individual. 7. Organizational Positions Sometimes, the organization itself evaluates where it is in order to prepare compensation plans. The position of the organization is determined by its productivity i.e, if the productivity of the worker is high, it assess itself as a higher position. As a consequence of it, the compensation system is determined at a higher level. Contrary to it, in case of lower productivity, wages/salary rates tend to be low. Thus, any shift in productivity and employee performance has direct impact on the wage level of the organization. 8. Productivity of Workers Another factor of compensation management is the productivity of workers. This is the new concept of linking pay with employee performance. Under it, if the workers are highly productive, they get high compensation as compared to less productive workers. Productivity is a key factor as it enhances organization's image and status.

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Types of Compensation:[2][5]
Direct Compensation Direct compensation refers to monetary benefits offered and provided to employees in return of the services they provide to the organization. The monetary benefits include basic salary, house rent allowance, conveyance, leave travel allowance, medical reimbursements, special allowances, bonus, Pf/Gratuity, etc. They are given at a regular interval at a definite time.

House rent Allowance Special Allowance

Basic Salary

Medical Reimbursement

Leave travel Allowance

Bonus

Conveyance

Direct Compensation
1. House Rent Allowance Employers who do not provide living accommodation pay house rent allowance (HRA) to employees. This allowance is calculated as a percentage of basic pay (30 per cent of basic pay in case of government employees). 2. Basic Salary Salary is the amount received by the employee in lieu of the work done by him/her for a certain period say a day, a week, a month, etc. It is the money an employee receives from his/her employer by rendering his/her services. Organizations either provide accommodations to its employees who are from different state or country or they provide house rent allowances to its employees. This is done to provide them social security and motivate them to work.

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3. Conveyance Organizations provide for cab facilities to their employees. Few organizations also provide vehicles and petrol allowances to their employees to motivate them.

4. Leave Travel Allowance These allowances are provided to retain the best talent in the organization. The employees are given allowances to visit any place they wish with their families. The allowances are scaled as per the position of employee in the organization. 5. Medical Reimbursement Organizations also look after the health conditions of their employees. The employees are provided with medi-claims for them and their family members. These medi-claims include healthinsurances and treatment bills reimbursements. 6. Bonus Bonus is paid to the employees during festive seasons to motivate them and provide them the social security. The bonus amount usually amounts to one months salary of the employee.

7. Special Allowance Special allowance such as overtime, mobile allowances, meals, commissions, travel expenses, reduced interest loans; insurance, club memberships, etc are provided to employees to provide them social security and motivate them which improve the organizational productivity. Indirect Compensation [2] Indirect compensation refers to non-monetary benefits offered and provided to employees in lieu of the services provided by them to the organization. They include Leave Policy, Overtime Policy, Car policy, Hospitalization, Insurance, Leave travel Assistance Limits, Retirement Benefits, Holiday Homes.

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Leave Policy Flexible timings Overtime Policy

Holiday Homes

Hospitalisation

Retirement Benefits Leave travel

Insurance

Indirect Compensation
1. Leave Policy It is the right of employee to get adequate number of leave while working with the organization. The organizations provide for paid leaves such as, casual leaves, medical leaves (sick leave), and maternity leaves, statutory pay, etc. 2. Overtime Policy Employees should be provided with the adequate allowances and facilities during their overtime, if they happened to do so, such as transport facilities, overtime pay, etc. 3. Hospitalization The employees should be provided allowances to get their regular check-ups, say at an interval of one year. Even their dependents should be eligible for the medi-claims that provide them emotional and social security. 4. Insurance Organizations also provide for accidental insurance and life insurance for employees. This gives them the emotional security and they feel themselves valued in the organization. 5. Leave Travel
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The employees are provided with leaves and travel allowances to go for holiday with their families. Some organizations arrange for a tour for the employees of the organization. This is usually done to make the employees stress free. 6. Retirement Benefits Organizations provide for pension plans and other benefits for their employees which benefits them after they retire from the organization at the prescribed age.

7. Holiday Homes Organizations provide for holiday homes and guest house for their employees at different locations. These holiday homes are usually located in hill station and other most wanted holiday spots. The organizations make sure that the employees do not face any kind of difficulties during their stay in the guest house. 8. Flexible Timings Organizations provide for flexible timings to the employees who cannot come to work during normal shifts due to their personal problems and valid reasons.

