COMPENSATION, METHODS &

POLICIES AND BENEFITS & SERVICES

CHAPTER 10
CONTENTS

PAGE

1.

Compensation Definition

2.

Types of Compensation

3.

Objectives of Compensation

4.

External Influences of Compensation

5.

Internal Influences of Compensation

6. Compensation Decisions

Abstract
This is a presentation report in connection to our Groups presentation on Chapter 10,
Chapter 11 and Chapter 12 of the textbook, Human Resource Management 12th Edition
by John M. Ivancevich and Robert Konopaske. The three chapters deal with issues
pertaining to Compensation, its overview, methods and policies, and benefits and
services. We will give comparison on how each of our companies that we work for differs
in terms of each companys method in giving compensation benefits to their employees.
There are also some similarities between the companies. We will also compare the
practices on how much similar or how it differs from what is being given in the textbook.
Finally, we will give justification on why each companies have their own reason on why
they offer certain types of compensation benefits to the employees. For this purpose, we
will review the practices of three different companies/agencies i.e. Jabatan Pengangkutan
Jalan (JPJ) Dyson Manufacturing Sdn Bhd (Dyson)
and AmBank Malaysia Berhad (Ambank).

Introduction
Compensation (also known as Total Rewards) can be defined as all of the rewards earned
by employees in return for their labour. This includes:

Direct financial compensation consisting of pay received in the form of wages,

salaries, bonuses and commissions provided at regular and consistent intervals.

Indirect financial compensation including all financial rewards that are not
included in direct compensation and understood to form part of the social contract
between the employer and employee such as benefits, leaves, retirement plans,
education, and employee services

Non-financial compensation referring to topics such as career development and

advancement opportunities, opportunities for recognition, as well as work
environment and conditions

While employees tend to focus on direct financial compensation when contemplating

their rewards, according to the McKinsey Journal, for individuals who are relatively
satisfied with their salary, it is the non-financial rewards that tend to be more effective in
contributing to long-term employee engagement.
Chapter 10: Compensation
Types Of Compensation
There are 2 types of compensation which are :
1.

Financial Compensation divide into 2 and there are direct and indirect financial
compensation.
a) Direct Financial Compensation consists of the pay an employee receives such as
wages, salaries, bonuses or commissions.

b) Indirect Financial Compensation or as known as benefits consists of all financial

rewards included direct financial compensation. There is vacation, various kinds
of insurance and services like child care or elder care.
2.

Nonfinancial Compensation
Rewards like praise, respect and recognition and usually affects employees
motivation, productivity and satisfaction. Employees assume pay is a necessity of
life. It is one of the reasons why they seek employment. Pay means that how they
provide for their own and their families need. However, for the employer,
compensation is one of the most important HRM functions.

Objective of Compensation
1. Objective of the compensation function is to create a system of rewards that is
equitable to the employer and employee alike. The desired outcome is the employee
who are attracted to the work and motivated to do a good job for the employer.
2. Patton suggest that in compensation policy, there are 7 criteria for effectiveness which
are :

Acceptable to the
employee = employee
should understand and
accept the pay system

Adequate = minimal gov,

union, managerial level
should be met

Compensation policy
with 7 criteria for
effectiveness
Incentive-providing =
motivate effective and
productive work

Equitable = everyone should

be paid fairly in line with their
effort

Balanced =
reasonable total
reward package

Cost-effective =
consider what the org.
can pay

Secure = pay should be

enough to help the employee
feel secure and aid the
employee satisfying basic
needs.

External Influences on Compensation

External factors that can influence pay and compensation policies are the labor market,
economic conditions, government influences and union influences :
a) The Labor Market
wages and salaries may have to be higher or lower depends on their qualification
and conditions.
pay may also be higher if the employees have few skills which are available in
the job market. It is because unions or accrediting associations limit the numbers
certified to do the job. For example, accountant, engineer or lawyer.
the increase in labor market diversity can change the way managers approach
their jobs and how they reward employees. Meaning of the workforce diversity
is more than simply keeping track of the demographic characteristics of current
and new employees. Diversity is not limited to multiracial, multicultural and
multi-ethnic impacts on the workplace. It refers to any mixture of elements
characterized by differences and similarities among employees. For example,
rapidly changing demographics will require employers to offer more, and more
varied and flexible, benefits to motivate, satisfy and retain employees.
b) Economic Conditions
economic conditions also affecting compensation as a external influences.
the more competitive the situation, the less able the organizations ability to pay
high wages which knows as a degree of competitiveness.
other consequence is relative productivity of the organization, industry, or sector,
if the organization is very productive, it can pay higher wages.
c) Government Influences
the pay of the compensation controlled by government such as prohibit an
increase in compensation for certain workers at certain times, our government
established minimum wage rates and wage and hour regulations and
discriminations.

