CHAPTER 8

Compensating Human Resources

Objectives of Compensation
Compensation – is the set of rewards that organizations provide to individuals in return
for their willingness to perform various jobs and tasks within the organizations.
Base wages and Salaries – are the hourly, weekly or monthly pay that employees receive in
exchange of their work.

The primary objective of any bases and salary system

 To establish a structure for the equitable compensation of employees, depending on
their jobs and their level of performance in their jobs.

The objective compensation

 To create a system of reward that is equitable to the employer and employee alike.
Compensation should be :

1. Adequate – to meet the needs of employees and to acquire and to retained qualified
personnel.
2. Equitable – each person should be paid fairly.
3. Balanced – pay benefits and other rewards should provide a reason.
4. Cost-effective – taking into consideration the company’s ability to pay.
5. Secure – pay should be enough to help an employee feel secure.
6. Incentive Providing – pay should motivate effective and productive work or reward
desired behavior.
7. Acceptable to the employee – the employee should understand the pay system being
followed by the company and should feel it is reasonable for the organization and for
him/her.
8. Compliant with legal regulation.
Main Components of Compensation
A. Base Pay – the hourly wage or weekly/monthly salary earned.
B. Premium Pay – refers to the additional compensation required by law for work
performed within (8) hours on nonworking days, such as rest days and special days.
C. Base Pay Progression - movement of base pay overtime, from year to year.
D. Variable Pay – incentive or bonus pay that does not fall into bae pay; such earnings
may be based on performance against preset goals (incentives) or pay at the discretion
of the company (bonuses); may be paid at the individual, team, group, or organization
level.

WAGES VS. SALARIES

Wages
 Generally refer to hourly compensation paid to skilled and unskilled workers or those
performing blue-collar jobs, with time as the basis in the computation.
Salaries
 Income paid to an individual not on the basis of time but on the basis of performance.
 Are usually given to the professionals 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 perquisites 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. Total rewards also include a broad array
of nonmonetary, but extremely important, rewards that we place under the general
umbrella of work life. These rewards include :
A. Organizational Structure – the norms and values defining appropriate behavior in the
organization. Quality of leadership and supervision are also defining elements of
culture.
B. Intrinsic Values – rewards inherent in the work itself. These rewards come from acts
of performing.
 C. 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.

Determining Pay Rates

 Most wage and salary systems establish pay ranges for certain jobs based on the
relative worth of the job of the organization
 An employee’s performance on the same job should then determine where that
employee’s pay falls within the job range.
 The key is the establishment of different pay range for the various permissible pay,
with minimum and a maximum.
2 BASIC PHASIS INVOLVED IN ESTABLISHING
PAY RATES
1. Determining the relative worth of the different jobs to the organization (thereby
ensuring internal equity).
2. Pricing the different jobs 9thereby ensuring the external equity).

Job Evaluation – primary method used to determine the relative work of jobs to the
organization.

THE FOLLOWING ARE SOME OF THE BASIC

DETERMINANTS OF PAY
I. EXTERNAL FACTORS
A. Market Factors
1. Supply and Demand for Labor
2. Economic Conditions and unemployment rate
I. a
 B. Existing pay level in the community
C. Government regulations & laws, i.e., minimum wage law

II. ORGANIZATIONAL FACTORS

A. Type of Industry
B. Profitability and Company’s ability to pay
C. Unionized and Nonunionized
D. Size of the Company
E. Capital or Labor
F. Value of the Job – Contribution to the Company

III. JOB FACTORS

A. Skill
1. Mental Requirements
2. Complexity of duties
3. Personal Qualifications Needed
4. Ability to make decisions, judgments
5. Preparation for the job – education, training and knowledge
 B. Responsibility
1. Money, commitments
2. Decision making
3. Supervision – work of others
4. Quality of work
5. Materials, equipment, property
6. Confidential Information
C. Effort
1. Physical and Mental required
2. Attention details
3. Pressure of work
D. Working Conditions
1. Job conditions
2. Physical Hazards

IV. Individual Factors

A. Performance, productivity
B. Experience
C. Seniority, length of service
D. Potential, promotability
Objectives of Compensation
The process of establishing pay rates while ensuring external, internal and (to some
extent) procedural equity consists of two steps:

1. Conduct the salary survey for the following reasons:

● Price benchmark jobs
● Majority of the positions found in the company are usually priced directly in the
market place.
● 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.
●Job evaluation – is a systematic comparison done in order to determine the worth of
one job relative to another.
JOB EVALUATION METHODS

A. Ranking Method – is a simplest and oldest method and the least often used job
evaluation technique.

ADVANTAGES
• Simplest and easiest to explain
• Take less time to accomplish than the other methods

DISADVANTAGES
• Provides no yardstick for measuring the value of one job relative to another.
• It is limited to smaller organizations where employees are very familiar with various
jobs.
• The method is highly subjective
B. Job Classification or Job Grading Evaluation Method – 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
• Provides specific standards for compensation and accommodates any changes in the
value of individual jobs.
• Can be constructed simply, quickly, and cheaply.
• Easy to understand and explain to employees.

DISADVANTAGES
• Jobs are forced to fit into categories that are not entirely appropriate and feelings of
inequity can result.
• Problems may arise in deciding how many classifications there should be because too
few classes will make it difficult to differentiate job value while too many classes make
writing definitions almost impossible.
C. Point System – requires evaluators to quantify the value of the elements of a job. On
the basis of the job description or interviews with job occupants, points are assigned
to the degree of various compensable factors to do the job.

STEPS
1. Selection of the key jobs
 This represents jobs that are common throughout the industry.
 The goal is to select enough key jobs to represent each major internal variable in the
pay structure for all the jobs being evaluated
 A full and detailed job description is necessary for each job.

