2. 6.1The Concept of Compensation
• Compensation is the human resource
management function that deals with every type
of rewards individuals receive in exchange for
performing organizational task.
• It refers to all forms of pay or rewards going to
employees.
• Employers use compensation to attract, retain,
and motivate employees to achieve
organizational goals.
• Employees also expect fair compensation for the
services they perform.
3. 6.2 Types of Compensation and Compensation
Policies
6.2.1 Types of Compensation
• Compensation has two main components:
Direct financial payments (in the form of wages,
salaries, incentives, commissions and bonuses), and
Indirect payments (in the form of financial benefits
like employer –paid insurance and vacation) arising
from their employment
4. 6.2.2 Compensation Policies
• Certain policies must be formulated before a
successful compensation system can be
developed and implemented.
• Naturally, these policies are strongly influenced
by the organization’s objectives and its
environment.
• Policies must deal with the following issues:
5. Cont’d
1. Minimum and maximum levels of pay taking in
to consideration:
the worth of the job to the organization,
the organization’s ability to pay,
government regulations,
union influences and
market pressure
2.General relationship among levels of pay
e.g. between senior management, operating
management, and operative employees, and
supervisors)
6. Cont’d
3. The division of the total compensation (i.e. what
portion goes in to base pay, in to incentive
programs and in to benefits).
In addition to these issues, organizations must
make decisions concerning how much money will
go in to pay increase for next year, who
recommend them, how rises will generally be
determined.
7. 6.3 Factors Affecting Compensation
Decisions
I. External Factors
A. Government: government rules, regulations,
executive’s orders, and laws have their influence on
an organization’s compensation policy.
• Every government provides laws for compensation in
areas like minimum wage rate and equal pay
provision to avoid pay differentials based on sex in
jobs requiring substantially equal skill, effort,
responsibility, and working conditions .etc
8. Cont’d
B. Cost of living: cost of living as measured in
terms of consumer price index may affect the
organization’s compensation policy as it tries to
adjust its employee’s earnings to the rate of
inflation.
• This process is called cost of living adjustment
(COLA).
• As per the policy of the organization,
compensation could be adjusted.
9. Cont’d
C. Comparable wage rate: the wage pattern in the
industry and community could have an impact on
the compensation policies and practices of
organizations.
• Comparing wages and salary rates in a given areas
may help in ensuring that the organization is
offering a salary that is not substantially higher or
lower than those paid by others in the same area.
• Comparison could also be done based on occupation
to provide a comparable pay to similar occupations
around the country.
10. Cont’d
• In order to insure that comparable level of
payment is offered to employees, organizations
conduct salary and wage survey on other
companies to avoid costly mistakes.
• These could also be done to offer comparable
benefit packages to employees.
D. Market condition: regardless of other factors
involved, the supply and demand relationships
in the labor market will determine the wage and
salary level in organization.
11. Cont’d
E. Union’s influences: union and labor relations
laws also influence pay plan design.
• Historically, the wage rate has been the main
issue in collective bargaining.
• However, union also negotiate other pay related
issues, including time off with pay, income
security (for those in industries with periodic
lay offs), cost of living adjustments, and
benefits like health care.
12. II. Internal Factors
A. The size and age of the organization:
• It is argued that large and new organizations tends
to pay higher wages compared to small and old
ones
B. The labor budget (resource allocation
strategy)
C. Managerial philosophy and strategy
• As top –level management has the final say on
pay level decisions, their views and strategies
affect payment decisions
13. 6.4 Maintaining a Sense of Equity of
Payment among Employees
6.4.1 Internal and External Considerations
• The primary objective of any basic wage and salary
system is to establish a structure and system for the
equitable payment of employees, depending on their
job and their level of performance on their job.
• There are several policy issues that need to be
addressed for establishing a fair and equitable
compensation system.
• Most organizations establish basic wage and salary
pay ranges based on the relative worth of a job to the
organizations.
14. Cont’d
• Determining the relative worth of a job to the
organization maintains fair and equitable pay
structure internally by comparing jobs within the
organization
• Moreover, wage and salary surveys ensures that
the payment range is comparable to the payment
systems in other similar establishments or
occupations .
15. I. Determining Internal fairness:
Conducting Job Evaluation
Job Evaluation
• It is a systematic determination of the value of
each job in relation to other jobs in the
organization.
