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Chapter 11 & 13
Employee Compensation, Benefits and Services
(Reading materials/lecture notes)
Text book: Human Resource Management, Gary Dessler, 14th edition/global edition
Prepared by: Prof Dr. Mohd H R Joarder
Introduction:
Compensation or Remuneration is a systematic approach to provide monetary value to employees
in exchange for work performed by them is called as compensation or remuneration.
Compensation may achieve several purposes assisting in recruitment, job performance and job
satisfaction. In the case of Human Resource Management, compensation is referred to as money
and other benefits that are received by an employee for providing services to his employer. Money
and benefits received may be in different forms — based compensation in money or monetary
form and various benefits, these may be associated with employee’s service to the employer like
provident fund, gratuity and insurance scheme and any other payment which the employee receives
or benefits he enjoys in lieu of such payment.
Learning Objectives
1.
2.
3.
4.
5.
6.
Understanding the concepts of employee compensation and benefits
List the basic factors determining pay rates
How to conduct a job evaluation
Discuss the main retirement benefits
Outline the main employees’ services benefits; and
Differences between competency-based and traditional pay
Employee compensation: Meaning & concept by experts
Compensation is one of the most important parts of an employment contract that brings in people
from outside and makes them members of an organization. It is payment to an employee in return
for their contribution to the organization, that is, for doing their job. The most common forms of
compensation are wages, salaries and tips. However, it is usually provided as base pay and/or
variable pay. Base pay is based on the role in the organization and the market for the expertise
required to conduct that role, while variable pay is based on the performance of the person in that
role. According to Wayne Mondy, compensation is the total of all rewards provided to employees
in return for their services. He added that the overall purpose of granting compensation is to attract,
retain and motivate employees. According to Gary Dessler, compensation means all forms of pay
or rewards going to employees and arising from their employment. Terry Leap opines,
compensation is a broad term pertaining to financial rewards received by persons through their
employment relationship with an organisation. On the other hand, Cascio states, compensation
includes direct cash payments indirect payments in the form of employee benefits and incentives
to motivate employee to strive for higher levels of productivity.
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PGDHRM
Compensation & Benefits
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Exempt and Non-Exempt
Jobs in organizations have two classifications, exempt and non-exempt. Professional,
management and other types of skilled jobs are classified as exempt. Exempt jobs get a salary,
that is, a fixed amount of money per time interval, usually a fixed amount per month. It's not
uncommon for exempt positions to receive higher compensation and benefits than non-exempt
jobs, although non-exempt jobs often can make more money than exempt jobs simply by working
more hours. Unskilled or entry-level jobs are usually classified as non-exempt. Non-exempt
jobs usually get a wage, or an amount of money per hour. Non-exempt jobs also get paid overtime, that is, extra pay for hours worked over 40 hours a week or on certain days of the week or
on holidays.
Different types of compensation include:
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Base Pay
Commissions
Overtime Pay
Bonuses, Profit Sharing, Merit Pay
Stock Options
Travel/Meal/Housing Allowance
Benefits including: dental, insurance, medical, vacation, leaves, retirement, taxes...
How is compensation used?
Compensation is a tool used by management for a variety of purposes to further the existence of
the organization, and it may be adjusted according the business needs, goals, and available
resources. Some of the major reasons are given here that compensation may be used to:
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attract, recruit and retain qualified employees,
increase or maintain morale/satisfaction of the employees,
reward, motivate and encourage higher performance,
establish/achieve internal and external equity, and
reduce turnover, incidents of grievances and encourage dedication and loyalty.
Recruitment and retention of qualified employees is a common goal shared by many employers.
To some extent, the availability and the cost of qualified applicants for open positions is
determined by market factors beyond the control of the employer. While an employer may set
compensation levels for new hires and advertise those salary ranges, it does so in the context of
other employers seeking to hire from the same applicant pool. Morale and job satisfaction are also
affected by employees’ compensation. Often there is a balance (equity) that must be reached
between the monetary value the employer is willing to pay and the sentiments of worth felt by the
employee. In an attempt to save money, employers may opt to freeze salaries or salary levels at
the expense of satisfaction and morale. Conversely, an employer wishing to reduce employee
turnover may seek to increase salaries and salary levels.
Dr. Mohd H R Joarder
PGDHRM
Compensation & Benefits
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Basic factors in determining pay rates
Employee compensation includes all forms of pay going to employees and arising from their
employment. It has two main components such as:
(i)
(ii)
direct financial payments (wages, salaries, incentives, commissions, and bonuses)
indirect financial payments (employer-paid insurance, vacations).
First direct pay option: Employers can make direct financial payments to employees based on
increments of time or based on performance. Time-based pay still predominates. Blue-collar and
clerical workers receive hourly or daily wages; and others like managers tend to be salaried and
paid weekly, monthly or yearly.