prevent

d)

Union Influences
unions have tended to be pacesetters in demands for pay, benefits and improved
working conditions. If the organization stays in an area where union are strong,
its compensation policies will be affected.
unions also bargain over working conditions and other policies that affect
compensation.
for example, in my organization (JPJ) which is government sector there are
CEUPACS to defends all level government servant in terms of salaries and
allowance. CEUPACS are very active to protect their members. CEUPACS is a
huge union which is representative for all government servant. It is quite
difficult for them to handle of the members. Compare with other unions,
members that they have not more than CUEPACS members.

INTERNAL INFLUENCES OF COMPENSATION

There are several factors that affect pay which are size and age, labor budget and
who is involved in making pay decisions fort he organization.
a) Size and age
-

normally there are relationship between organization size and pay means
that larger organizations tend to pay higher to their employees.

b) The Labor Budget

-

it means the amount of money available for annual employee compensation.

for example, in JPJ, person in charge for HR unit and finance unit will
collect data and calculate each of employees salaries and send the report to
head quarters which is located in Putrajaya for yearly budgeted. They are
usually submitted end of the year before (budget for 2016 will submit on

end

of 2015). The labor budget depends on the organizational.

c) Who Makes Compensation Decisions
-

decision on how much to pay, what system to use, what benefits to offer and
more are influenced from top management to the bottom of the organization.

top management makes decision that determine the total of the firm;s budget
to be earmarked for pay, he form to be used and other pay for policies.

COMPENSATION DECISIONS
Pay for a particular position is set relative to 3 groups. There are :

Groups
Group A

Meaning
Employee working on similar jobs in other organizations (also called pay-

Group B

level decision)
Employee working on different jobs within the organization (also called pay-

Group C

structure decision)
Employee working on the same job within the organization (also called
individual pay determination)

Group A (Pay-Level Decision)

-

pay level decided by managers who compare the pay of people working inside
the organization with those outside it.

there are 3 pay-level strategies that managers must take which are :
a) High-Pay Strategy
* manager choose to pay higher than average level.
* the assumption behind this strategy is you get what you pay for.
* managers believe that paying higher wages and salaries can retain the best
employees and this is the most effective long-range policies.
b) Low-Pay Strategy
* manager pays at the minimum level needed to hire enough employees.
* this strategy may be used because this is all the organization can pay. The
ability to pay is restricted by internal and external factors.
* for example, limited labor budget or forecasted decline in sales and profits.
c) Comparable-Pay Strategy
* this strategy is the most frequently used.

* the wage criteria are comparable wages, perhaps modified by cost-living

or purchasing power adjustments.
d) Choice of a Strategy
* the choice of strategy partially reflects the motivation and attitudes held by
the manager.
* if the manager is ethically oriented, low strategy is not likely to be chosen
willingly.
Pay Surveys
-

techniques and instruments used to collect data about compensation paid to

employees by all employers in a geographic area, an industry and an
occupational group.

must be carefully designed, because their results are quoted and used in making
compensation decisions.
Who Conducts Pay Surveys?
* conducted by professional and consulting enterprises, trade associations,
government, unions and competitors.
* source of pay surveys

Government Sources

Bureau of Labor Statistics

Federal Reserve Banks
Monthly Labor Review
Administrative Management Society

Professional and Trade Organizations

American Association of Management

Surveys Conducted by Other

Society for Human Resource Management

Bureau of National Affairs

Organizations

Consulting Firms
Hay Associates
Management Compensation Services
Pay Data Service
BusinessWeek

Surveys by Journals

Compensation and Benefits Review

Duns
Forbes
Fortune
Hospital Administration
Nations Business

Group B (Pay-Structure Decision)

-

next step is to construct an internal pay hierarchy or pay structure.

traditional way to develop pay structure is to make a systematic comparison

between the worth of one job with another job using job evaluation.
Job Evaluation
* formal process by which the relative worth of various jobs in the organization
is determined for pay purposes.
* involves making judgments that are subject to errors on the part of job
evaluators.
* there are 4 methods frequently used in job evaluation :
- Job ranking
- Classification
- Point system
- Factor comparison

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Group C (The Individual Pay Decision)

-

compensation analyst and operating managers have information on comparable

pay levels of competitors and the surrounding area and a system for evaluating
jobs so that differentials between job descriptions can be established.

