Human Resource

Management
Compensation
Management
 Concept of Compensation
 Compensation refers to the rewards that
employees receive in exchange for their work. It is
extrinsic
composed of the base wage or salary and incentives or
bonus and any benefits. – Bayers and Rue
Compensation includes direct cash payments, indirect
payments in the form of employee benefits, and Incentives to
motivate employees to strive for higher levels of productivity.”
 It includes such areas-
• job valuation,
• surveys of wages and salaries,
• analysis of relevant organizational problems,
• development, and maintenance of wage structure,
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 Concept of Compensation
 establishing rules for administering wages, wage payments,
 incentives, profit sharing,
 wage changes and adjustments, supplementary payments,
 control of compensation
 provident fund, gratuity, insurance scheme

From the above definition it can be concluded that the organizatio

mainly consist of two types of compensation scheme:
 Direct compensation

 Indirect Compensation

 Non-monetary Compensation.
 Compensation o f T o t a l Compensation
© Kam al S ube di, 201 6

EXTERNAL ENVIRONMENT
INTERNAL ENVIRONMENT

COMPENSATION

FINANCIAL NON-FINANCIAL

DIRECT INDIRECT THE JOB THE ENV.

 Direct-Indirect Compensation
Direct Compensation
 Money is included under the direct compensation popularly known as
wages/gross pay. There are direct financial payments in the form of the
wages, salaries, incentives, commission and bonuses.
 CTC-Cost to company-Includes elements –HRA,PF, Medical Insurance,
other allowances
 CTC,Gross Salary,Net Salary,Basic Salary
Indirect Compensation
 Benefits come under indirect compensation. It may consist of insurance
(life and death insurance), the employer’s contribution to retirement, pay for
illness and vacation, and employer’s required payments for employment
welfare as a social security.
Non-monetary Compensation
The non-monetary compensation includes any benefit that an employee receives fro
m an employer or a job that does not involve tangible value
.
Examples are career development and advancement opportunities, opportunities
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6
Structure and components of compensation

 Wages and salary:

 wage is the remuneration paid periodically to an

employee or worker (blue-collar workers).

 On the other hand salary refers to the weekly or the

monthly rates paid to clerical, administrative and

professional employee (white-collar employee)
 Incentives:
 it refers to all the plans that provide

extra pay for extra performance in addition to regular

salary and wages.
They acts as the extra financial motivation.

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Structure and components of compensation
 Benefits:

They are usually known as fringe benefits
because they are offered by employer to the
employee as a fringe (free of cost).
 They are supplements to wages received by
employee at a cost to employer.
 Pay for time not worked (holidays, leaves,paid
vacations) Programs insurance (medical etc)
 Gratuity pension, Retirement Benefits
 Executive
-Benefits (Newspapers telephone,security guards,

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Structure and components of compensation

 Service perquisites
 Org. also a number of services
employees
provide find desirable. These service are usually
that
provided by the organization at no cost to the
employee at a significant reduction from what might
have to be paid without the organization support.
 Free or subsidized housing, fooding, clothing,
work transportation etc.
 Child care facilities (day care, nurseries)
 Financial and legal services
 Purchasing services
 Educational, medicinal, outplacement services.

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Some Examples-
1.Bonus (direct )- A day of bonus is different in different
countries like in America bonus is given on new year, in
India it is on the Hindu festival Diwali. Similarly, it is
different in Australia, Netherlands, Greece etc.
2.Hospitalization (indirect)- medical insurance,
medical bills payments, concessions in selected
hospitals
the Indian government policy of CGHS (central
govt.Health scheme) provides free medical services for
certain problems in specific hospitals.
3.Holiday Homes- benefits of accommodation while
travelling. Some organization have holiday homes and
they provide their employees at lower cost for vacation
(SBI,court, etc.)
4.Flexible Times- Giving flexible time off leaving and
coming to the office provides
Process of Compensation Management
Performed
job analysis