Second direct pay option: the second direct payment option is to pay for performance, for
example, piecework ties compensation to the amount of production the workers turns out. Sales
commissions tie pay to sales. However, many employers’ pay plans combine time-based pay
and incentives. Several factors should influence any pay plan’s design. These include strategic
policy consideration, as well as equity, legal, and union considerations.
(i)
(ii)
(iii)
(iv)
Strategic policy consideration
Equity
Legal
Union consideration
The compensation plan should first advance the firm’s strategic aims-management should produce
an aligned reward strategy. This means creating a compensation package including wages,
incentives and benefits that produces the employee behaviors the organization needs to achieve its
competitive strategy.
Equity and pay rates
The equity theory of motivation postulates that people are motivated to maintain a balance
between what they perceive as their contributions and their rewards. The theory states that if a
person perceives an inequity, a tension or drive will develop that motivates him or her to reduce
the tension and perceived inequity. Research tends to support equity theory, particularly as it
applies to those underpaid. In one study turnover of retail buyers was significantly lower when the
buyers perceived fair treatment in rewards and in how employers allocated rewards. Overpaying
can sometimes backfire too, perhaps due to feelings of guilt or discomfort.
In compensation, one can address external, internal, individual, and procedural equity. External
equity refers to how a job’s pay rate in one organization compares to the job’s pay rate in other
organization. Internal equity refers to how fair the job’s pay rate is when compared to other jobs
within the same organization in the similar position. Individual equity refers to the fairness of an
individual pay as compared with what his/her coworker is earning for the same or very similar jobs
within the organization, based on each person’s performance, and the procedural equity refers to
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the ‘perceived fairness of the process and procedures used to make decisions regarding the
allocation of pay.
How to address the equity issue?
Managers use various means to address such equity issues, for example, they use salary survey
to monitor and maintain external equity. They use job analysis and comparisons of each job to
maintain internal equity. They use performance appraisal and incentive pay to maintain
individual equity, and they use communications, grievances mechanisms, and employees’
participation to help ensure that employees view the pay process as procedurally fair. Some
organizations administer surveys to monitor employees’ pay satisfaction. Questions typically
include, ‘how satisfied are you with your pay?, and ‘what factors do you believe are used when
your pay is determined’?. To head off discussions that might prompt feelings of internal inequity,
some organizations maintain strict secrecy over pay rates with mixed results.
Legal considerations in compensation
Employers do not have free reign in designing pay plans, and various laws specify like minimum
wages, overtime rates and benefits. One familiar provision governs overtime pay. It says
employers must pay overtime at a rate of at least one-and-half times of normal pay for any hours
worked over 40 in a work week.
Union influences on compensation decisions
Unions and labor relations laws also influence pay plan design. The National Labor Relations
Act of 1935 (Wagner Act) granted employees the right to unionize and to bargain collectively.
Historically, the wage rate has been the main issue in collective bargaining. However, union also
negotiate other pay related issues including time off with pay, income security, cost-of-living
adjustments, and health care benefits.
Geographical consideration
How to account for geographic differences in cost of living is another big pay policy issue. For
example, the average base pay for an office supervisor ranges from about $49,980 in Florida to
$60,980 in New York. Let’s consider the cost of living differences in Dhaka and Barisal district.
Employers handle cost of living differentials for transferees in several ways. One is to pay a
differential for ongoing costs in addition to a one-time allocation.
Job Evaluation Methods
Employers use two basic approaches to setting pay rates such as,
(i)
(ii)
Market-based approach
Job evaluation methods
Many organizations particularly smaller ones, simply use a market-based approach, and for this
they conduct formal and informal salary surveys to determine what others in the relevant labor
markets are paying for particular jobs. They then use these figures to price their own jobs. Job
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evaluation methods involve assigning values to each of the organization’s jobs. This helps to
produce a pay plan in which each job’s pay is equitable based on its value to the employer.
Job evaluation is a formal and systematic comparison of jobs to determine the worth of one job
relative to another. Job evaluation aims to determine a job’s relative worth. The job evaluation is
a judgmental process and demands close cooperation among supervisor, HR specialists and
employees, and union representatives. The initial steps include identifying the need for the
program, getting cooperation, and then choosing an evaluation committee who will then perform
the actual evaluation. The committee usually consists of about five members, most of whom are
employees. Once the committee members are appointed, each member should receive a manual
explaining both the job evaluation process and how to conduct the job evaluation. Job evaluation
eventually results in a wage or salary structure or hierarchy. The basic principle of job evaluation
is this: jobs that require greater qualifications, more responsibilities, and more complex job
duties should receive more pay than jobs with lesser requirements. The basic job evaluation
procedure is to compare jobs in relation to one another- for example, in terms of required
effort, job complexity, and skills.