SUMMARY
This topic elaborate an overview about compensation. Compensation is a HRM function
that deals with every type of reward that individual receive in exchange for performing
organizational tasks such as wages, salaries, bonuses, commissions, benefits, and
nonfinancial rewards like praise and satisfaction. The objective of compensation is to
create a system of rewards that is equitable to the employer and employee.
Chapter 10: Compensation: Methods and Policies
Introduction
Compensation paid to employees
Chapter 13: Employee Benefits and Services
Introduction
Benefits and services are known as employer provided rewards and services other
than pay. Some organization, the benefits are depending on the seniority or performance.
It will available as long as the employees are employed.
Benefits which also known as indirect financial Compensation currently being
increased due to below reason:
a)
b)
c)
d)
e)
f)
g)

Increased of legislation
Insurers insolvency
Cost of medical technologies
Aging workforce
New immigration
More women in workforce
Global competition

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The most important reason of providing the benefits in the organizations is to increase
the employees performance. The more benefits provided, the more motivated employees
can be produce in an organization. Besides than pay, the amount and type of benefits will
also the main attraction to external employees to be a part of the organization.
There are a few parties or personnel who will involve in making decisions for benefits
in organization. Some organization gets advice from an independent consultant to help
and guide the organization in terms of decision making. The reason of this is because
most probably the organization is lack of expertise. In Malaysia, some Union will also
involve in directly with the benefits decision making. This is happen where they will
normally help to fight for the needs of the supporting level of employees.
Malaysia Government also playing a big role in decision making for organizations
benefits.It will normally under the Malaysia labour act. The reason of Malaysia labour act
under benefits are to facilitate the employee with such a convenience way.

3.2 Mandated and Voluntary

Mandated is a must or compulsory provided by the organization for their employees.
It is a benefits programs which mandated by the federal state of government.
Those park under mandated are Social Security and workers compensation.
3.2.1 Social security
Social security was to provide income to retire people to supplement
savings, private pensions and part time work. Like example in Malaysia are EPF
and SOCSO. Below are the concept and goals for providing the benefits for
employees.
The concept

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Both employer and employee would pay taxes

The taxes would cover the retirement payments each employee would

later receive
A self-funding insurance program

The goals

Adequate payments for all

Individual equity

3.2.2 Workers compensation

Workers compensation is workers with job-related illnesses or accidents receive
some financial protection
Workers comp administered by the states
Employers pay the entire cost
Premiums tied to employers past experience with job-related accidents
and illnesses

Voluntary is an option for organization to provide for their employees.Many

employers provide these benefits voluntarily fort their employees.Those under voluntary
are like insurance protection, retirement plant, house allowance and medical insurance.

3.3 Employees services.

Accommodation provided for employees. It is depend on the organization
in order to ensure their employees been facilitate with a good and convenience

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working environment. List of examples are as below which do have in Dyson

Manufacturing.

Cafeterias
Smoking area
Discount product
Sick bay
Free parking
Transportation

3.4 Things to consider in giving effective benefits program.

There are a few cosndieration in giving the effective benefits programme. The
main consideration is on funding. Its important to know on the funding in certain
organization in order to provide sufficient benefits to employees. There is no specific
proof showing that benefits do motivate or increase employees satisfaction. However, it
will convince the employee with a good working environment.

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Case Studies
Influences in determining compensation and benefits
JPJ is a Government agencies entrusted to overseas the issuance of licences and permits
for land transportation in Malaysia. Government regulations directly affect what type of
compensation can be given or not given.
Dyson is the manufacturing of home and industrial appliances.
Ambank is in the banking sector. Much of its practices including compensation and
benefits are regulated by Bank Negara Malaysia (BNM). Market forces i.e. competition
and labor market also influence on how much salaries are given to new entries, seasoned
employees and executives. Union has also a lot of influence on how much Ambank can
give in terms of pay rise and annual bonuses.
Case Study 1
Union Influence. The presence of a union directly affects most aspects of HRM. A union
is an organization that represents the interests of the employees on such issues as working
conditions, wages and salaries, fringe benefits, employees rights, grievance processes,
and work hours. Unions have different types such as cooperative union and combative
unions. Government workers also have unions that are taking care their rights and
interests. Nowadays, professionals such as engineers nurses, teachers, professional
footballers and professors also have unions.
JPJ The interest of workers in JPJ is taken care of by CUEPACS (Kongres Kesatuan
Pekerja-Pekerja Di Dalam Perkhidmatan Awam).
Dyson In Dyson, there are no trade union established currently.
Ambank Clerical staffs can join NUBE (National Union of Bank Employees) and

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Officers under ABOM (Association of Bank Officers Malaysia). Usually ABOM just
follows what NUBE is doing. There have been several occasions of picketing and boycott
performed by NUBE members for past 10 years. Among the fight promoted by NUBE is
higher bonus payment and higher annual increment for its members. Executives and
management staffs do not have union in the bank.