Implementation
Conduct pay or
of wages and
salary
salaries
surveys

Analyze
Forming pay relevant
administration organizational
rules problems

Preparation of
pay
structure Page 11
Process of Compensation Management
 Performing job Analysis: job has
analysis major outcomes, job two and
description After which the rating of the job occurs.
specification.
A job evaluation is the process of determining the job
value of the job related to other job. And it is also
concerned with converting the work value to
monetary value.
 Conducting pay surveys: in the another step the
actual amount to be paid is determined with the wage
and salary surveys. The information is collected with.
 Benchmarking

 Packaging surveys

 Own surveys

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Process of Compensation Management
 Analysis of organizational problems:
determination of pay requires more than wage and
salary surveys. Dozens od variable can affect wage
structure. HR manager may be interested in following
queries.
 What should be the relationship between the pay

structure and fringe benefit?

 Would the firm recruit new employee after revised

pay structure?
 Are the prevailing rates in industry consistent with

the result of the job evaluation?

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Process of Compensation Management
 Preparation of Pay Structure: it is the joint outcome of
above three steps. For the purpose of determining pay
structure a lot of decisions need to be taken. For example.
 Weather to pay amounts equal, above or below
industry level?
 The number of width of pay grades and the extent of

overlap.
 Forming pay administration rules: as the rates ranges
have been determined, the development of rules/policies
of pay system has to be fixed. A lot of the policies and
rules required to answer:
 A trade of between seniority and merit basis

 The frequency of pay increases

 How to control salary and wage costs

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Process of Compensation Management
 Implementation of wages and salaries: finally, it
should be implemented and controlled by authorized
executives. Due to the seniority of pay system, it is
usually assigned to a committee composed of high-
ranking officers. This committee may require frequent
advise and help from technical HR staff.

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 Wages

wage refers to the remuneration paid to the workers appointed on

hourly, daily or weekly basis in return for the service rendered.
It varies according to physical and mental requirement of the job
a.minimum wage,
b.fair wage
c.and living wage
i. Minimum Wage:
It is that wage which is sufficient to meet the basic need of a worker
and his family.
“the wage must provide not only for the bare sustenance of life, but for
the preservation of the efficiency of the workers. For this purpose,
minimum wage must provide some measures of education, medical
requirements and amenities”.
ii. Fair Wage:
According to committee on fair wage “fair wage is the wage which is
above the minimum wage but, below the living wage”.
The lower limit of the fair wage is the minimum wage; the
upper limit is set by the capacity of the industry to pay.
Fair wage depends on several factors-
(a)The productivity of labour
(b) The prevailing rates of wage in the same or neighboring
localities.
(c) The level of national income and its distribution.
(d) The place of industry in the economy of the country.
iii. Living Wage:
It is the wage that provides some of the comforts of life. It provides certain
amenities considered necessary for the well-being of the worker.
bare essentials of food, clothing and shelter but also includes
• education for children,
• protection against ill health,
• requirements of essential social needs and
• measure of insurance
Salary
Structure
Net Salary-This is the salary that you get in your hands
and is also called the ‘in-hand’ salary.
This is the amount you get (or pay) after deduction, such
as Provident Fund (PF), Employee State Insurance (ESI),
Professional Tax (PT), Tax Deducted at Source (TDS),
loss of pay and other deductions, as applicable by the
company.
Gross salary
This is the total earning of an employee, excluding
statutory and non-statutory deductions. It also includes
loss of pay based on employee’s attendance.
CTC
CTC or cost-to-company is the total monetary benefit provided by the employer
for the complete financial year. This will include components, such as the PF
contribution from the employer, gratuity provision, any insurance that is being
provided, or any other benefits.
Fixed pay and variable pay
Fixed pay is the fixed amount of money paid by an employer to its employees
in exchange for services rendered by them, in the form of a fixed salary. Fixed
pay is the accrual salary mentioned in the salary slip with basic and multiple
allowances. It is the fixed amount received every month by the employees.
variable pay -It is the part of pay that can change based on performance and
other factors.
also called performance- based salary or performance-linked incentive.
It can come in the form of bonuses, commissions, and incentives
.
Basic salary
Basic salary is the base income of an employee, comprising of approximately 50
percent of the CTC.
It is a fixed amount that is paid prior to any reductions or increases due to bonus,
overtime, or allowances.
Basic salary is determined based on the designation of the employee and the
industry in which they are working in.
Most of the other components, like allowances, are based on the basic salary.
This amount is fully taxable
Allowances
an amount payable to employees during their regular employment.
It can be partially or fully taxable, depending upon the type of allowance.
their respective limits will differ from one company to another, as per their respective
policies.
Types of allowances
1) Dearness allowance (DA): Dearness allowance is a certain percentage of the basic
salary paid to employees, aimed at mitigating the impact of inflation.

