COMPENSATING HUMAN

RESOURCES
Chapter 8
 WHAT IS COMPENSATION?
It is the set of rewards that organizations provide to individuals in return for their willingness to
perform various jobs and tasks within the organization.
It includes all forms of financial returns and tangible services and benefits employees receive as part
of an employment relationship. It also includes various elements such as base salary,
incentives, bonuses, benefits, and other rewards.

the hourly, weekly, or monthly pay that

employees receive in exchange for their work.

The primary objective of any base wage and salary system is to establish a structure for
the equitable compensation of employees, depending on their jobs and their level of
performance in their jobs.

If the base wage and salary system are effective, a firm’s compensation system can
improve cost efficiency, ensure legal compliance, enhance recruitment efforts, and reduce
morale and turnover problems. People are willing to work in exchange for inducements or
rewards they receive from working.

The desired outcome is an employee that is attracted to the work and motivated to do
a good job for the employer.
COMPENSATION SHOUD BE:
ADEQUATE TO MEET THE NEEDS OF THE EMPLOYEES AND TO ACQUIRE
AND RETAIN QUALIFIED PERSONNEL. a. It is fair relative to the pay
coworkers in the same organization
EQUITABLE receive.
b. It is fair relative to the pay
BALANCED received by coworkers in other
organizations who hold similar
COST-EFFECTIVE positions.
c. It is fairly reflects their input
SECURE or contribution to the organization.

INCENTIVE-PROVIDING
ACCEPTABLE TO THE EMPLOYEE
COMPLIANT WITH LEGAL REGULATION
 MAIN COMPONENTS OF
COMPENSATION
DIRECT COMPENSATION consists of cash directly paid to the employee
in exchange for his/her work. Included in this category are:

BASE PAY PREMIUM PAY

the additional compensation
the hourly wage or required by a law for work
weekly/monthly salary earned. performed within eight (8)
hours on nonworking days, such
as rest days and special days.

BASE PAY PROGRESSION VARIABLE PAY

movement of base pay overtime, incentive or bonus pay that does
from year to year. not fall into base pay.
 WAGES VS. SALARY
GENERALLY REFER TO HOURLY COMPENSATION PAID AN INCOME PAID TO AN INDIVIDUAL NOT ON THE
TO SKILLED AND UNSKILLED WORKERS OR THOSE BASIS OF TIME BUT ON THE BASIS OF
PERFORMING BLUE-COLLAR JOBS, WITH TIME AS PERFORMANCE. IT IS USUALLY GIVEN TO
THE BASIS IN THE COMPUTATION. PROFESSIONAL AND MANAGERIAL EMPLOYEES OR
THOSE WHO ARE PERFORMING WHITE-COLLAR
JOBS.
Base pay, Base Pay Progression, and variable pay add up to total
cash compensation paid in any given year.
BENEFITS AND PERQUISITE OR PERKS - In addition to direct cash, compensation is also
paid in the form of indirect cash or benefits that have monetary value.
 INDIRECT COMPENSATION - quality of work life.

These rewards include:

ORGANIZATIONAL CULTURE – the norms and values defining appropriate behavior in
the organization.
INTRINSIC VALUE - rewards inherent in the work itself. These rewards come from the
act of performing.
CAREER OPPORTUNITIES - the prospects for development and growth. For
organizations, careers represent the most efficient way to grow the talent they will
need to compete; while for employees, careers represent valued opportunities to
grow and achieve professional and occupational goals.
 Most wage and salary systems establish pay ranges for certain jobs based on the
relative worth of the job to the organization. Establishing pay ranges involves two
basic phases:
1. Determining the relative worth of the different jobs to the organization (thereby
ensuring internal equity)
2. Pricing the different jobs (thereby ensuring external equity)

BASIC DETERMINANTS OF PAY

1. External Factors a. Existing pay level in

b. Profitability and
a. Market Factors the Community Company’s ability to
Supply and Demand c.
b. Government pay
for labor Regulations and laws Unionized
Economic conditions 2. Organizational Factors Size of the Company
and Unemployment Type of Industry
 BASIC DETERMINANTS OF PAY

Capital or Labor preparation for the Effort

Intensive job - education, Physical and mental
Value of the Job - training, and effort required
contribution to the knowledge Attention to details
company Responsibility Pressure of work
3. Job Factors Money, commitments Working Conditions
Skill Decision Making Job Conditions
Metal requirements Supervision - work of Physical Hazards
Complexity of duties others 4. Individual Factors
Personal Quality of work Performance,
qualifications needed Materials, equipment, productivity
Ability to make property Experience
decisions, judgements Confidential Seniority, length of
Information service
Potential, promotability
 ESTABLISHING PAY RATES

1. Conduct the salary survey (aimed at determining prevailing wage rates) for the following
reasons:
a. Price benchmark jobs
b. Majority of the positions found in the company are usually priced directly in the
marketplace.
c. To collect data on benefits so as to provide a basis on which to make decisions regarding
employee benefits.
2. Determining the worth of each job through job evaluation

refers to a systematic comparison done in order to

determine the worth of one job relative to another.
 JOB EVALUATION METHOD

RANKING METHOD
The simplest and oldest method and the least often used job evaluation technique. It involves
ranking each job relative to all other jobs, usually based on overall difficulty rather than on a
number of compensable factors.

