Chapter 4

The Rewarding of
Human
Resource/Compensat
ion

Dr. essayas taye

-Unless the organization satisfies one of the basic
psychological needs of being valued and
appreciated, people, howsoever well paid, may
not like to continue.

-There compensation system should communicate

to the employees that they are valued.

Compensation is the monetary or nonmonetary

payment to an individual in various forms (and
other benefits given) for the work he or she does.
2
 Compensation & Benefits

• How much to offer in salary and wages.

• How much to offer in bonuses, commissions,
and other performance-related pay.
• Which benefits to offer and how much of the
cost will be shared by employees.
 Compensation

 Employees are motivated to work hard

when they are provided a fair compensation
for work rendered to the organization.

 Compensation:- wages and salaries, pay

raises, and similar monitory exchange for
employee’s performance
 Objectives of Compensation

 Establish fair and equitable pay systems

 Design cost-effective benefits packages
that help attract and retain high-quality
employees.
 Ensure equating
 Provide an incentive to work hard
 Reward desired behavior
 Comply with legal regulations
 Facilitate understanding
 Nature of Compensation

 Types of Compensation
 Intrinsic
 Intangible, psychological and social
effects of compensation
 Extrinsic
 Tangible, monetary and nonmonetary
effects of compensation

12–6
Factors Influencing Employee
Compensation

-A number of factors influence the

Compensation to employees. They
can be categorized into:
1) External Factors
2) Internal Factors.
3) Individual Factors
7
 External Factors
1. Labor market,
2. Cost of living
3. Labor unions
4. Government legislations
5. The society,
6. The economy‘
7. Geographical climate
Internal Factors
i. Company’s Business objectives and
Strategy
ii. Resource availability
iii. Extent of organizational profit and growth
iv.Job Evaluation grade and pay structure
v. Working conditions
vi.Job hazards

9
 Individual Factors
i. Education
ii. Skills, Knowledge, experience
iii. Effort (physical and mental)
iv. Seniority
v. Performance level
vi. Responsibility

10
Compensation Approaches

Figure 12–4
12–11
Components of a total reward Program

Figure 12–1
12–12
 Direct Compensation
Compensation Type
Base Pay The basic monetary compensation
that an employee receives, usually as a
wage or salary.

Wages Payments calculated on the amount of

time worked.
Salary Consistent payments made each period
regardless of the number of hours worked in
the period.

Variable Pay Compensation linked to individual or

team performance.
Benefit An indirect reward given to an employee
or group of employees as a part of
organizational membership.
12–13
 Types of Compensation

Financial Compensation

Direct Indirect
Wages Insurance plans
Salaries Social Assistance
Commission Employee services
Bonus Paid absences
 Non-financial Compensation

The Job Job Environment

Interesting Duties Sound policies
Responsibility Competent supervision
Recognition Congenital co-workers
Achievement Status symbols
Advancement Working condition’s
Factors That Influence Compensation
Employee’s
tenure and Company
performance profitability

Kind of job
Size of performed
company Level of
Compensation
and
Kind of
Geographical Benefits
business
location

Management Unionization
philosophy Labor-or
capital-intensive
 Determinants of Financial
Compensation
 Organizational interest in compensation
Aims:
 Attract qualified candidate for vacant
positions
 Retain competent and dedicated
employees
 Facilitate performance
 Comply with government policies
 Factors Affecting Compensation
Decision of Organization:

 Quantity and quality of needed skills

 The organization’s current financial position
and financial prospects for the future .
 Cost of living index
 Employee behaviors performance, turnover,
absenteeism, unionization attempts, and
sabotages.
 Labor Markets influence on Compensation
 Demand Focuses on: Organization’s ability to
pay
 Supply focuses on: Number of persons of
work age; the attractiveness of the job in
pays benefits, and psychological rewards;
the availability of training institution, etc.
 Analysis of demand supply balance
 Job Influence on compensation
 Organizations appear to attribute similar
values for similar jobs
 Organizations pay for the value they attach
to certain duties and responsibilities