• If it is done properly, the relative value of the jobs
is reflected in the relative wage rate for the jobs.
• It involves:
To enumerate the requirements of a job
The jobs contribution to the organization
Classifying it according to importance
16. Cont’d
Steps in Job Evaluation
1. Gather information on the job being evaluated. The
information is obtained from job analysis.
2. Determining factors that are to be used in determining
the worth of different jobs to the organization like
education, skill, initiative, responsibility, working
conditions, physical and mental effort, experience, etc.
3. Determining the method of evaluation that will use the
chosen factors for evaluating the relative worth of the
different jobs .The most common kind of job evaluation
methods include point method, factor comparison, job
classification, and job ranking.
4. Grading jobs according to their importance
17. II. Determining External Equity:
Using wage and salary survey
• It is used to collect comparative information on the
policies, practices and methods of wage payment
from selected organizations in a given geographic
location or particular type of industry.
• Conducting wage and salary survey is useful to
ensure external equity by providing information
about the labor market.
• It also helps in correcting employees’
misconception about certain jobs level of
importance or paying.
18. Cont’d
• Employees will also be motivated when they
know that they are getting a comparable payment
with employees of other organizations.
• In order for the survey to be effective, it is
essential to identify the jobs to be surveyed and
also the organizations and their geographic
location.
• Then the appropriate wage survey will be
designed.
19. Cont’d
• Some of the issues usually included in the
survey include:
Length of workday
Base wage rate
Overtime time pay
Vacation and holyday practice
Pay ranges, incentives plan, etc
20. 6.5 Methods of Payment
There are Three Basic Methods of Payment:
1. Time-based payment: it is a payment computed
in terms of some time unit-hours, days, weeks,
months, years, etc. remuneration does not vary
according to quantity and quality of performance.
One good example is salary.
Advantage:
- It is easy to administer since it is fixed amount
- It improves employees’ integration to the
organization by enhancing employees’ security.
(Knowing what they earn at the end of a certain
period to time)
21. Cont’d
Disadvantages:
- It is not a good motivator as it is not
associated with performance.
- In times of need to reduce costs due to
financial problems, organizations are
forced to lay-off salaried employees as
opposed to reducing working hours and
keeping employees with the organization
22. Cont’d
2. Performance-Based Payment Method: in this
method, remuneration depends upon the quality and
quantity or work.
Advantages:
• It may result in motivation of employees to improve
performance.
Disadvantage:
• Incentive pay system however, is applicable only in a
relatively limited number of situations most notably
where employee or group out put can be counted or
assessed in monetary terms.
• It may result in scarifying quality of work for quantity
23. Cont’d
• The administration of incentive system is also
problematic because employees are motivated
to “beat the game” by keeping standards low so
that they can maximize their pay with a
minimum effort. As a consequence, an
adversarial relation ship may develop between
the employees and managers responsible for
the pay system.
24. Cont’d
3. Combination of Time-based and Output-
based methods:
• It involves paying salaries to employees and
adding other output related payments (like bonus
or commissions) to create a financial incentive
for employees.
25. 6.6 Employee Benefits
• It refers to benefits given to employees in
addition to salaries or wages.
• Unlike wages and salaries, benefits are not
usually related to employees’ performance.
• Broadly classified there are two types of fringe
benefits. These are:
A. Time-off pay:
• These are payments for the time not worked and
include paid vacations, paid holidays, paid sick
leaves, pension programs, rest periods, etc.
26. Cont’d
• Paid vacations- organizations provided employees a
certain number of paid vacation days in a year.
The number of days may vary according to how long
an employee has worked for an organization.
Usually, paid vacation times increases with seniority.
• Sick leaves:- providing employees with pay for days
not worked because of illness
• Pension programs: it represents a fixed payment
other than wages, made regularly to former
employees or their surviving dependents.
27. Cont’d
B. Non-pay Benefits:
• These are benefits not paid in cash but include
expenditures on items such as medical services,
transportation, accommodation, insurance, cafeteria
services, education programs, child care services, and
others.
Health Insurance: Medical insurance program designed
to cover a portion or total medical expense incurred by an
employee.
• It may include coverage for hospitalization, outpatient
doctor bills, prescription drugs, dental, eye, medical health
care, etc.
Accident and Disability Insurance: it is designed to
protect the employees who experience a long term or
permanent disability.