Compensation Management Process [5]

In order to achieve the objectives of compensation management, it should proceed as a process. This process has various sequential steps as shown: 1. 2. 3. 4. 5. Organisations strategy Compensation policy Analysis of contingent factors Design and implementation of compensation plan Evaluation and review

1. Organisation's Strategy: Organisation's overall strategy though not a step of compensation management is the starting point in the total human resource management process including compensation management. Companies operating in different types of market/product having varying level of maturity, adopt different strategies and matching compensation strategy and blend of different compensation methods. Thus, it can be seen that organisations follow different strategies in different market situations and align their compensation strategy and contents with these strategies. In a growing market, an organisation can expand its business through internal expansion or takeover and merger of other organisations in the same line of business or a combination of both. In such a growing market, the inputs, particularly human resources, do not grow in the same proportion as the

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business expands. Therefore, in order to make the growth strategy successful, the organisation has to pay high cash to attract talents. For example, information technology is a fast growing business presently and we find maximum merger and higher managerial compensation in this industry. In mature market, the organisation does not grow through additional investment but stabilises and the growth comes through making the present investment more effective, known as learning curve growth. In such a situation, average cash and moderate incentives may work. The benefits which have been standardised have to be maintained. In the declining market, the organisation has to harvest profit through cash generation and cost cutting and if this cannot be sustained over the long run, the possible retrenchment of business to invest somewhere else. In such a case, compensation strategy involves cost control with below average cash and incentive payments. 2. Compensation Policy: Compensation policy is derived from organisational strategy and its policy on overall human resource management. In order to make compensation management to work effectively, the organisation should clearly specify its compensation policy, which must include the basis for determining base compensation, incentives and benefits and various types of perquisites to various levels of employees. The policy should be linked with the organisational philosophy on human resources and strategy. Besides, many external factors which impinge on the policy must also be taken care of Job Analysis and Evaluation. Job analysis provides basis for defining job description and job specification with the former dealing with various characteristics and responsibilities involved in a job and the latter dealing with qualities and skills required in job performer. Job analysis also provides base for job evaluation which determines the relative worth of various jobs in the organisation. The relative worth of various jobs determines the compensation package attached with each job. 3. Analysis of Contingent Factors: Compensation plan is always formulated in the light of various factors, both external and internal, which affect the operation of human resource management system. Various external factors are conditions of human resource market, cost of living, level of economic development, social factors, pressure of trade unions and various labour laws dealing with compensation management. Various internal factors are organisation's ability to pay and employees' related factors such as work performance, seniority, skills, etc. These factors may be analysed through wage/salary survey. 4. Design and Implementation of Compensation Plan: The organisation may be able to design its compensation plan incorporating base compensation with provision of wage/salary increase over the period of time, various incentive plans, benefits and perquisites. Sometimes, these are determined by external party, for example, pay commissions for Government employees as well as for public sector enterprises. After designing the compensation
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plan, it is implemented. Implementation of compensation plan requires its communication to employees and putting this into practice. 5. Evaluation and Review: A compensation plan is not a rigid and fixed one but is dynamic since it is affected by a variety of factors which are dynamic. Therefore, compensation management should have a provision for evaluating and reviewing the compensation plan. After implementation of the plan, it will generate results either in terms of intervening variables like employee satisfaction and morale or in terms of end-result variable like increase of productivity. However, this latter variable is more important. The evaluation of compensation plan must be done in this light. If it does not work as intended, there should be review of the plan necessitating a fresh look.