Remark
Organization use job analysis and job
evaluation in order to determine the relative
values of jobs
 Job Evaluation
 Job Evaluation is that part of compensation system in
which a firm determines the relative value of one job in
relation to anther
Job evaluation is used to:
 Identify the organization’s job structure
 Bring equity and order to the relationship among jobs
 Develop a hierarchy of job value that can be used to
create a pay structure
 Achieve a consensus among managers and employees
regarding job and pay within the firm

Remark
Job evaluation rates the job not the employee performing
the job
Job Evaluation
 The process of determining how much a
job should be paid, balancing two goals
 Internal Equity: Paying different jobs
differently, based on what the job entails
 External Competitiveness: Paying
satisfactory performers what the market is
paying

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Job Evaluation:
The Point Method
 Job Analysis to determine…
 The tasks performed in a job
 The Job Description
 The knowledge, skills, and abilities needed
to perform the job
 The Job Specification

ORG434: Advanced
HRM 23
Job Evaluation:
The Point Method
 Example: Software Engineer
 Job Description
 The Software Engineer designs, develops, tests and
maintains one or more of our products or internal
applications. This position reports to the appropriate
Project Manager.
 Job Specification
 Bachelor's or undergraduate degree in Computer
Science, Information Systems, Electrical Engineering or
equivalent experience. Masters or graduate degree is
desirable. Understand Intranet and Internet
technologies: http, firewall.

ORG434: Advanced
HRM 24
Job Evaluation:
The Point Method
 Develop a list of compensable factors…
 A set of standards the organization uses to distinguish
among jobs for pay purposes
 Examples of commonly used compensable factors:
 Degree of responsibility, supervision
 Knowledge needed to perform the job
 Discretion in performing the job, independent judgment
 Job conditions
 Effort
 Hazard
 Consequence of error

ORG434: Advanced
HRM 25
Methods of Job Evaluation

 Job ranking
 Job grading
 Factor Comparison
 Point system
 Job Ranking Method
 The simplest of all the methods
 Evaluation team review the job descriptions
and challenging job in the organization.
 It bases of subjective evaluation of relative
values.
 It is suitable for small organization’s having
a limited number of employees.
 Job Grading (Classification)
Method
 The job grading works by having each job
assigned to a grade by matching standard
description’s with each job description –
 A job classification schedule for use with the
job grading method
Direction:
To determine appropriate job grade, match standard
description with job description.
Job Grading…Cont’d
Job Grade Standard Description

I Work is simple and highly repetitive done under close

supervision, requiring minimal training and little
responsibility or initiative.

II Work is simple and repetitive, done under close

supervision, requiring some training or skill.
Employee is expected to assume responsibility or
exhibit initiative only rarely.

III Work is simple, with little variation, done under

general supervision. Training or skill required.
Employee has minimum responsibilities and must take
some initiative to perform satisfactorily.

IV Work is complex, varied, done under general supervision.

Advanced skill level required. Employee is responsible for
equipment and safety; shows high degree of initiative.
Examples: Machine operator II, tool specialist.
 Comparison Method

 Need more quantitative analysis of the job

involved
 Each job is broken down into factors, which are
considered common to all types of jobs.
 The compassable factors used to compare job in
the organization are skill, mental requirements
physical requirements, responsibilities and
working conditions.
 Comparison…Cont’d

Compensable Factors Allotted Birr

Skill requirements 240
Mental requirements 360
Responsibility 240
Physical requirements 192
Working condition’s 168

Total Job Value Birr 1,200/P.M

 Point Method
 More accurate and widely used
 It looks the factor comparison method in that, in
both cases, jobs are broken down into factors like
skill, mental effort, responsibility, physical effort and
working conditions.
 unlike the factor comparison where monetary value is
assigned to each job, here points are used to
determine the worth of jobs in the organization.
 Point Method…Cont’d
Example: Steps of Assigning points
 Assign a number (say between 1 and 100) to
each factor
 Closely examine each factor in terms of its
importance in relation to the other. For
instance, the physical effort requirements for
the job of labor are thrice as important as skill
requirements (see the figure next slide).
 Finally, each factor point value is added, to place
job in order of importance
 Job Evaluation Table: Point - rating

