The other side of the HR table: Explaining Salaries (Part 1) to a 20-something year old professional

As a fresh 22-years old engineering graduate, I read my first job offer letter from a Consulting firm. My offer letter mentioned that my annual gross salary would be INR 9,56,725. The letter also said that I would be awarded an additional INR 1,25,000 after I completed 1 year at the firm, as part of their Young Leaders Program. I immediately had 3 sets of questions on my mind -

1. How did the firm decide that my salary should exactly be INR 9,56,725? Why is it not higher or lower than this figure? Why is it exactly 9,56,725 and not 9,60,000?
2. Why did my compensation have multiple components - Basic, Variable, Retirals, Allowances? Why could my monthly take home not simply be (9,56,725 / 12 - Taxes)?
3. Who decides how much money I should make in my job? How will it be decided next year?

An MBA in Human Resource Management and five years of experience in the function later, I look back at the understanding that my 22-year-old self had of Compensation, Benefits & Rewards, only to realize that other greenhorns in the industry need a better understanding of how their salaries are designed and how they can discuss numbers with their employers. In this article, I will reflect upon my learnings over the last half-decade about the other side of the Human Resources table and attempt to explain to young professionals the Science behind their Compensation.

Let’s first acknowledge that an organization will design its compensation strategy based on how it wants its employees to behave as individuals, as a group, and in their roles. Compensation is a tool to influence people’s behavior at scale. Your actions and behavior at work will be directed by how you are paid by your employer.

An organization’s compensation strategy usually has four elements: Organizational Strategy, Compensation Philosophy, Budgets, and Salary Structures. Sounds like jargon, right? Let’s demystify them.

What is a Compensation Philosophy? It is the company's thinking on how it will pay its employees for the value they create for the company and for its customers. A company's Compensation Philosophy creates a consistent framework which the firm uses to reinforce behaviours amongst its employees. Compensation Philosophies can be bucketed into 3 broad types -

1. Competitive Pay - The company defines a value for its own jobs based on industry practices and standards. Companies who follow the Competitive Pay philosophy decide where they want to be competitively positioned in the market by defining their pay-percentiles. Jobs are first broken down to identify the required skills and experiences and are then benchmarked against the industry (industry is defined uniquely by your company based on its roles, competitors for talent and vertical integration. A company in the Energy sector might not necessarily benchmark itself with others in Energy but can also add FMCG for Technology firms in its definition of industry). An example of this is where a company decides to pay all its employees at the 90th percentile in the industry. Such a decision will mean that Sales employees will have their median salaries pegged at the 90th percentile of all Sales roles in the industry, and the median salary for Technology employees in the company will be at the 90th percentile of all Technology roles in the industry.
2. Standard Pay - The company chooses to pay all its employees equally irrespective of the complexity or the nature of their roles. An example of this is where the salary structure and numbers for a Sales Manager are the same as the ones for a Technology Manager in a Product company. An Equal Pay philosophy creates an environment of collaboration and runs a higher risk of creating dissatisfaction amongst employees in more complex jobs
3. Goal-oriented Pay - Where the company chooses to design person-specific or team-specific compensation structures depending on the strategic goals of the individual role or the team. An example of this will be when the compensation of the Marketing team is different from that of the Technology team; or when the salary components of a Sales Manager are different from that of the Sales Field Force. Tailored pay works for teams or individual roles that have specific goals or targets

Your firm's Compensation Philosophy is usually decided by your Human Resources function and your Board. They will either adopt one of the above philosophies or create a combination of them based on the requirements of your business.

To decide the type of Compensation Philosophy that your company will adopt, your HR team and your Board will also determine whether they wish to maintain Pay Parity internally and externally. The answer to this question can be found in the way your company defines their desired Culture. Internal Pay Parity is achieved when the same Compensation Philosophy and Salary Bands are applied to all employees, irrespective of which function or business unit they belong to. Such a practice fosters collaboration, avoids the creep of Corporate Classes amongst peers and builds inclusivity. External Pay Parity helps a company remain competitive in the industry - This practice is facilitated through Compensation Benchmarking surveys (through industry forums run by firms like Aon , 德勤 , 美世 etc.). Few firms (usually market leaders or market makers) do not believe in the concept of external Pay Parity and acknowledge that it is okay for other firms to poach talent because the market-makers themselves have unique and distinctive capabilities and the practice of their competitors poaching talent is inevitable.

Now that you know about the types of Compensation Philosophies and the questions that your Human Resources team has to answer before designing your Salary, speak to your HR Partner to understand how your company has defined its Compensation Philosophy.

Part 2 of this article will explain to you the Science behind your Salary Structure - Why you see multiple lines (Basic, House Rent Allowance, Travel Allowance, Hard Location or Greenfield Allowance, Variable Pay, Long Term Incentive, E-SOPs etc.) in your pay-slips.