Under section 3 of the Minimum Wages Act, DA is described as cost of living allowance It
is paid by the government to employees of the public sector and pensioners of the
same.
Dearness allowance is fully taxable whether it is “in terms” or “not in terms

In India it has become integral part of the wage system.

.
2) House rent allowance (HRA): House rent allowance is paid to employees to
meet their monthly rental expenses for housing/ accommodation.
It offers tax benefits to employees for the sum that they pay towards their
housing/ accommodation every year. Salaried individuals residing in rented homes
can claim this exemption and reduce their tax liability either fully or partially. If an
employee doesn’t live in a rented accommodation, this allowance is fully taxable.
Least of the following amount will be exempt u/s 10(13A):
40%/50%* of basic salary and dearness allowance (DA)
Actual amount received
Rent paid – 10 percent of basic salary and dearness allowance (DA) FY 2020-21 (AY
2021-22)
3) Conveyance allowance: Conveyance allowance, also known as
transportation allowance, is an incentive offered to employees to compensate
for their travel expenses to and from their residence and workplace.
4) Leave travel allowance (LTA): Leave travel allowance is eligible for tax
exemption. It is offered to employees to cover their travel expense when the
travel occurs during a leave of absence from work. The amount paid as leave
travel allowance is exempted from tax only on the actual travel costs under
Section 10(5) of Income Tax Act, 1961.
Leave travel allowance only covers domestic travel and the mode of travel
needs to be air, railway, or public transport. The exemption is also limited to
LTA provided by the employer.
5) Medical allowance: Medical allowance is a fixed allowance paid to the
employees of an organization to meet their medical expenditure
6) City Compensatory Allowance (CCA)-an allowance provided by companies,
(public sector or private sector), to its employees to compensate for the higher
cost of living in metropolitan or Tier-1 cities

Other miscellaneous allowances : Miscellaneous allowance(MA) includes

phone allowance, shift allowance, travel allowance etc
Salary-The term salary refers to remuneration paid to the employees
appointed on monthly or annual basis in return for the service rendered.
Take Home Salary:
It is the net amount of salary received by an employee after making all the
deductions towards the payment of income tax, LIC premium and contribution
to P.F. etc.
Incentives:
Incentive is a reward paid in addition to wages whether monetary or not that
motivates or compensates an employee for performance above the
standard.
Payment of incentive depends on productivity, sales and Profit of the
organization
Fringe Benefits:
It is a general term used to describe any of a variety of non-wage or
supplemental benefits that employees receive in addition to their regular
wages. These include such employee benefits as provident fund, gratuity,
medical care, hospitalization, accident relief, paid holidays, health and group
insurance, pension etc.
Perquisites (Perks):
Perquisites also called perks are the special benefits made available only to
the top executives of an organisation. These may include
company car, furnished house, stock option scheme, club membership,
paid holidays etc.
 Factors influencing Compensation
The Organisation’s Ability to Pay: Companies that have
good sales and, therefore, high profits tend to pay higher
wages than those which running at a loss or earning low
profits because of the high cost of production or low sales.
Supply of and Demand for Labour:
The labour market conditions or supply and demand forces
operate at the national, regional and local levels, and
determine organisational wage structure and level.
If the demand for certain skills is high and the supply is low,
the result is a rise in the price to be paid for these skills.
Prevailing Market Rate:also known as the ‘comparable wage’
or ‘going wage rate’, and is the most widely used criterion.
The Cost of Living: When the cost of living increases,
workers and trade unions demand adjusted wages, when living
costs are stable or decline, the management does not resort to
this argument as a reason for wage reductions.
Productivity:is measured in terms of output per man-hour.
It is not due to labour efforts alone
Technological improvements, better organisation and
management, the development of better methods of production
by labour and management
are all responsible for the increase in productivity
Methods of Employee Compensation

