HUMAN RESOURCE MANAGEMENT

PHR 2143

CHAPTER 8:
COMPENSATION &
BENEFITS
Chapter Objectives
After completing this chapter, you should be
able to:
1. Introduction to Compensation & Benefits.
2. Determinants of individual compensation.
 Compensation:
An Overview
 Purpose of compensation is to attract, retain, and motivate employees.
Three mechanisms contributes to this purpose:
$ Pay helps define a person’s standard of living, higher pay enables people to meet
their most basic needs such as food and shelter more easily than those who earn
less.
$ Pay level influences an employee’s attitudes such as job satisfaction, contribute to
better job performance.
$ Type of payment such as incentive pay aligns the interests of employees with a
company’s mission. For instance, sales employees have the potential to earn
greater amounts of incentive pay for the attainment of progressively higher sales
goals.
Definitio
n
Compensation
 The total of all rewards provided employees in return
for their services.
Direct financial compensation
 The pay that a person receives in the form of wages, salaries,
commissions and bonuses.
Indirect financial compensation (benefit)
 All financial rewards that are not included in direct
financial
compensation.
Non-financial compensation
 Consist the satisfaction that a person receives from the job itself
or from the psychological and physical environment in which the
person works.
Components of a Total Compensation Program
 Wages
A fixed regular payment earned for
work or services, typically paid on a
daily or weekly basis

Salaries
One type of base pay. Employees
earn salaries for performing their
jobs, regardless of the actual
number of hours worked.

Commissions
A sum of money that is paid to an
employee upon completion of a task,
usually the task of selling a certain
amount of goods or services.

Bonuses
A sum of money added to a person's
wages as a reward for good
performance.
 Legally Required Benefits Discretionary Benefits

Those benefits that are required by law Those benefits that are not mandated by law,
organization voluntary provide

a) Payment For Time Not Worked

a) Social Security In providing payment for time not worked, such as
A system of retirement benefits that provides paid vacations, payment for holidays not
benefits like disability Insurance and Medicare. worked, paid sick leave and so on.

b) Unemployment Compensation b) Health Care

An individual laid off by an Specific areas include health, dental, and
organization covered by the Social vision care.
Security Act may receive Unemployment
compensation for up to 26 weeks. c) Life Insurance
To protect the employee's family in the event
c) Workers' Compensation of his or her death
Financial protection for employees who incur
expenses d) Retirement Plans
Resulting from job-related accidents or provide income for employees who retire after
illnesses. reaching a certain age or having served the
firm for a specific period of time
Meaningful Learning

Appreciated Enjoyable

Satisfying Challenging
Sound Policies
Human resource policies and practices reflecting management's concern for its employees can serve as positive rewards.

Competent Employees
Successful organizations emphasize continuous development and assure that competent managers and non-managers
are employed.

Congenial Coworkers
Although the American culture has historically embraced individualism, most people possess, in varying degrees,
a desire to be accepted by their work group.

Appropriate Status Symbols

Organizational rewards that take many forms such as office size and location, desk size and quality,
private secretaries, floor covering, and title.

Working Conditions
The definition of working conditions has been broadened considerably during the past decade.
 WORKPLACE
FLEXIBILITY
Flextime
The practice of permitting employees to choose, with certain limitations, their own working hours.

Compressed Workweek
Any arrangement of work hours that permits employees to fulfill their work obligation in fewer days than
the typical five-day workweek.

Job Sharing
An approach to work that is attractive to people who want to work fewer than 40 hours per week.

Telecommuting
Telecommuting is a work arrangement whereby employees are able to remain at home, or otherwise
away
from the office, and perform their work over telephone lines tied to a computer.

Part-Time Work
Use of part-time workers on a regular basis has begun to gain momentum in the United States.
This approach adds many highly qualified individuals to the labor market by permitting both employment and
family needs to be addressed
Determinants of Direct
Financial Compensation
 Organization as a Determinant of
Direct Financial
Compensation
Compensation
Ability to
Policie
Organization Level
pay
s s
•Pay leaders: Pay higher
wages and salaries to
attract high-quality, •Upper management often •There is logic for using
productive employees makes decisions to ensure cost of living as a pay
• Market rate or going consistency determinant
rate: •However, there may ne •a pay increase must be
Pay what most employers advantages to making pay roughly equivalent to the
pay for same job decisions at lower levels, increase of living if a
• Pay followers: Pay where better information person is to maintain a
below market rate may exit regarding previous level of real
because of employee performance wages.
firm’s poor financial
condition or belief that it
does not require highly
capable employees
 Labor Market as a Determinant of Direct
Financial Compensation
 A means of obtaining data regarding what other firms are paying for specific
Compensation jobs or job classes within a given labor market.
Survey  Market rates remain the most important standard for determining pay.

 Managers in highly technical and specialized areas occasionally need to use

Expediency nontraditional means to determine what constitutes competitive
compensation for scarce talent and niche positions.
 Need real-time information

 When prices rise over a period of time and pay does not, real pay is actually
Cost of Living lowered
 Some firms index pay increases to inflation rate

 Mandatory collective bargaining between management and unions on: –

Labor Unions Wages –Hours –Other terms and conditions of employment

 Affects financial compensation decisions

The Economy  Depressed economy generally increases labor supply
 Cost of living often rises as economy expands
Job as a Determinant of Direct Financial
Compensation
Job analysis Job description

A written document that describes

The systematic approach to job duties or functions and
determine the skills responsibilities which serve as
& knowledge needed different purpose, including data for
perform the job
to evaluating jobs.

Job evaluation

Process that determines the relative

value of one job in relation to
another.
 Employee as a Determinant of Direct
Financial Compensatio
n

Performance Based Pay

is governed by how well one

performs the job include merit Skill Based Pay Competency Based Pay
pay, merit bonuses, and
incentive pay. System that compensates Compensation plan that
employees for their job-related rewards employees for the
skills and knowledge, not for capabilities they attain
their job titles.
 Cont..

Seniority Experience Organization Membership

•Receive some compensation
Length of time an employee has components without regard to
been associated with the Regardless of the nature of the
task, experience has the particular job they perform or
company, division, department, their level of productivity
or job. potential for enhancing
a person ability to perform. •Receive them because they are
members of the organization
 Cont..

Potential Political Influence Luck

• Useless if it is never realized •Firms should obviously try not

to permit political influence to •Helps to be in the right place
• Many young employees are be a factor at the right time
paid well because they have •Opportunities are continually
the potential to add future •To deny its existence would
value be unrealistic presenting themselves
•Natural for a manager to •Luck works primarily for the
•Used to attract talented young
favor a friend or relative in efficient
people to the firm granting a pay increase or
promotion