COMPENSATION ADMINISTRATION CLASSIFICATION OF COMPENSATION

DIRECT COMPENSATION
CHAPTER 1: FOUNDATION OF COMPENSATION
ADMINISTRATION -Refers to an actual monetary value that entitles an
employee.
COMPENSATION - The means of giving a monetary value
equivalent to any work performed by an employee. -It could be in the form of salary or wage.

-It also refers to all financial rewards and non-financial -It can also be in the form of variable pay such as bonuses,
rewards which an employee may receive out of a work incentives, commissions, and other performance-based
rendered for the employer. pay.

COMPENSATION – ITS NATURE AND OBJECTIVE INDIRECT COMPENSATION

-Compensation is usually attached to employees’ -Refers to nonmonetary aspects of compensation, such as

contributions to the organization. It is often defined as a benefits packages that include hospitalization and life
insurance plans, sick and vacation leaves, car plans,
means of providing monetary value based on the work
educational grants
performed
-It is referred to as the “add on” or the extra component of
-It aims to attract and retain employees and provide them base pay (Armstrong, 2015).
with compensation packages to maintain high productivity
and efficiency. POLICIES AFFECTING COMPENSATION

BASIC TYPES OF COMPENSATION 1. INTERNAL ALIGNMENT

1. BASE PAY -Refers to the consistency and fairness in how different

jobs within a company are valued and rewarded.
-It is the basic pay given to the employee for the actual
work rendered usually in the form of salary or wage. 2. EXTERNAL COMPETITIVENESS

-It is the pay that was negotiated and agreed upon by the -Aligning pay with competitors, calculate the risk of being
employee and the employer during the hiring process competitive.

2. VARIABLE PAY 3. EMPLOYEE CONTRIBUTION

-It is the pay that is linked to actual accomplishments in -Aligning pay with the contributions of employees in
performance such as bonuses or incentives based on a achieving organizational objectives.
target sales or quota or target productivity.
4. MANAGEMENT OF THE PAY SYSTEM
-It can be paid on an individual, group or team basis.
-Employees should be worthy of the pay that they receive.
3. BENEFITS There should be fairness in providing compensation for
everyone.
-These are indirect rewards that may either be
government- mandated or voluntarily given by the 6 COMPONENTS OF A COMPENSATION SYSTEM
employer.
1. JOB ANALYSIS
OBJECTIVES OF COMPENSATION
-The process of determining all the information specific to
-To retain high performance employees and reduce a particular job.
employee turnover.
-Provides the necessary behavior required to perform the
-To achieve high productivity and efficiency by providing task and the performance needed to evaluate job
fair compensation among employees commensurate performance
to their position 2. JOB DESCRIPTION
-To satisfy pay requirements in accordance with the law. -written summary of all duties and responsibilities of a
particular job position.
“If you pick the right people and give them the opportunity
to spread their wings – and put compensation and rewards -guides the employee on the tasks that they should
as a carrier behind it – you almost don’t have to manage accomplish
them.”

-Jack Welsh
3. JOB EVALUATION 2. IRON LAW OF WAGES (FERDINAND LASSALLE)

-The process of determining the worth of a job. The worth -This is the tendency of wages to remain fixed at a
or value of a job forms part in determining pay rates, subsistence or minimum level. Wages cannot fall below the
specifically the basic pay. It also organizes jobs into a minimum because workers will not be able to work.
hierarchy as pay levels are developed. -Natural Price – A natural price of labor is a price that is
Job evaluation supports two important principles: needed for a laborer to sustain himself/herself.
-Market Price – A market price of labor is the price paid for
A. Equal pay for equal work
labor as provided by the worker.
B. More pay for more important work
3. JUST PRICE THEORY (J. STACEY ADAMS)
4. PAY STRUCTURES -This Theory emphasizes that employees would like to
-Helps in determining entry pay and incremental increases maintain equity between inputs (Their contribution to the
job) and output (the outcomes that they receive out of the
during performance evaluation or promotion.
efforts that they give to the organization).
-This minimizes complaints on the corresponding amount
-In this theory, wages are provided based on the status or
of increases because they are structured and position of each employee. Employees with higher
systematically arranged per grade or level positions have higher wages.
5. SALARY SURVEYS 4. WAGE FUND THEORY (ADAM SMITH)
-Some organizations participate in salary surveys and -This Theory is developed by Adam Smith. This theory
purchase market data on prevailing rates for different means that workers are paid based on a fund that is
positions in the industry where they belong. already there in the first place.