A CASE STUDY ON COMPENSATION MANAGEMENT SYSTEM IN TCS (Tata Consultancy Services): [Citation6]
The case discusses the compensation management practices at Tata Consultancy Services Ltd. (TCS), one of the leading Indian IT companies. TCS' compensation management system was based on the EVA model. With the implementation of Economic Value Added (EVA)-based compensation, the salary of employees comprised of two parts fixed and variable. The variable part of the salary was arrived after considering business unit EVA, corporate EVA, and also individual performance EVA. During the first quarter of the financial year 2005-06, about 1000 employees whose performance was not up to the mark were asked to leave Tata Consultancy Services(TCS), the largest IT company in India. TCS had asked around 500 people to leave the company after the second annual appraisal it carries out, citing performance-related issues. By the end of the financial year, this number could went up to 600. The employees who were asked to leave are mostly those with 2-3 years of experience and do not include trainees because they have less than a years experience.HR experts believed that this decision was based on the implementation of the EVA(Economic Value Added) based model for assessing employees' contributions, at the company. The first two year cycle of EVA had just been completed when the retrenchment decision was taken. TCS came in the news for cutting down the variable pay of employees for slippages in internal growth targets a move that will save it about Rs 83 crore. This move however was unlikely to be linked any slowdown worries. This manner of forced attrition was only linked to the appraisal process. It was not linked to any other factor. Those who were asked to leave had obtained low ratings in their performance appraisal for two consecutive years, despite being under mentorship. It seemed to be a routine exercise carried out bi-annually to weed out non-performers. The number of employees impacted during this year till date is 500 which constitutes about 0.5% of the companys employee strength of 1,08,000. In this process if an employee gets a grade of 2 or below during the first appraisal cycle, the company puts the employee on a performance improvement plan that includes additional training and assignments on new projects. At the end of the second appraisal if the employees ratings do not improve to a grade better than 2, the employee is asked to resign. TCS arranges for
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placement agencies to help the employees get placed in other organizations though. The grades are on a scale from 1 to 5, with 1 being the lowest and 5 being the highest. At a time when IT manpower was in short supply and IT and BPO companies were going out of their way to reduce employee attrition, TCS's decision to retrench employees made headlines in several Indian news dailies. On April 19, 2005, TCS announced its annual results for the fiscal 2004-05. The company declared total revenues of US$ 2.24 billion and net profit of US$ 0.51 billion. TCS had been the first Indian IT company to achieve the US$ 1 billion revenue milestone in the fiscal 2002-03. It continued its success story when it became the first Indian IT company to earn revenues of more than US$2 billion per annum. S. Ramadorai , CEO & Managing Director of TCS commented, "Consistent with our position as the pioneer of the Indian IT industry, TCS is proud to be the first IT Company to cross the two billion dollar milestone. Through our strategic initiatives we have managed to double our revenues in the last two years. We are alive to the challenges facing the industry and are geared to enhance our leadership position."4 TCS aimed at earning revenues of US$ 5 billion by 2010. The EVA compensation model was used as a basis for giving incentives to employees and the bonus declared was a part of improved EVA achieved. In the EVA model, the components of fixed and variable pay were determined. Fixed pay comprised of wages and pension while the variable pay had components like bonus, profit sharing and stock options. According to him "There's no ceiling on the bonus. It can be equal to the fixed portion of the salary, providing the cell has shown that kind of EVA growth. It is not just compensation, the process aimed at employees to also have get a feeling of ownership for their own unit, and its performance. Each employee was made to feel as if they are running their business. They had to think like entrepreneurs and know the cost attached to their business and how will they add value to the investment. TCS adopted EVA in 1999, when the company had a staff of around 15000, working at several locations across the world. Through the EVA model, TCS aimed at creating economic value by concentrating on long term continuous improvement. EVA measured operating and financial performance of the organization through BSC and the compensation of all employees was linked to it. TCS went in for the EVA as during that time, the company was not a public limited company and hence could not have a stock option plan. There were several people who played an important role in the success of the organization, who needed to be recognized. As there was no wealth sharing mechanism in place, EVA was adopted to focus on continuous improvement rather than short term goals and also to motivate employees. It was designed to construct a defined incentive system, which would reward on the basis of profitability. In 1996, TCS was organized into a three dimensional model with the first dimension comprising of industry practices, which included engineering, transportation and telecom; the second dimension comprising of service practices like e-business, outsourcing, technology consulting; while global and regional operating areas formed the third dimension. A business unit could be a part of a service, a practice, a geographical unit or a combination of all the three. Every unit was considered to be a revenue centre and had its own EVA target. The units that did not fall under the purview of any of these were corporate offices and research & development, the costs of which were divided among all the units. Through EVA-linked compensation, employees could claim stakes at three EVA levels 22