There are various method of compensation available in

HRM. A single organization can use single or two or
more methods at a time.
 Base plus cost of living allowance (BCOLA)

 Scale plus cost of living allowance (SCOLA)

 Cash incentives

 Bonus or variable pay

 Broad banding method

 Job or skill based pay method

 Merit pay method

 Other forms of compensations.

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Base plus cost of living allowance (BCOLA)
 This method is based on two factors viz, base and
allowance. Every organization has their base salary
for all the types of jobs.
 On and above that employees are provided with
cost of living allowance.
 COLA Is an adjustment to the base salary by a
percentage that is assumed to match increases in
cost for good and services
 on a national regional or local level or account for
change in the market. TA & DA

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Scale plus cost of living allowance (SCOLA)
 This is the second method of compensation used by
many organizations. It also has two components viz.
scale level for a particular level of job plus the COLA
given. Many companies set a range of pay rates from
minimum to maximum, designed for specific pay
grades.
 range of pay rates for each job position
 based on factors such as education, experience,
skills, and job duties
 On and above that a cost of living
adjustment/allowance is given to the employees as
discussed in first method.

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 Cash incentives: this is the third method
in compensation. This method takes
method
one explained
of above.
the two Again the employee
given, additional compensation is
reward him/her for exceeding performance goalsand
to motivate in
the form of cash incentives.
 Bonus or Variable Pay: it is another method that is
used by many organizations to compensate their
employee according to their contributions. Bonus or
variable pay plan method is an incentive pay plan
which awards employee compensation in addition to
their basic salary. It is given for achieving, individual
or group performance and productivity goals.
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 Broad Banding method: Broad banding means
collapsing salary grades and ranges into just a few
wide levels each of which contains a wide range of
jobs and salary levels. It creates vertical pay rates
ranges. (CFP-Certified finance planner-)
 Job or Skill based pay method: it is another type of
compensation method which is becoming vey
popular in recent years. It may be due to high
demand for skills experience, and education trend in
the market. In a real sense it is salary differentiation
system that bases compensation on an individual
education experience, knowledge, skills or
specialized traning.Digital Marketing SEO,SEM
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 Merit pay method: it is also a very popular method
of compensation used by majority of organizations in
recent days. Merit pay is a compensation system
where by base pay increase are determined by
individual performance.
 Other forms of compensation: these techniques
are only supplementary in nature than an established
method. Some examples are: award programs,
sabbaticals team based pay and so on.

