Understanding Your Compensation

by K Sudarshan, Managing Partner – India, EMA Partners International
Thursday, December 18, 2008

As HR Managers grapple with a serious talent crunch in certain sectors, compensation and wealth creation opportunities for professionals have become the buzz words. Today increasingly organizations are moving away from a ‘one size fits all’ approach and are open to structure compensation to suit the needs of the individual, especially at Senior levels. Hence it is critical for executives to look beyond the numbers and cost to company figures to get a true picture of what is in the store.

Also the other important aspect one should keep in mind is your current compensation and broad industry benchmarks. Compensation offered is often a function of the demand supply situation in your industry and usually organizations use your current compensation as a base for negotiations and factor an increase on the same.

At some level, there is also an assessment of your key drivers for change and usually compensation alone as a key driver is a ‘put-off’ for most organizations. So you need to play your cards carefully to ensure that it is win-win situation for you as well as the hiring organization.

(As you sit down to negotiate/ structure an appropriate compensation for yourself you need to keep the following points in mind.)

Base pay:
You need to see what is the percentage of base pay in the overall compensation. Usually your retirals (PF, Super Annuation, and Gratuity) are a function of your base pay. Base pay is usually around 40-50% of your total compensation excluding variable pay. Also in large organizations, annual increases are effected as a percentage of the base.

Housing:
Companies these days either give a lump sum house rent allowance as part of the overall compensation or provide a company leased accommodation. In larger metros, especially Mumbai, housing is a significant cost and one needs to understand the company policy on deposits for housing. Also the cost would also depend on the location of the house and convenience from work/family perspective.

Flexi Basket allowance:
Companies give a flexible basket allowance which could be structured as per the employee needs under various heads permissible as per the income tax rules. Items like car lease cost, leave travel etc. could form part of this. It is advisable to take the counsel of the company taxation manager or your personal tax advisor while structuring this part.

Variable pay:
You would need to understand the specifics of this head and also understand if there are any minimum guarantees incorporated or performance/ operational parameters on which this payout is dependent on. It is advisable to spend time with both the HR as well as the line managers to understand the downside as well as upside of variable pay and check out a few past trends in the organization. Usually variable pay may range between 50-150% of base pay in some organizations (Again you will see the importance of your base pay!)

Long term wealth creation plans

These days organizations are constantly devising ways to retain their best talent by ring fencing them with long term wealth creation plans in the form of employee stock option plans long term incentives or deferred bonuses.

Employee stock options are granted to selected senior managers of a company on certain terms. They carry the right (but not the obligation) to buy a certain amount of shares in the company at a predetermined price. Normally employees must wait for a specified vesting period before being allowed to exercise the option. The broad idea behind the stock option is to align incentives between the management and the shareholders of a company.

One needs to understand the upside of such plans and suitably factor this in your decision. In the recent bull run, ESOPs have played a key role in creating employee wealth. The downside here is that the company stock price could drop below the exercise price.

Privately owned or unlisted local entities or MNCs also structure shadow/ phantom options for their senior executives. A phantom stock plan gives senior managers a bonus based on the market appreciation of the company’s stock over a certain period of time without actually giving them any company stock. The phantom stock follows the price movement of the company’s actual stock, paying out any resulting profits.

Golden Parachute

Golden Parachute is a clause in the employment contract that provides the executive with a severance package in the event of his/her termination. The clause may include a continuation of salary and perquisites and at times accelerated vesting of stock options. This clause usually is seen more in the case of C-suite executives.

To summarize, though compensation is an important barometer for measuring an opportunity on a short term basis, the decision should be based on the long term potential of the role in question and the impact it makes on your future employability.

- K Sudarshan
Managing Partner – India, EMA Partners International, A Global Executive Search Firm

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