-This help in determining appropriate rates and at the -Employees or workers will be paid equally by dividing the
same time remaining competitive among competitors. wage fund over the number of workers. The lower the
number of workers, the higher the wage.
6. POLICIES & REGULATIONS
5. RESIDUAL CLAIMANT THEORY (FRANCIS WALKER)
-Each organization has its policies for administering and
implementing its pay system. -According to this theory, wages are residual claims after
rent, interest, and profits are deducted from the total
-These depend on many factors including the product. It suggests that residual claims will only increase
organization’s capacity to provide compensation and the if productivity will increase
standards set by law. 6. STANDARD OF LIVING THEORY
-They also indicate the kind of support that the top -It is the level or quality of life that a particular worker
management has given in the implementation of enjoys in a particular location or area. It includes the basic
compensation packages. necessities of life, education, and recreation which a
worker has been used to.
THEORIES ON WAGES
7. BARGAINING THEORY (JOHN DAVIDSON)
1. SUBSISTENCE THEORY (THOMAS MALTHUS)
-This is especially true for labor unions that negotiate their
-This theory is the most popular economic theory on wages on the bargaining table.
wages.
-Wages are high if the workers are stronger than the
-Wages of workers are established at a level of employer. If the employer is stronger than the workers, the
compensation that is only high enough to cover their basic wages tend to be low.
needs.
-The rise of labor organizations had been instrumental in
-According to this theory, an increase in wages above the this theory.
minimum or subsistence level will only lead to an increase
in population at a faster rate.
3RD WEEK – COMPENSATION STRUCTURE IN THE
PHILIPPINES AND WAGE RELATED BENEFITS

- The Labor Code of the Philippines, otherwise known as

the Presidential Decree No. 442, governs all employer-
employee relations, their rights, and obligations.

Wage and Wage-related Benefits

1. Minimum Wage
-Wage Rationalization Act, Republic Act No. 6727 sets the
minimum wage rates applicable per region, province, and
industry sector. The minimum wage may vary depending
on the number of employees and gross sales of an
enterprise and its industry sector.
2. Overtime Pay
The Industry sectors are: -Minimum wage is based on a 40 hours 8 hours per day
I- Non-Agricultural work.

Cottage and handicraft (Pottery, basket weaving, -There should be a 60-minute (mandatory) lunch break
soap making, leather craft, etc.) which is not included in the 8-hour work day. (Not
compensated)
Retail and service sector (supermarkets, grocery
stores, restaurants, hotels, schools, salons, hospitals, -Overtime pay starts beyond the 8 hours work per day and
banks, etc.) the rates vary depending on when the overtime work takes
place.
II - Agricultural
-Regular work day – 25% of the hourly pay rate
Plantation – (Dole, Del Monte) – focus on growing
on type of - Rest day, regular/special holiday, night (between
10-6 am) plus 30% of the hourly rate on the said day.
Non-Plantation – (San Miguel, Century Pacific
Food)
Overtime Pay Example: on a regular working day

Pedro’s daily rate is P500. Pedro works for 15 hours on

one regular working day.

How much is Pedro’s total pay?

