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Mirage of Mid-term Pay Hikes

October 11, 2010 Leave a comment

Most of the IT companies are struggling to rein attrition. Some big (and Mature?) IT companies have already offered retention bonus or restricted stocks is the last quarter. However, there are media reports indicating towards mid-term hikes by many IT companies. I doubt if mid-term hike can help.

Employee are looking for something substantial before the next pay hike (expected in April’11). Mid-term hikes will not be as high as yearly hike since these were not budgeted in the annual plan.

Also the hikes will be effective October’10 (not April’10), so employees only get the benefit for next 6 months. Results show that a software engineer earning 5 Lacs will not gain more than 2 thousand a month, post 5% mid-term hike. However, the companies base salary does inflate by 5% for no good.

These inflated salaries will pose difficulty for companies to offer high increments in April’11. And the attrition problem continues! So, a mid-term hike can be summarized as ‘no short term gain but long term pain’. Yet, some companies might go for the hikes. It will be interesting to see what do they gain out of it.

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Tailoring ‘Compa Ratio’

August 13, 2010 1 comment

Compa Ratio (CR) refers to the salary of an individual with respect to the median (mid point in the salary range). CR offers more realistic and useful insight into an individual’s compensation than the range penetration.

Consider following case: An employee is drawing 0.9 M salary and the salary range for the position is from 0.5 M to 1.5 M with 0.95 M as the median. In this case, the Compa Ratio is .9/.95 = 95%. This means that the person is quite close to the mid point.

However, at times we may want to place employees at 66 percentile or 75 percentile. In this case the formula can be slightly tweaked to replace Median with Target Salary (Benchmark). Thus, CR = Individual’s Salary/ Benchmark Salary

In the above case, if the 66 percentile is 1.3 M, the CR would be : .9 / 1.3 = 69%. So we know that the employee is at 69% percent of the target salary and need salary correction.

Therefore, it helps to calculate Compa Ratio by comparing the salary to Target Salary instead of the Median.

On “Range Penetration’

May 25, 2010 Leave a comment

One of the popular compensation position indicators is Range Penetration. This ration gives position of an individual’s salary with respect to the maximum salary.

And here lies the problem. The rapid growth of IT industry resulted in shortage of manpower. To attract and retain employees companies pay salaries which may not be in line with market and internal salary bands.

In a situation where salary bands are loosely defined and internal equity is not maintained the Range Penetration gives grossly distorted analysis.

Consider following case: Employee is drawing 0.9 M salary and the actual salary range for the position is from 0.5 M to 1.5 M.

In this case, the Range Penetration is (900000-500000)/(1500000-500000) = 40% This means that the employee is at the 40% in the salary range.

However, the salary of 1,500,000 might not be a desired max salary for the band. It might be an exceptional salary offered to that employee due to niche/critical skill. At times such salary might have been offered to get the person on board quickly to prevent the billing loss.  

Therefore, comparing everyone’s salary to 1,500,000 would be disastrous. There can be two approached to address this issue.

First, instead of 1,500,000 take the actual max salary defined as per the salary band (if it’s available). Assume it’s 1.1 M.

In this case, the Range Penetration comes to  67% which is actual representation of the person’s salary with respect to the band. However, salary bands are not strictly defined and governed in many IT companies. In such a scenario the best way is to use Compa Ratios.  

I will take this up for the next blog.