Compensation and Wages

CHAPTER 5: STAFFING
Compensation/ Wages and Performance Evaluation
Compensation/wag
es- all forms of pay
given by employers
to their employees for
the performance of
their job.
Performance Evaluation- a
process undertaken by the
organization, usually done once a
year, designed to measure
employees’ work performance.
Compensation/wages and performance evaluation are related to
each other because the employees' excellent or poor
performance also determines the compensation given to them,
after considering other internal and external factors like the
actual worth of the job, compensation strategy of the
organization, conditions of the labor market, cost of living, and
area wage rates, among others.
Types of Compensation
Direct compensation - includes workers' salaries, incentive pays,

bonuses, and commissions
Indirect compensation - includes benefits given by employers

other than financial remunerations; for example: travel,
educational and health benefits, and others
Nonfinancial compensation - includes recognition programs, being

assigned to do rewarding jobs, or enjoying management support,
ideal work environment, and convenient work hours
Connecting Compensation to Organizational
Objectives
Worker compensation/wages had tremendously changed in the 21 't
century due to increased market competitions (both local and global),
required skills from workers, and changes in technology, among others.
Along with these, organizations' pay philosophies have also changed.
Instead of paying employees based mainly on their job positions or

titles, they are now given pay according to their individual competencies
or according to how much they could contribute or have contributed to
their company's success.
Wage experts now prepare compensation packages that create value for
both the organization and its employees.
Compensation: A Motivational Factor for
Employees
Compensation pay represents a reward that an employee receives for
good performance that contributes to the company's success; in
relation to this, the following must be considered:
Pay Equity — related to fairness; the Equity Theory is a motivation

theory focusing on employees' response to the pay that they receive and
the feeling that they receive less or more than they deserve.
Employees generally feel that their pay must be commensurate to the
effort exerted in the performance of their job. In other words, pay equity
is achieved when the pay given to them by their employers is equal to
the value of the job performed; thus, this motivates them to perform
well and to do their jobs to the best of their abilities.
Expectancy Theory - another theory of motivation which predicts that

employees are motivated to work well because of the attractiveness of
the rewards or benefits that they may possibly receive from a job
assignment.
The employee's perception of the compensation or pay attached to a job
position is an important factor in ascertaining the motivational value of
compensation.
Bases for Compensation
Employees may be compensated on the following bases:

Piecework basis — when pay is computed according to the number of units
produced
Hourly basis — when pay is computed according to the number of work
hours rendered.
Daily basis — when pay is computed according to the number of work
days rendered.
Weekly basis - when pay is computed according to the number of work
weeks rendered.
Monthly basis — when pay is computed according to the number of work
months rendered.
Compensation rates are influenced by internal and external factors.
Among the internal factors are the organization's compensation policies,
the importance of the job, the employees' qualifications in meeting the
job requirements, and the employer's financial stability.
External factors, on the other hand, include local and global market
conditions, labor supply, area/tegional wage rates, cost of living,
collective bargaining agreements, and national and international laws,
among others.
Purposes of Performance Evaluation:
Administrative and Developmental Improving individual job performance
through performance evaluation is just one of the reasons why
employees are subjected to assessments on a continuous basis.
There are other purposes behind employee assessment that are

beneficial to both the company and the employees, these are:
Administrative Purposes — These are fulfilled through appraisal/
evaluation programs that provide information that may be used as basis
for compensation decisions, promotions, transfers, and terminations.
Human resource planning may also make use of it for recruitment and
selection of potential employees.
Developmental Purposes — These are fulfilled through appraisal/
evaluation programs that provide information about employees'
performance and their strengths and weaknesses that may be used as
basis for identifying their training and development needs. Through this
approach, the workers become more receptive to the explanations given
by the organization's management regarding the importance of having
evaluations at regular intervals—that these are conducted to improve
their competencies in order to prepare them for future job assignments.
erformance Appraisal Methods
Methods of evaluating workers have undergone development in order to
adapt new legal employment requirements and technical changes.
Trait methods — performance

evaluation method designed to find
out if the employee possesses
important work characteristics such
as conscientiousness, creativity,
emotional stability, and others
Graphic rating scales — performance

appraisal method where each characteristic
to be evaluated is represented by a scale on
which the evaluator or rater indicates the
degree to which an employee possesses
that characteristic
Forced-choice method -
performance evaluation that
requires the rater to choose from
two statements purposely designed
to distinguish between positive or
negative performance; for example:
works seriously—works fast; shows
leadership—has initiative
Behaviorally anchored rating

scale (BARS) — a behavioral
approach to performance appraisal
that includes five to ten vertical
scales, one for each important
strategy for doing the job and
numbered according to its
importance
Behavior observation
scale (BOS) — a
behavioral approach to
performance appraisal
that measures the
frequency of observed
behavior
CHAPTER 5: STAFFING
Rewards System
Definition of Terms
Reward — is something given or done in return, especially in the form of
salary, a gift, prize, incentive pay, benefits, or recompense for merit,
service or achievement, and which may have a motivating effect on the
employee.
Organizations offer
competitive rewards
systems to attract
knowledgeable and
skilled people and to
keep them motivated
and satisfied once
they are employed in
their firm. Further,
rewards promote
personal growth and
development and
present fast employee
turnover.
Managements offer different types of rewards:
Monetary Rewards - rewards which pertain to money, finance, or
currency.
a. pay/salary - financial remuneration given in exchange for work
performance that will help the organization attain its goals; examples:
weekly, monthly, or hourly pay, piecework compensation, etc.
b. benefits - indirect forms of compensation given to employees/workers

for the purpose of improving the quality of their work and personal lives;
health care benefits, retirement benefits, educational benefits, and
others.
c. incentives - rewards that are based upon a pay-for-performance
philosophy; it establishes a baseline performance level that employees or
groups of employees must reach in order to be given such reward or
payment; examples: bonuses, merit pay, sales incentives, etc.
d. executive pay - a compensation package for executives of

organizations which consists of five components: basic salary, bonuses,
stock plans, benefits, and perquisites
e. stock options - are plans that grant employees the right to buy a
specific number of shares of the organization's stock at a guaranteed
price during a selected period of time
Nonmonetary Rewards - rewards which do not pertain to money,
finance, or currency; refer to intrinsic rewards that are self-granted and
which have a positive psychological effect on the employee who
receives them.
a. award - nonmonetary reward that may be given to individual
employees or groups/teams for meritorious service or outstanding
performance; trophies, medals, or certificates of recognition may be
given instead of cash or extrinsic rewards
b. praise - a form of nonmonetary, intrinsic reward given by superiors to

their subordinates when they express oral or verbal appreciation for
excellent job performance

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CHAPTER 5: STAFFING

Compensation/ Wages and Performance Evaluation

Direct compensation - includes workers' salaries, incentive pays,

Indirect compensation - includes benefits given by employers

Nonfinancial compensation - includes recognition programs, being

Along with these, organizations' pay philosophies have also changed.

Instead of paying employees based mainly on their job positions or

Pay Equity — related to fairness; the Equity Theory is a motivation

Expectancy Theory - another theory of motivation which predicts that

Employees may be compensated on the following bases:

There are other purposes behind employee assessment that are

Trait methods — performance

Graphic rating scales — performance

Behaviorally anchored rating

b. benefits - indirect forms of compensation given to employees/workers

d. executive pay - a compensation package for executives of

b. praise - a form of nonmonetary, intrinsic reward given by superiors to

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