Overtime rate: Regular work day hourly rate + 25%

Hourly Rate = Daily rate / 8 hours

Overtime Rate = Daily Rate x 25%

500 / 8 = 62.50 per hour 62.50 x 125% = 78.13

Regular daily pay per 8 hours 500.00

Overtime pay (7 hrs. x 78.13) 548.10

Total pay 15 hours 1,048.10

Premium Pay: Rest day + Regular Holiday

Day’s Wage with Premium = Regular holiday rate + 30%

Regular Holiday rate = 200%

Premium pay = 30% of the Regular holiday rate

(200% x 30% = 60%) 60%

Day’s wage with premium = 260%

Basic rate per day = 500.00

Holiday rate = (500 x 2) = 1,000.00

Premium = 1,000 x 30% = 300.00

Day’s wage with premium = 1,300.00

Or 500 x 260% = 1,300.00

4. Holiday Pay

The Labor Code requires the payment of an

employee’s daily basic wage for all non-working regular
holiday. There are 12 Regular Holidays as per Republic
Act No. 9849.

1. New Year’s Day 7. National Heroes Day

2. Maundy Thursday 8. Eidl Fitr

3. Good Friday 9. Eidl Adha

4. Araw ng Kagitingan 10. Bonifacio Day

5. Labour Day 11. Christmas Day

6. Independence Day 12. Rizal Day

- If work is accomplished on a regular holiday (up to 8

hours), an employee is entitled to at least twice (200%) of
his basic wage. If the holiday corresponds to a scheduled
rest day, the employee is entitled to an additional 30%
based on his regular holiday rate of 200%, which comes to
a total of at least 260%

5. Night Shift Differential

- For work done between the hours of 10 pm to 6 am,

employees are entitled to a Night Shift Differential (NSD)
which represents an additional 10% to the regular wage
for each hour of work performed.

Example: Worker with a daily wage of P500.00

Regular wage per hour 62.50 (500/8 hrs)

10% of 62.50 6.25 – Night Shift Differential

Total pay per hour 68.75

Employee wage = 8 hrs x 68.75 = 550.00

(10 am to 6 am)
6. Service charges - Victims shall be to take paid leave of absence up to ten
(10) days in addition to other paid leaves under the Labor
- Employees of employers collecting service charges are Code and Civil Service Rules and regulations, extendible
entitled to an equal share in the 85% of the total of such when the necessity arises as specified in the protection
charges, except managerial employees. The remaining order.
15% of the charges may be retained by the management to
answer for losses and breakages and for distribution to 10. 13th Month Pay
managerial employees, at the discretion of the
management. - Each year, a 13th month pay is given to all rank-and-file
employees and must be paid before December 24th and is
- Service charges are collected by most hotels and some mandatory.
restaurants, event venues and catering services, tour
operators and travel agencies. - Employees who have resigned or have been severed from
the company before the payment of the 13th-month pay
7. Service Incentive leave are still entitled to it in proportion to the length of time
they worked during the year.
- A leave granted to every employee who has rendered at
least 1 year of service equivalent to 5 days with pay. Example: Total annual salary = 120,000 / 12

-Service incentive leave may be used for sick and vacation 13th month pay = 10,000.00
purposes.
11. SEPARATION PAY
-Unused Service incentive leave at the end of the year can
be converted into cash using the salary rate at the date of - Following the labor code of the Philippines, articles 283
conversion. and 284, an employee can claim separation pay if his
contract is ended under unauthorized causes. According to
-It is the prerogative of the employer to grant or not grant the article 282, an employee terminated for just cause
additional vacation leave. (neglect of duties, fraud, and crime.) is generally not
entitled to a separation pay
8. Parental Leaves
Separation Pay of ½ month for every year of service for
Maternity Leave– Whether married or not, each termination with authorized causes:
pregnant employee is entitled to 105 days leave with pay
(60 days leave for miscarriage), for up to four pregnancies. - Retrenchment of person for loss prevention
During the duration of the maternity leave, employees - Branch cease of operation due to losses or
receive a fraction of their regular monthly salary from the financial difficulties
company, which is in turn reimbursed by the SSS. - Has contracted a disease not curable within 6
months and his presence at work is harmful to his
co-workers or himself
Paternity Leave – All married male employees are Separation pay of 1 month for every year of service for the
entitled to a 7-day leave with pay delivery or miscarriage ff:
of his legitimate spouse with whom he must live, for up to
- Employer has installed a labor-saving device
four pregnancies.
- Redundancy of employee service for the company
Solo-Parent Leave – In addition to parental leaves - Impossibility of employee restatement to former
at the time of a child’s birth, solo-parent leave can also be position for reasons outside of the company’s
availed by solo parents as described in the Solo Parents power. (Ex. Company bought by another)
12. Retirement Pay
Welfare, Republic Act No. 8972. Solo parent employee
must be working for at least a year to be entitled to this - All employees from the private sector may retire from age 60 up
leave, which is equivalent to 7 working days of leave in a to age 65, at which retirement becomes compulsory, and must
year. have served the establishment for at least 5 years. Retirement
pay must at least be equivalent to half a month’s salary for each
9. Other Leaves year of service and a fraction of at least 6 months is considered as
one whole year. One half month salary must include 15 days
Gynecological Leave salary based on the last salary pay, the equivalent of five days of
incentive leave and 1/12 of the 13th month pay. Therefore ½
- A woman employee having rendered continuous
month salary is equivalent to 22.5 days.
aggregate employment service of at least 6 months for the
last 12 months shall be entitled to a special leave benefit of Minimum Retirement pay = Latest daily pay rate x 22.5
2 months with full pay based on her gross monthly days per month x number of years of service.
compensation following surgery caused by gynecological
disorders.
13. Gross and De Minimis Benefits: Maybe cash or in
kind