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Let us understand this with the help of an example.
Suppose Mr. XYZ works in Bihar in an ABC company
and has a basic salary of Rs. 35,400. Here are the
other components of his salary:
•Basic Salary: Rs. 35,400
•Dearness Allowance: Rs. 6,018 (17% of Basic Pay)
•House Rent Allowance: Rs. 8,496 (24% / X Cities)
•Travelling Allowance: Rs. 4,212 (Level-6 / A1 Cities)
•Gross Salary: Rs. 54,126
•Deduction for NPS: Rs. 4,142
•In-Hand Salary / Net Salary: Rs. 49,984
Grade Pay : Government employees receive grade pay which depends
on the category/class of employee. Actually grade pay depends on the
seniority and the position of the employee in the government.
Basic Pay :- This is the core of salary, and many other components may
be calculated based on this amount. It usually depends on one’s grade
within the company’s salary is a fixed part of one’s compensation
structure. Many allowances and deductions are described in terms of
percentage of the Basic Salary.
Pay Scale :- It is the range of the salary you are entitled to receive during
your tenure in company.
For eg :- If payscale is Rs( 5240-20000).
Number1 - 5240 : It is the basic pay at which your salary is calculated
when you are appointed.
Number2 - 20000,: It is the maximum basic pay a person can receive in a
designated post.
.
Examples -7th CPC Pay Commission report for Central Govt Jobs
Pay Band 1: Pay Scale 5200-20200

Grade pay in PB-1 can be 1800, 1900, 2000, 2400, 2800 depending on post of the candidate.

Posts that are given Pay Band 1 salary include Group D, Clerk, LDC, Laboratory Attendant,
Technician, Assistant, Radiographer, Lineman etc.

Pay Band 2: Pay Scale 9300-34800

Grade pay in PB-2 can be 4200, 4600, 4800, 5400 depending on post.

Posts that are given Pay Band 2 salary include Junior Engineer, UDC, TGT, PGT, PRT Teachers,
Investigator etc
Pay Band 3: Pay Scale 15600-39100

Grade pay in PB-3 can be 5400, 6600, 7600 depending on post.

Posts that are given Pay Band 3 salary include SDO / SDE, Assistant Professor, Director,
IAS Officer etc.
Pay Band 4: Pay Scale 37400-67000

Grade pay in PB-4 can be 8700, 8900, 10000 depending on post.

Posts that are given Pay Band 3 salary include Professor, Accountant General /Principal
Director etc.
Compensation and incentive for management
employees
 Concept and needs: the executives of the company
plays an important role for looking the economic
health of the company. As they are important for the
success, growth and profitability of an organization
they have to be compensated properly. To make the
executive happy as far as possible, companies have
been giving in recent years bigger and more frequent
rise in salaries.
 The executive compensation cost a sizeable cost

and rising cost.

 The payment can be in form of, medical care,

professional services in legal and financial matters,

facilitates for entertaining customers and for dining,
customer recreational services. Page 21
Why organization needs separate plan for managers?
Components of executives compensations and incentives
 The executives total compensation package consists of four
package for short term and long term incentive perquisites.
 Basic Salaries: fixed element of pay and it does not

normally vary in relation to company performance.

 Short term incentives: they are awarded annually.

Award incentives reflect hierarchical position relationship

in most cases with higher opportunities relative to higher
position and vice versa.
 Long term incentives; the payments is based on the

performance for the period beyond one year

 Benefits/perquisites: it is not based on the quantity

benefits, this consists of company cars, club membership,

housing etc.

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Purposes and Uses of Compensation
Total compensation is important because of the several
purposes it can serve including.
 To attract potential job applicants: In relation with
the organizational recruitment and selection efforts
the compensation program can help assure that pay
is sufficient to attract the right people at right time for
the right jobs.
 To retain good employee: internally equitable and
externally competitive compensation scheme help to
retain the employee.
 To motivate employee: it acts as a tool of motivation
to increase the productivity or potential of the
employees.
Page
Purpose and use of Compensation
 To administer pay within legal requirements: there
are many organizations to monitor the compensation
payment according to the law so to avoid the
violation of the law the compensation should be
provided to the employees.
 To facilitate organizational strategic objectives:
the organizational may want to create a very
rewarding and supportive climate. And to attract the
potential candidate for the job the proper
compensation scheme could be the effective tool to
attain the strategic objectives like rapid growth,
survival and innovation.

