The document discusses compensation and its components. It defines compensation as all forms of pay arising from employee performance, including both financial and non-financial rewards. Compensation includes direct payments like wages and salaries, indirect payments like benefits, and performance-based versus membership-based rewards. It also outlines the purposes, factors, and processes involved in establishing compensation rates.

1. Compensation
 All forms of pay or rewards going to
employees and arising from their
performance.
 Total compensation includes both extrinsic
(pay, promotion, benefits etc.) and intrinsic
(responsibility, achievement, recognition
etc.). They can also be categorized as
financial versus non-financial rewards.

2. Components of compensation
 Direct financial payments: They are pay in
the form of wages, salaries, incentives and
bonuses.
 Indirect financial payments: Pay in the
form of financial benefits such as
insurance.

3. Performance based versus
membership based rewards
 The reward system in which compensation
is tied with employee effort and
performance.
 Membership based plan is provided to an
employee as being a member of a group
(position held) regardless of the
performance.

4.  Wages and salary: Wages usually refer to hourly
rates of pay. Salary is given for fixed term
employees. It will be either daily, weekly or
monthly.
 Incentives: It refers to the additional
compensation above the salary and wages.
Incentives are generally based on sales, profits
or cost reduction efforts. It may be based on
individual, group or organizational performance.

5.  Employee benefits: These include
insurance, paid vacations and holidays,
pension programs etc.
 Perquisites: These include amenities and
perks to uplift the quality of work life of
employees. Examples are car, housing,
children’s education etc.

6. Purposes of compensation
 To attract potential job applicant.
 To retain qualified and competent
employees.
 To administer pay within legal framework.
 To enhance innovation and quality.

7. Factors affecting compensation
 Legal factors: Every country has its own rules
and regulations to guide firm level compensation
policy. Company Act, Labor Act, Trade Union
Act, Bonus Act and others guide the
compensation in Nepal.
 Unions and other associations: They play
important role in determining wage and salary
structure. Unions bargain for higher
compensation.

8.  The market: The market is another
important determinant of the
compensation. The organization has to
conduct market survey to determine its
compensation, especially those which are
highly technical or professional.

9. Process of establishing pay rates
 Conduct a salary survey of what other
employers are paying for comparable jobs (to
help ensure external equity).
 Determine the worth of each job in your
organization through job evaluation (to ensure
internal equity).
 Group similar jobs into pay grades.
 Price each pay grade.
 Fine tune pay rates.

10.  Corporate policies and competitive strategy: This
also determines the compensation. According to
this the compensation plan should further the
firm’s strategic aims. The reward should link
both short term and long term business success,
drive shareholder value, encourage the
behaviors that we need and deliver true value to
our employees.

11.  The policies may include:
 Will firm be a leader or follower regarding pay?
 Whether to emphasize seniority or performance?
 What should be the pay cycle?
 How to award salary increases, overtime pay,
probationary pay and leaves?
 Should cost of living be a criteria for compensation?

12. Establishing pay rates
 The salary survey: A survey aimed at
determining prevailing wage rate. A good salary
survey provides specific wage rates for specific
jobs.
 The survey information is used for determining
benchmark job. Benchmark job is a job that is
used to anchor the employer’s pay scale and
around which other jobs are arranged in order of
relative worth.

13. Job evaluation
 A systematic comparison done in order to
determine the worth of one job relative to
another.
 In this process, compensable factors are
identified. A compensable factor is a
fundamental element of a job such as
skills, efforts, responsibility and working
condition.

14. Steps in job evaluation
 Job analysis
 Determination of compensable factors e.g.
accountability, know-how, problems
solving ability, physical demands etc.
 Determining the relative worth of
compensable factors

15. Job evaluation methods
 Ranking method: The simplest method of job
evaluation that involves ranking each job relative
to all other jobs, usually based on overall
difficulty.
 Job classification method: Grouping jobs based
on a set of rules for each group or class, such as
amount of independent judgment, skills, physical
effort required. Classes usually contain similar
jobs.

16.  Point method: A number of compensable factors
are identified and then the degree to which each
of these factors is present on the job is
determined.
 Factor comparison method: A method of ranking
jobs according to a variety of skill and difficulty
factors, then adding up these rankings to arrive
at an overall numerical rating for each given job.

17. Pay for performance
 The performance based pay is determined
after measuring the performance against
previously set objectives.
 This pay is based on individual
productivity, team or group productivity,
departmental productivity, or the overall
organization's profits.

18. Pay for performance process
 Classification of performance based pay
Individual
Group
Organizational
Measuring performance objectively: Cost
effectiveness and profits measure the
performance.

19.  Offering rewards for successful
performance
Merit rating pay
Sales commission
Piece rate
Profit sharing

20. Incentives systems
 This is the method of rewarding employees on
the basis of their outputs.
 Individual incentives plan
 The piecework plan: A system of pay based on the
number of items processed by each individual worker in
a unit of time, such as items per hour or day.
 The standard hour plan: A plan by which a worker is
paid a basic hourly rate but is paid an extra percentage
rate for production exceeding the standard per hour

21.  Sales incentives plan: A plan which is based
on the quantity sold by an individual sales
person.
 Managerial incentives plan: A plan specially
designed to reward managers who put extra
efforts.

22. Group incentive plan
 Production incentive program: Members receive
regular pay and bonus for performance. Also
known as team incentive plan where all team
members receive an incentive bonus payment
when production or service standards are met or
exceeded.
 Professional incentive plan: Offered specially to
professional staff such as accountants,
engineers etc.

23. Organization level incentive plan
 Profit sharing: This is offered through
holding of shares by employees. Based on
overall profitability of the organization.
 Gain sharing: This is a plan under which
both employees and the organization
share financial gains according to a
predetermined formula that reflects
improved productivity and profitability.

24. Executive compensation
 Compensation plan for executives are
unique. One significant feature is the
opportunity to receive large incentive
rewards (often through stock options)
relative to the executive’s base pay.
Another is the large amount of money they
receive for their performance.

25. The executive pay package
 Organization commonly have more than
one compensation strategy for executives
to meet various organizational goals and
executive needs. They usually consists of:
Base salary
Short term incentives or bonuses
Long term incentives or stock options
Perquisites

26. Employee benefits
 Pay for time not work/paid time off
 Supplemented pay benefits: This includes
payment for holidays, vacation, bereavement
leave, family leave, Sabbatical, sick leave etc.
 Severance pay: Paid a small amount in the time of
termination
 Insurance
 Retirement benefits: Pension, gratuity, child care,
education, perks such as residence. Conveyance