Gross Benefits – includes 13th month pay, Christmas

bonuses, productivity and incentive bonuses and other
benefits of the same nature or kind.

De Minimis Benefits – compensation of small value

Compute for the SSS personal and employer share of
- Monetized unused vacation leave up to 10 days Employee A who has a monthly salary of P37, 000.
per year
Established in January 2021 as part of Republic Act 11199,
- Medical cash allowance up to 750 per semester or
124 per month WISP is a mandatory provident fund scheme that serves as
- Rice subsidy up to 1,500 another savings for private-sector workers and other
- Uniform and Clothing allowance up to 5,000 per individual paying members of the SSS
year
The Employees' Compensation (EC) program aims to assist
- Actual medical benefits up to 10,000 per year
- Laundry allowance up to P300 per month workers who suffer work-connected sickness or injury
- Employee achievement award up to 10,000 per resulting in disability or death.
year
SSS Contribution
- Gifts given for Christmas up to 5,000
- Daily meal allowance not to exceed 25% of basic Employee A Salary = 23,000 per month
minimum wage
- Benefits receive from Collective Bargaining How much is his SSS contribution and how much is his
agreements not to exceed 10,000 per year employer share. How much is the total remittance for SSS
Excluded from gross income for tax purposes – but not to
exceed 82,000 See SSS Contribution table:

SSS – covers private sector employees and is based on Employee = 1,035

employees’ gross monthly pay Employer = 2,215
- Employee and employer contributions based on Total Remittance for Employee A 3,250.00
schedule
PHILHEALTH – all Filipinos age 21 and above and has the Pag-ibig Contribution (Home Development Mutual Fund)
capacity to pay the premium
A mandatory contribution for all employees who are
- Employer and employee contributes covered by GSIS or SSS (RA 9679) Employer’s and
Home Development Mutual Fund – Mandatory to all employee contribution is set at 2% with a Fund salary base
employees covered by SSS or GSIS of 10,000 (Pag-ibig circular 460, effective February 2024)
- Employer and employee contributes 10,000 x 2% = 200

Employee contribution = 200

Employer contribution = 200

Total required Pag-ibig remittance = P400

For salary of P1,500 and below, employee contribution is

1% and employer contribution is 2%

Employee contribution (10,000 x 1%) 100

Employer contribution (10,000 x 2%) 200

Total required Pag-ibig remittance P300

PHILHEALTH

All government and private sector employers are required

to register with PhilHealth to enable them to provide social
health insurance coverage to their employees.

Current rate is 5% to be shared by the employer and

employee.

Example:

Employee A salary = 20,000 per month

PHIC Contribution = 20,000 x 5% = 1,000

Employee = 500

Employer = 500

Total PHIC remittance to be remitted by the employer for

Employee A = P1, 000