Page
Issues in management compensation
 Executives compensation has assumed importance in recent
years. They are increasing ever years and has become
public comment. The issue covers three major aspects.
 What and how much are the executives paid?

 Why are they paid heavy remuneration?

 What issues are involved in payment of

higher
remuneration?
 The reasons are:
 First, the management compensation differs
country to country and they are kept confidential.
 Second, they are paid for the talents, and to satisfy their

GREED honest business practices must be adopted.

 Third, higher salariesand benefit do not
guarantee motivation Page 43
Job Evaluation System (Process)
 Job evaluation is the process of determining the relative
worth od various jobs within the organization, so that
different wages may be paid to jobs of different worth.
 It is the quantitative measurement of relative job worth

 Its purpose is to establish consistent

wage rate differentials by objective means.
 It measures the differences between job requirements.

 It does not set the price of the job; it merely fixes its

relative worth.
 It rates the job, not the qualities of the
individual employees on the job.
 Job evaluation process ignores individual
abilities or the performance of the jobholder.

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Job Evaluation System (Process)

• Formal or informal? • Ranking

• Make or buy? • Classification
• Who? • Factor comparison
• point

Preliminary Selecting Developing Evaluating

planning Method plan jobs

Job Job
Analysis Description

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 © Kamal Subedi, 2016

Job Evaluation System (Process)

 Preliminary planning: it is the first issues whether to

conduct job evaluation formally or informally. The
formal evaluation is relatively systematic application
of standards and decision rules to rank or rate jobs. It
is longer and costly process.
 Selecting the job evaluation plan: four common job
evaluation methods are available viz., marketing,
classification, factor comparison, and point. The point
method is basically the most widely used method.
 Developing the plan: in this third step, a job
hierarchy is developed by comparing the content of
various jobs against the specified standards using
predetermined procedures.
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 © Kamal Subedi, 2016

Job Evaluation System (Process)

 Evaluating jobs: job cannot be adequately evaluated

without accurate up-to-date information about job duties and
responsibilities. Very often members of the job evaluation
committee also observe the job and interview.
 Job holders and supervisors to obtain additional
information for the evaluation.
 It is preferable for evaluations to be done

independently by two or more evaluators.

 where disagreements exists, the reason should be

explored and more information about jobs should be

gathered if necessary.
 Differences should be resolved through discussion.

 The above process helps in validating the job

hierarchy.
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 © Kamal Subedi, 2016

Job Evaluation Methods

 There are two basic types and four methods of

job evaluation.
 Non-analytical methods

 Ranking method
 Job classification or grading method

 Analytical Method
 Point (rating) method

 Factor comparison method

Reference:

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 © Kamal Subedi, 2016

Non Analytical Methods

 Ranking Methods: The ranking method is the

simplest form of job evaluation. In this method, each
job as a whole is compared with other and this
comparison of jobs goes on until all the jobs have
been evaluated and ranked. All jobs are ranked in the
order of their importance from the simplest to the
hardest or from the highest to the lowest.
 The importance of order of job is judged in terms of
duties, responsibilities and demands on the job
holder. The jobs are ranked according to “the whole
job” rather than a number of compensable factors.

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 © Kamal Subedi, 2016

Ranking Method

 The application of the Ranking Method involves the

following procedure:
 Analyze and describe jobs, bringing out those aspects which
are to be used for purpose of job comparison.
 Identify bench-mark jobs (10 to 20 jobs, which include all
major departments and functions).
 Rank all jobs in the organization around the bench-mark
jobs until all jobs are placed in their rank order of
importance.
 Finally, divide all the ranked jobs into appropriate groups or
classifications by considering the common features of jobs
such as similar duties, skills or training requirements. All the
jobs within a particular group or classification receive the
same wage or range of rates.