2. Selecting compensable factors.

 Compensable factors are factors or characteristics of jobs that are deemed important
by the organization to the extent that it is willing to pay for them.
 The degree to which a specific job possesses these compensable factors determines its
relative worth.
• For companies with recognized labor union, compensable factors selected must be
acceptable to both management and the union.
• In this method, job subfactors are used to describe compensable factors in more detail.
• The compensable factor of knowledge might include subfactors such as education,
experience and training, job complexity, and manual skills.
• Knowledge here defined as the familiarity or level of education or skill that must either
be possessed or acquired by an individual to be able to discharge the duties of the job.
• Degree statements describe the specific requirements of each subfactor.
 POSSIBLE SUBFACTORS AND DEGREES FOR KNOWLEDGE AS
COMPENSABLE FACTOR
Subfactors 1st Degree 2nd Degree 3rd Degree 4th Degree
Education College Level College Graduate With MA/MS With Ph.D.
Experience Less than 1 year 1 year or more 2 years or more 3 years or more
Job Complexity Diversified work of a Difficult or involves Difficult or involves Unusual work of
routine nature requiring work not necessarily work comprising new complex nature
considerable care and now requiring problems requiring the requiring the use of
attention considerable care and use of judgment judgment
attention
Manual Skills Able to operate simple Able to operate or apply Able to setup, operate, Able to manipulate and
office equipment like various kinds of drive, and handle office tend office machinery
telephone, fax machine, management and machinery needed in (including tools,
typewriter, calculator, systems in the effective performing job and company vehicles, and
and computer performance of job whenever necessary laboratory equipment)
needed in performing
job requiring the use of
judgment
Assigning Weights to Factors
 Weights are assigned to each of the factors, subfactors, and degrees to reflect their
relative importance.
 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:

1. Examine the job description.

2. Determine the degree statement that describes each subfactor for each compensable
factor.
3. Add the total number of points.

• The point totals should present the same general relationships that the actual pay
scales show for the key jobs.
• A rank ordering of the key jobs according to pay.
• Weights are assigned on the basis of a maximum number of points for any job; this
number is often decided arbitrarily.
ADVANTAGES

• Can be easily interpreted and explained to employees because of its mathematical

nature.
• Detailed and specific – Jobs are evaluated on a component basis and compared against
a predetermined scale.
• The system is easy to keep current as jobs change.
• Because of its quantitative nature, it is easy to assign monetary values to jobs.

DISADVANTAGES

• Time consuming and costly to develop

• Requires significant interaction and decision-making by the differentparties involved
in conducting job evaluation.
D. Factor Comparison Method
 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.
 It is essential that the rates of pay of key jobs be viewed as reasonable and fair to all
those making evaluations
 Compensable factors are then identified

Examples of Compensable Factors

1. Skills
2. Responsibilities
3. Effort
4. Working Conditions
Steps:
1. Identify key (benchmark) 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. This should be done factor by
factor, to determine how much each unique job should be paid.
6. Group similar jobs into pay grades. A pay grades is compromised of
jobs of approximately equal difficulty or importance as determined by
job evaluation.
7. Price each pay grade. The jobs are then priced and the total pay for
each job is divided into pay for each factor.
ADVANTAGES
• Relatively detailed and specific.
• Usually easier to develop than the point method.
• Value of the job is expressed in monetary terms.
• Can be applied to a wide range of jobs.
• Can be applied to newly created jobs.

DISADVANTAGES

• Relatively difficult to explain to employees since the pay for each factor is based on
judgments that are subjective.
• The standard used to determine the pay for each factor may have built-in biases that
would affect certain groups of employees like females or minorities.
 CONSIDERATIONS
1. Consistency
● To establish reliability
● When two people evaluating the same job provide similar ratings.

2. Freedom from bias

● Process should be free from political considerations or personal biases.

3. Correctability
● Firms should provide mechanisms to modify inaccurate or out-of-date
evaluations.

4. Representativeness
● All employees affected by the process should have their concerns represented.

5. Accuracy of Information
● Ratings must be based on accurate information.
 DIFFERENT FORMS OF COMPENSATION
1. Payment for time worked – this method has no direct relation to the worker’s output

SIX TYPES OF PAY INCREASES

A. General
B. Merit Increase
C. Cost of Living Adjustment
D. Reclassification Increase
E. Promotional Increase

2. Incentive Forms of Compensation – this is a method of compensating employees on

the basis of output which means more production and more earnings.
CLASSIFICATION
A. Piecework or payment by result – this is a system of pay based on the number of items
produces by each individual worker in a unit of time.
B. Individual Incentive Plans – this rewards individual performance on real time basis
for meeting a goal or hitting a target.
C. Group Incentives – these are given when its difficult to measure individual output or
when it is necessary done by groups.

3. Performance based rewards – this motivates the employees to wok harder and to have
an excellent performance to achieve the award.
4. Spot bonuses – these are spontaneous incentives awarded to individual for
accomplishment not readily measured by a standard.
5. Skill and Knowledge–based pay/Competency based-pay – this sets pay level on the
basis of how many skills an employee has or how many job he/she can do.
6. Merit pay plans – this is usually awarded to employees on the basis of the relative of
their contribution.
7. Profit sharing – this happens at the end of the year, in which some portion of the
company’s profit is distributed to all the employees.
8. Stock ownership plans – employees receive a claim of ownership of some portion of
the stock held by the company based on seniority and performance.
9. Executive Compensation
A. Base pay – a guaranteed amount of money that the consecutive will get from the
company.
B. Incentive Pay – this is established to give company executives the option to buy
company stocks on the future at predetermined fixed price.