ADVANTAGES DISADVANTAGES

simplest and easiest to explain. provides no yardstick for measuring the value
takes less time to accomplish than other of one job relative to another
methods. it is limited to smaller organizations where
employees are very familiar with various jobs.
highly subjective.
 JOB EVALUATION METHOD

JOB CLASSIFICATION OR JOB GRADING EVALUATION METHOD

This is a simple, widely used method in which jobs are categorized into groups. The groups are
called classes if they contain similar jobs, or grades if they contain jobs that are similar in
difficulty but otherwise different.

ADVANTAGES DISADVANTAGES
Provides specific standards for compensation Jobs are forced to fit into categories that are not
entirely appropriate and feelings of inequity can
and accommodates any changes in the value of
result.
individual jobs. Problems may arise in deciding how many
Can be constructed simply, quickly, and cheaply. classifications there should be because too few
Easy to understand and explain to employee classes will make it difficult to differentiate job value
while too many classes make writing definitions
almost impossible.
 JOB EVALUATION METHOD

ADVANTAGES DISADVANTAGES
Provides specific standards for compensation Jobs are forced to fit into categories that are not
entirely appropriate and feelings of inequity can
and accommodates any changes in the value of
result.
individual jobs. Problems may arise in deciding how many
Can be constructed simply, quickly, and cheaply. classifications there should be because too few
Easy to understand and explain to employee classes will make it difficult to differentiate job value
while too many classes make writing definitions
almost impossible.
 JOB EVALUATION METHOD

POINT SYSTEM
Requires evaluators to quantify the value of the elements of a job.

STEPS:
1. Selection of key jobs.
2. Selecting compensable factors.
 ASSIGNING WEIGHTS TO FACTORS

Weights are assigned to each of the

factors, subfactors, and degrees to
reflect their relative importance.
Naturally, the weight assigned varies from
job to job.
 ASSIGNING POINTS TO SPECIFIC JOBS

After the point scale has been agreed on,

point values are derived for key jobs using
the following steps:

Examine the job descriptions.

Determine the degree statement that best

describes each subfactor for each
compensable factor.

Add the total number of points.

 JOB EVALUATION METHOD

FACTOR COMPARISON METHOD

This method is similar to the point method but slightly more complex, and it involves a monetary
scale instead of a point scale, thus, not as popular as the point method.

SKILLS

RESPONSIBILITIES
Examples of Compensable Factors
EFFORT

WORKING CONDITIONS
 JOB EVALUATION METHOD

FACTOR COMPARISON METHOD

STEPS:
1. Identify key (benchmarks) jobs.
2. Identify job factors.
3. Rank jobs with respect to each of the
factors independently.
4. Assign monetary amounts to each job on
each factor.
5. Compare unique jobs with key jobs.
6. Group similar jobs into pay grades.
7. Price each pay grade.
 JOB EVALUATION METHODS

In conducting job evaluation, the following must be taken into consideration:

Consistency Representativeness

Freedom from bins Accuracy of Information

Correctability
 DIFFERENT FORMS OF COMPENSATION

PAYMENT FOR TIME WORKED

Pay surveys are used to establish competitive pay for the industry and job evaluation is the
principal method for setting time-pay schedules. This method has no direct relation to the
workers' output.
PAY IS USUALLY ADJUSTED UPWARD THROUGH SIX TYPES OF INCREASES:
a. General - across-the-board increase for b. Merit increases - paid to employees
all employees based on some indicator of job performance

c. Cost of living adjustment d. Reclassification increase

e. Level adjustment f. Promotional increase

 DIFFERENT FORMS OF COMPENSATION

INCENTIVE FORMS OF COMPENSATION

This is a method of compensating employees on the basis of output which means, more production,
more earnings.

CLASSIFICATIONS b) INDIVDUAL INCENTIVE PLANS

- this rewards individual performance on a
real-time basis for meeting a goal or hitting a
a) PIECEWORK OR PAYMENT BY RESULTS target rather than increasing a person's base
- a system of pay based on the number of salary at the end of the year.
items produced or processed by each c) GROUP INCENTIVES
individual worker in a unit of time such as - are given when it is difficult to measure
items per hour or items per day. individual output or when cooperation is
needed to complete a task or project.
 DIFFERENT FORMS OF COMPENSATION

PERFORMANCE-BASED REWARDS
Organizations want employees to perform at relatively high levels and need to make it worth their
efforts to do so.

SPOT BONUSES
These are spontaneous incentives awarded to individuals for accomplishments not readily measured
by a standard. An example is to "recognize exemplary customer service each month to identify
employee of the month awardee."
 DIFFERENT FORMS OF COMPENSATION

SKILL AND KNOWLEDGE-BASED PAY/COMPETENCY-BASED PAY

This sets pay levels on the basis of how many skills an employee has or how many jobs he/she can
do.

MERIT PAY PLANS

Merit pay is usually awarded to employees on the basis of the relative value of their contributions
to the organization.
 DIFFERENT FORMS OF COMPENSATION

PROFIT SHARING
At the end of the year, some portion of the company's profits is paid into a profit sharing pool,
which is then distributed to all employees.

STOCK OWNERSHIP PLANS

Employees receive a claim of ownership of some portion of the stock held by the company based on
seniority and perhaps performance.
DIFFERENT FORMS OF COMPENSATION

EXECUTIVE COMPENSATION

Base Pay - guaranteed amount of money that the executive will get from the
company.

Incentive pay/executive perquisites or perks, e.g., stock option plan - an

incentive plan established to give company executives the option to buy
company stocks in the future at a predetermined fixed price.