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 © Kamal Subedi, 2016

Ranking Methods

 Merits:
Ranking method has the following merits:
1. It is the simplest method.
2. It is quite economical to put it into effect.
3. It is less time consuming and involves little paper work.
 Demerits:

The method suffers from the following demerits:

1.The main demerit of the ranking method is that there are no
definite standards of judgment and also there is no way of
measuring the differences between jobs.
2. It suffers from its sheer unmanageability when there are a large
number of jobs.

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 © Kamal Subedi, 2016

Job Classification or Grading Method

 Grading method is also known as ‘classification method’. This
method of job evaluation was made popular by the U.S. Civil
Service Commission. Under this method, job grades or classes are
established by an authorized body or committee appointed for this
purpose.
 A job grade is defined as a group of different jobs of similar difficulty
or requiring similar skills to perform them. Job grades are
determined on the basis of information derived from job analysis.
 The grades or classes are created by identifying some common
denominator such as skills, knowledge and responsibilities.
 Once the grades are established, each job is then placed into its
appropriate grade or class depending on how well its characteristics
fit in a grade. In this way, a series of job grades is created. Then,
different wage/salary rate is fixed for each grade.

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 © Kamal Subedi, 2016

Job Classification or Grading Method

 Merits:
The main merits of grading method of job evaluation are:
1. This method is easy to understand and simple to operate.
2. It is economical and, therefore, suitable for small organizations.
3.The grouping of jobs into makes
classifications determination problems easy to pay
administer.
4. This method is useful for Government jobs.
 Demerits:

The demerits
1.The of this
method method
suffers frominclude:
personal bias of the
committee members.
2.It cannot deal with complex jobs which will not fit neatly into one
grade.
3. This method is rarely used in an industry.
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 © Kamal Subedi, 2016

Analytical Methods
Points Rating:
 This is the most widely used method of job
evaluation. Under this method, jobs are broke down
based on various identifiable factors such as skill,
effort, training, knowledge, hazards, responsibility,
etc. Thereafter, points are allocated to each of these
factors.
 Weights are given to factors depending on their
importance to perform the job. Points so allocated to
various factors of a job are then summed. Then, the
jobs with similar total of points are placed in similar
pay grades. The sum of points gives an index of the
relative significance of the jobs that are rated.
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 © Kamal Subedi, 2016

Points Rating

 Merits:
The method has the following merits:
1. It is the most comprehensive and accurate method of
job evaluation.
2. Prejudice and human judgment are minimized,
i.e. the system cannot be easily manipulated.
3. Being the systematic method, workers of
the organization favor this method.
4. The scales developed in this method can be used for
long time.
5. Jobs can be easily placed in distinct categories.

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 © Kamal Subedi, 2016

Points Rating

 Demerits:
The drawbacks of the method are:
1. It is both time-consuming and expensive method.
2. It is difficult to understand for an average worker.
3. A lot of clerical work is involved in recording
rating scales.
4. It is not suitable for managerial jobs wherein the work
content is not measurable in quantitative terms

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Factor Comparison Method

 This method is a combination of both ranking and point methods

in the sense that it rates jobs by comparing them and makes
analysis by breaking jobs into compensable factors. This system
is usually used to evaluate white collar, professional and
managerial positions.
 The mechanism for evaluating jobs under this method
involves the following steps:
 First of all, key or benchmark
the jobs are selected as standards. The
contents,key
well accepted
jobs pay rates
selected
in the community,
should
and should
consist have
of a representative
standards cross-section of all jobs that are
being evaluated-from the lowest to the highest paid job, from the
most important to the least important—and cover the full range
of requirements of each factor, as agreed upon by a Committee
representing workers and management.
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Contd.
 The factors common to all jobs are identified,
selected and defined precisely. The common factors
to all jobs are usually five, viz., mental requirements,
physical requirements, skill requirements, working
conditions and responsibility.
 Once the key jobs are identified and also the
common factors are chosen, the key jobs are, then,
ranked in terms of the selected common factors.
 The next step is to determine a fair and equitable
base rate (usually expressed on an hourly basis)
and, then, allocate this base rate among the five
common factors as mentioned earlier. Following is a
specimen of base rate and its allocation scheme:
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Factor Comparison Method

 Merits:
This method enjoys the following merits:
 It is more objective method of job evaluation.