at the organization level, at the business unit and the individual level. The individual was informed how he or she could contribute to the EVA enhancement at all three levels. EVA was controlled by revenues, capital and costs, and an individual could contribute in any or all of these areas at all the three levels. The benefits of EVA were realized across all levels in the organization. Employees became aware of their responsibilities and their share in increasing the EVA of the unit and organization. All the units could determine how they had fared against the targets. The bonus banks also helped in sustaining performance from the individuals, with close relationship between pay and performance. There was an increased sense of belonging among the employees and the employees were motivated to increase their contribution as they were also equally benefited by the increase in EVA. EVA was not just a performance metric but an integrated management process aimed at achieving long term goals. One of the major benefits of implementing EVA in TCS was increased transparency in the organization. The internal communication within a unit had increased considerably. The decision making process became more decentralized. The EVA-based compensation system received severe criticism during the initial years of its implementation. Industry analysts commented that EVA concentrated mainly on return on investments, due to which the growth of TCS could be restricted. In 2003, TCS caused an uproar in the IT industry when it reduced the variable salaries of employees by10%. This was the initial impact of EVA which was implemented in the company from April 01, 2003. The reduction in the variable salary resulted in an overall reduction of monthly take-home salary for most of its employees. The TCS move to cut the salary of the employees on falling short of its projected revenues for the quarter has taken the IT fraternity by surprise. There was a universal support building up among IT staff in the form of a web campaign condemning the move. Frenzied blogs were busy gathering support against the announcement. Though the tactics employed by the management of Tata Consultancy Services (TCS) is perfectly legal, the sudden manner in which the decision had been implemented had caused a furore. There is an element of fear among the entire software community as to if the IT companies would take a cue from the TCS initiative and make such salary pruning regular practice to show profits in future. The most affected parties of the salary adjustment were reportedly the confirmed employees of TCS located in the US and India. These people were likely to have their paycheques lesser by Rs 10,000 during February and March 2008.There is fear that soon other top companies such as Infosys and Wipro too may adopt the practice owing to the appreciating rupee value against dollar. And this has resulted in blog and email campaigns mustering support against the move.

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The Benefits[4]
The benefits of EVA were realized across all levels in the organization. Employees became aware of their responsibilities and their share in increasing the EVA of the unit and organization. All the units could determine how they had fared against the targets. The bonus banks also helped in sustaining performance from the individuals, with close relationship between pay and performance. There was an increased sense of belonging among the employees and the employees were motivated to increase their contribution as they were also equally benefited by the increase in EVA. EVA was not just a performance metric but an integrated management process aimed at achieving long term goals. One of the major benefits of implementing EVA in TCS was increased transparency in the organization. The internal communication within a unit had increased considerably.

The Drawbacks[4]
The EVA-based compensation system received severe criticism during the initial years of its implementation. Industry analysts commented that EVA concentrated mainly on return on investments, due to which the growth of TCS could be restricted. In 2003, TCS caused uproar in the IT industry when it reduced the variable salaries of employees by 10%. This was the initial impact of EVA which was implemented in the company from April 01, 2003. EVA is also shareholder-centric and hence of little relevance to the rest of the stake holders. EVA is identical to residual income, which was largely abandoned by companies years ago.

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Conclusion
In recent years a great deal of attention has been directed to the development of compensation systems that go beyond just money. In particular there has been a marked increase in the use of pay-for-performance (PrP) for management and professional employees, especially for executive management and senior managers. Compensation is a primary motivation for most employees. People look for jobs that not only suit their creativity and talents, but compensate them both in terms of salary and other benefits accordingly. Adequate rewards and compensations help in attracting a quality workforce, maintaining the satisfaction of existing employees, keeping quality employees from leaving and motivating them for higher productivity.

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Bibliography
1. Meaning and Important Concepts extracted from the book, Compensation Management outsourced from Harvard Business School (MBA H-4030 extract). [source wikibooks.org] 2. Supportive content extracted from the research papers (from International Human Resource management textbook) prepared by Dr. Shyamlal Gomes [faculty at Xaviers Institute of Social Service, Ranchi, Jharkhand & member of board at Magadh University] 3. Insights from blogs by Arindam Chaudhari, Professor, IIPM (source: arindamchaudhari.com) 4. Discussions from HR professionals extracted from Forbes magazines (source: Managementparadise.com) 5. Concepts also extracted from essays & term papers from studymode.com 6. Case study extracted from IBS Center for Management Research (ICMR) database: Case Details: Case Code : HROB112 Period : 2003-2007 Pub Date : 2007 Organization : Tata Consultancy Services Industry : Computer, IT & ITES Countries : India

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