What are basic components of compensation and benefits?

Employee compensation and benefits are divided into four basic categories:

The Guaranteed pay - a fixed monetary reward paid by an employer to an employee. The most common form of guaranteed pay is base salary.

The Variable pay - a non-fixed monetary reward paid by an employer to an employee that is contingent on discretion, performance, or results achieved individually or a team. The most common forms of variable pay are bonuses and incentives.

Benefits - programs an employer uses to supplement employees compensation, such as paid time off for vacation, medical insurance, company car, and club membership etc.

The Equity-based compensation - stock or pseudo stock programs an employer uses to provide actual or perceived ownership in the company which ties an employee's compensation to the long-term success of the company. The most common examples are stock options.

Guaranteed pay

Guaranteed pay is a fixed monetary (cash) reward. The basic element of guaranteed pay is base salary which is paid on an hourly, daily, weekly, bi-weekly or monthly rate. Base salary is typically used by employees for ongoing consumption. Many countries dictate the minimum base salary defining a minimum wage. Employees' individual skills and level of experience leave room for differentiating income levels within a job-based pay structure.

In addition to the base salary, there are other pay elements which are paid based solely on employee/employer relations, such as salary and seniority allowance.

Variable pay

Variable pay is a non-fixed monetary (cash) reward that is contingent on discretion, performance, or results achieved. There are different types of variable pay plans, such as bonus schemes, sales incentives (commission), overtime pay, and more.

Performance Linked Incentive which is variable and may range from 130% to 0% as per performance of the individual as per his KRA.


There is a wide variety of benefits offered to employees such as Paid Time-Off (PTO), various types of insurance (such as life, medical, dental, and disability), participation in a retirement plan (such as pension or 401(k)), or access to a company car, among others. Some benefits are mandatory which are regulated by the government while others are voluntarily offered to fulfil the need of a specific employee population. Benefit plans are typically not provided in cash but form the basis of an employees' pay package along with base salary and bonus.

HR Departments, while implementing a benefit plan, must ensure compliance with federal and state regulations. Many states and countries dictate different minimum benefits such as minimum paid time-off, employer's pension contribution, sick pay, among others.

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Salary Trends - India in 2014

Salaries in India are projected to rise 10% in the year 2014 on the back of improving business confidence, positive expectations from the general elections, and moderating inflation. According to Aon Hewitt's 18th Annual Salary Increase Survey in India, the 2014 increase is the second lowest the country has seen in a decade (the lowest was in FY2009 when markets became extremely cautious after the global financial crisis).

Even though growth appears to be strengthening in both advanced and developing economies, it is expected to be muted and slower paced than in the pre-2008 era. Sectors that are largely reliant on the domestic economy such as Pharmaceuticals, Chemicals, Engineering Services and Consumer Goods, are projecting the highest salary increases, typically above 10% for 2013-14. In these industries, compensation costs represent a smaller percentage of the total cost structure.

Service industries like Retail, Financial Services, and Hospitality bring up the rear in salary increase projections, with these businesses impacted by the slowing down of the economy and consumer spending. In these industries, compensation costs are a significant portion of their total cost structure, thus managing salary costs has become an important element in their cost management strategy. It is important to note that the dispersion between the highest paying and the lowest paying industries has narrowed in 2014 to about 2--3%, as compared to the 5--7% dispersion observed in 2013.

Highest & Lowest Salary Increase Projections for 2014

Emerging Trends from the Study

With shrinking salary increase budgets, the one definitive change observed in the compensation philosophy of organizations in India is the increased reinforcement of the performance and rewards linkage. Top performers are projected to receive an average 15.3% increase in 2014, almost 1.5 times the average increment provided to employees meeting expectations. This gap has been widening over the last decade. Additionally, in the last five years, the percentage of employees in the top performance rating has dropped by 30%, implying that organizations are not hesitating to differentiate sharply on the basis of performance and then allocate a disproportionate share of the total increase budget to top performers, thus encouraging a high performance culture.

Slow economic growth and limited opportunities in the market impacted attrition in 2013. It fell to 18.5%, almost 1% lower than previous years, with a reduction of almost 3% at the entry level. With a growing recognition that motivated, high-performing talent is a sustainable competitive advantage, organizations are reshaping their strategies to safeguard their key talent. This is reflected in the lower average attrition for critical talent of 4.5%, down from 5.7% a year ago.

On the back of increased cost prudence and rewarding true performance, spending on variable pay as part of total compensation has been steadily growing over the past few years. This indicates a shift in overall pay philosophy, as employers are tying a greater percentage of each employee's pay to individual and overall company performance. Top/Senior Management see 23% of their total compensation as variable (up from 16% in 2001) and even the lowest rung entry management gets approximately 12% of their salary as variable compensation (up from 10% in 2001).

To summarize, though successful performance based- incentive is important, it is critical to ensure that the right set of performance measures is used for the plan.