Case Study 2
New employee benefits
JPJ
Dyson
Ambank New officers usually has to undergo on-the-job training for the first six months
of their employment. In their Letter of Offer its states that not confirmed staff can resign
provided that they give a week notice while confirmed staff will need to give 3 months
notice to resign. Failure will result in the officer needing to pay the penalty of 3 months
salary. The officer would also not be allowed to utilise their pro-rated annual leave
entitlement during the first 6 months. All other benefits such as medical and health is
allowed. Usually, depending on the head of department, an officers basic salary can be
increased after confirmation but the decision on solely on the prerogative of the HOD.
Sometimes HOD can give some leeway to new officers should the need arises on certain
benefit issues. Allocation for car parking bay is also not given to new recruits. Usually
new recruits need to be at least 2 years in the job to be able to apply for car parking bay in
the office building. Otherwise, all new recruits need to use public transport to get to the
office. For the purpose of visiting clients, officers can use company cars.
Case Study 3
Pay rise schedule
JPJ JPJ employs the same pay schedule as other government agencies would do in

16

Malaysia. Salary increment is based on education level and grade level. An example of
the minimum and maximum salary allowed for each class can be viewed in Appendix 2.
DYSON Ambank For officer level in Ambank, there is no fixed schedule for annual increment of
basic salary. Each officer annual increment is determined by HRM and HOD. Should the
officer is promoted that year, he or she would usually enjoy a higher increment than the
rest of the team. Promotion does not necessarily means higher increment as there are
cases where the promotion was necessary for the officer to keep doing his job as
instructed by HRM. The promotion was not given due to the officers good performance
or higher production.

Case Study 4
Payment of bonuses
JPJ
Dyson
Ambank Payment of bonuses in Marketing department usually will be based on the Bell
Curve model. The model was established in year 2002 to replace the old method. Based
on the bell curve model, each HOD has to distribute the allocation for bonus entitlement
to the team based on a percentage of 10% lowest, 90% average and 10% highest. The
lowest 10% would get 2 months bonus while the average will get 3 months bonus, and
the highest getting 4-5 months bonus. Before the introduction of the bell curve model, all
team members were paid the same rate. Although our HOD was against this system, he
had to follow the method as instructed by management of the bank. The bell curve model
might be useful for a team that employ more than 100 employees but our team consist
only less than 20 personnel. Thus grading them being the lowest were unfair for any
officer.
Case Study 5

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Pay secrecy or openness

JPJ Salary and wages are not a secret in the government sector. Everybody follows the
schedule established by JPA (Jabatan Perkhidmatan Awam). All employees are given
salary based on their grades.
Dyson
Ambank Private sector like the bank usually treat wages and salaries as secret and
confidential. In Ambank, we were advised not to discuss our salary with fellow workers
as this would lead to dissatisfaction among the staff. Salary slips would always be given
at the end of the month and handed to the officer personally by HOD or team head. Any
matters pertaining to the salary must only be discussed with HOD and not team head.
HOD would then refer the matter to HRM.
Case Study 6
Maternity leave. How many days does your company allow maternity leave and paternity
leave.
Ambank Ambank allows the standard 3 months maternity leave and 1 day paternity
leave. Cost of delivery is not compensated.
Case Study 7
Incentives
Ambank gives incentives to employees who can bring in referrals for insurance policies.
Top employees with most successful referrals will enjoy free vacation to overseas
destinations.
Case Study 8
Indirect benefits such as insurance, medical, etc
Case Study 9
Stock ownership plans. Does your company offer stock ownership plan?
Ambank has ESOS, employee stock ownership scheme

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Case Study 10
Reimbursement. Pay first and claim later.
Ambank allows marketing officers to pay certain allowances with their own pocket
money and ask for reimbursement from the bank later.

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SUMMARY
This topic elaborates an overview about compensation. Compensation is a HRM function
that deals with every type of reward that individual receives in exchange for performing
organizational tasks such as wages, salaries, bonuses, commissions, benefits, and
nonfinancial rewards like praise and satisfaction. The objective of compensation is to
create a system of rewards that is equitable to the employer and employee.

20

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