 The method is flexible as there is no upper limit

on the rating of a factor.
 It is fairly easy method to explain to employees.

 The use of limited number of factors (usually five)

ensures less chances of overlapping and over-
weighting of factors.
 It facilitates determining the relative worth of different
jobs.

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Factor Comparison Method

 Demerits:
The method, however, suffers from the following
drawbacks:
 It is expensive and time-consuming method.

 Using the same five factors for evaluating jobs may

not always be appropriate because jobs differ across
and within organizations.
 It is difficult to understand and operate.

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Pay for Performance/Incentive Pay

 Incentive pay, also known as "pay for performance" is

generally given for specific performance results
rather than simply for time worked. While incentives
are not the answer to all personnel challenges, they
can do much to increase worker performance.
 The components of the pay based system are:
 Merit pay systems: they affect a relatively small

percentage of an individual’s total salary. Because it

is generally used only to move an individual’s
compensation within rate range.
 Incentive systems: in it performance is often

measured by standards of productivity and direct

indexes of individual, group or organizations.
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Challenge of PBP

 The challenges associated with the performance

based pay are as follows:
 What are the obstacles to the design of effective

performance based pay system? How can they be

removed?
 What are the limits on an organization’s decision to

use a performance based pay plan. Which plan is

the best?
 Can companies really afford to reward people for

good performance?
 Should companies use performance based pay,

especially incentive pay?

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Incentive systems (A tool of PBP)

 Incentive pay is any formal and announced program

under which the income of an individual, a small
group, a plant work force or all the employees if a
firm are partially of wholly related to some measures
of productivity output.
 Developing incentives plan (system)
 Establishing the minimum job rates

 Establish performance standards

 Determine incentive rates

 Establish process for changing standards

 Try out the incentive plan on an experiment basis

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Types of incentives pay plans

 Individual incentive pay plans

 The piecework plan

 The standard hour work plan

 Sales incentives plan

 Managerial incentive plans

 Other types of plans

 Group level incentive pay plans

 Production incentive program

 Department head incentive

program
 Professional incentive

program
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Types of incentives pay plans

 Organizational level incentive plans

 Profit sharing plans

 The Scanlon plan

 Gain sharing plans

 Employee stock ownership plan

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Employee benefits and services

 Indirect non cash compensation paid to an employee

by the employing organization is called benefits.
Some benefits are mandatory by law such as social,
security etc.
 The different types of benefits/services
 Economical financial benefits

 Recreational social services

 Professional services

 Family welfare services

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Issues of Compensation

 The different issues of the compensation pay plan in

Nepal are listed below:
 The issue of the minimum wages

 The issue of comparable worth

 The issue of pay secrecy

 The issue of inflation and salary compression

 The issue of cost of living differentials

 The issue of pay reviews

 The issue of employee participation

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Government regulations of compensation

 The legal environment and pay system is

not satisfactory in the context of Nepal.
 Government legislation

 Different acts

 Labor act 2048 and labor regulation

 Bonus act
 Public service regulation
 Company act 1996
 Interim constitution of Nepal, 2063
 Constitution of Nepal 2072

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Contd.

 Labor laws
 Equal pay/no discrimination
 Minimum wages
 Provident fund
 Overtime payment
 Other provisions
 Bonus Act

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Contd.

 Pay system governance (institutional framework)

 Department of labor (DOL)

 Wage boards

 Pay commission committee

 Tribunals

 Labor court

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Contd..

 Pay practices
 Governmental organizations

 Private sector organizations

 Private banks and financial institutions

 Non governmental organizations

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Thank You 