Compensable Factors
Job Total
Skill Mental Responsibility Physical Working
Title effort effort Condition

Manager 20 20 40 5 5 90
Secretary 20 20 35 5 5 85
File clerk 10 5 5 5 5 30
Laborer 5 2 2 17 9 35
 Employee influences on compensation

 It is presumed that employees are willing and

cooperative to do their jobs to the best of their
abilities if they believe that pay is relatively
equitable to performance
 Compensation affects employee decision to stay or
the organization, to work effectively and to accept
addtional responsibilities.
 Other factors like performance, seniority, and
experience also determine pay levels in an
organization.
 Benefits
 Benefit
 An indirect compensation given to an employee or

group of employees as a part of organizational

membership.

 Strategic Perspectives on Benefits

 Benefits absorb social costs for health care and

retirement.
 Benefits influence employee decisions about

employers (e.g., recruitment and retirement).

 Benefits are increasingly seen as entitlements.

 Benefit costs are might be about 40% of total

payroll costs.
14–37
 Benefit Needs Analysis
 Benefit Needs Analysis
 A comprehensive look at all aspects of benefits.
 How much total compensation?

 What part of total compensation should

benefits comprise?
 What expense levels are acceptable for each

benefit?
 Which employees should get which benefits?

 What are we getting in return for the benefit?

 How will offering benefits affect turnover,

recruiting, and retention of employees?

 How flexible should the benefits package be?
14–38
 Types of Benefits
I. Security Benefits
 Worker’s Compensation
 Benefits provided to persons injured on the job.

 Unemployment Compensation
 A payroll tax that funds state unemployment systems.

 Involuntary unemployment and actively seeking work is

required for persons to claim benefit.

 Severance Pay
 A security benefit voluntarily offered by employer to

employees who lose their jobs.

 Payments are determined by the employee’s level within

the organization and years of employment.

 Pension Plans
 Retirement benefits established and funded by employers

and employees
14–39
II. Health-Care Benefits
 Medical and dental
 Long term care

 Vision care

 Prescription drugs

 Psychiatric counseling

 Wellness program

14–40
 Health-Care Benefits Costs mechanism
 Co-Payment
 Employees are required to pay a portion of the cost of

both medical insurance premiums and medical care.

 Defined Contribution Plans for Health Benefits
 Employer provides a set amount that the employee

may spend on health-care coverage benefits.

 Health Maintenance Organization (HMO)
 A managed care plan that provides services for a fixed

period on a prepaid basis.

 Managed Care
 Approaches that monitor and reduce medical costs

using restrictions and market system alternatives.

14–41
 Other Benefits
Credit
CreditUnions
Unions
Purchase Discounts
Purchase Discounts
Stock
StockInvestment
Investment

Family-Care
Family-Care Relocation
Relocation
Benefits
Benefits Expenses
Expenses

Benefits
Benefits
Family-Oriented
Family-Oriented Life,
Life,Disability,
Disability,
Benefits
Benefits Legal Insurances
Legal Insurances

Social
Socialand
and Educational
Educational
Recreational
Recreational Assistance
Assistance

14–42
Establishing Pay Structures

Figure 12–12
12–43
Objectives of Benefit
 Reduce fatigue (tiring task)
 Discourage labor unrest
 Satisfy employee objectives
 Aid recruitment
 Reduce turnover
 Minimize overtime cost
 Non-Financial Compensation
 Human needs other than the basic ones
such as social, ego, self-actualization
 Such higher level needs may be may
satisfied through the job or job
environment or both
 Organizations need to match the job
requirements and individual abilities
(through selection and placements)
 Availability of sound policies, congenial co-
workers appropriate status symbols and
comfortable working conditions.
 THANK YOU

for your active participation

….