Compensable Factors
We can use two basic approaches to compare the worth of several jobs. First, we might decide
that one job is more important than another is, and not dig any deeper. As an alternate, we could
compare the jobs by focusing on certain basic factors the jobs have in common. Compensation
management specialists call these compensable factors, and they are the factors that establish how
the jobs compare to one another, and that determine the pay for each job. According to Gary
Dessler, compensable factor is the fundamental, compensable elements of a job such as skills,
efforts, responsibility, and working conditions. Some employers develop their own
compensable factors, however most use factors popularized by packaged job evaluation systems
or by federal legislation (in US context). For example, the Equal Pay Act uses four compensable
factors such as skills, effort, responsibility, and working conditions. The method popularized
by the Hay consulting firm emphasizes three factors: know-how, problem solving, and
accountability, while Walmart uses knowledge, problem solving skills, and accountability
requirements. Identifying compensable factors plays a central role in job evaluation. We usually
compare each job with all comparable jobs using the same compensable factors. However,
compensable factors we use depend on the job and the job evaluation method.
Job Evaluation Methods: Ranking Method
The simplest job evaluation method ranks each job relative to all other jobs, usually based on some
overall factor like ‘job difficulty’. According to Gary Dessler, ranking method is the simplest
method of job evaluation that involves ranking each job relative to all other jobs usually based on
overall difficulty level of the job. This is the simplest job evaluation method and easiest to explain
which takes less time than other methods like job classification and point 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
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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. The ranking of jobs in a University, based
on Ranking Method, may be like this: Professor/Registrar; Reader/Deputy Registrar;
Lecturer/Assistant Registrar.
There are several steps in the job ranking method, such as:
(i)
(ii)
(iii)
(iv)
(v)
Obtain job information
Select and group job
Select compensable factors
Rank jobs
Combine ratings
Merits of the Ranking Method:
Ranking method has the following merits:
(i)
(ii)
(iii)
It is the simplest method.
It is quite economical to put it into effect.
It is less time consuming and involves little paper work.
Demerits of the Ranking Method:
The method suffers from the following demerits:
(i)
(ii)
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.
It suffers from its sheer unmanageability when there are a large number of jobs.
Job Evaluation Methods: Job Classification/Grading Method
Job classification or job grading is a simple, widely used job evaluation method in which raters
categorize jobs into groups where all the jobs in each group are of roughly the same value for pay
purpose. We call the groups classes if they contain similar jobs, or grades if they contain jobs that
are similar in difficulty but otherwise different. Here classes refer grouping jobs based on a set of
rules for each group or class such as amount of independent judgment, skill, physical effort,
and so forth required, classes usually contain similar jobs while grades often contain
dissimilar jobs, and is written based on compensable factors listed in classification systems.
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. The example of job grades may
include, depending on the type of jobs the organisation offers, skilled, unskilled, account clerk,
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clerk-cum-typist, steno typist, office superintendent, laboratory assistant and so on. 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.
Merits of the Job Classification Method:
The main merits of grading method of job evaluation are:
(i)
(ii)
(iii)
(iv)
This method is easy to understand and simple to operate.
It is economical and, therefore, suitable for small organizations.
The grouping of jobs into classifications makes pay determination problems easy to
administer.
This method is useful for Government jobs.
Demerits of the Job Classification Method:
The demerits of this method include:
(i)
(ii)
(iii)
The method suffers from personal bias of the committee members.
It cannot deal with complex jobs which will not fit neatly into one grade.
This method is rarely used in an industry.
Job Evaluation Methods: Point Method
The point method’s overall aim is to determine the degree to which the jobs are evaluated contain
selected compensable factors. It involves identifying several compensable factors for the jobs, as
well as the degree to which each factor is present in each job. 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.
The procedure involved in determining job points is as follows:
Determine the jobs to be evaluated. Jobs should cover all the major occupational and levels of
responsibility to be covered by the method. Decide on the factors to be used in analyzing and
evaluating the jobs. The number of factors needs to be restricted because too many factors result
in an over-complex scheme with overlap and duplication between factors. Define the factors
clearly in written. This is necessary to ensure that different job raters interpret a particular factor
in the same sense. Determine degrees of each factor and assign point value to each degree. Point
values are assigned to different degrees on the basis of arithmetic progression. Finally, money
values are assigned to points. For this purpose, points are added to give the total value of a job. Its
value is then translated into money terms with a predetermined formula.
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Merits of the Point Method:
The method has the following merits:
(i)
(ii)
(iii)
(iv)
(v)
It is the most comprehensive and accurate method of job evaluation.
Prejudice and human judgment are minimized, i.e. the system cannot be easily
manipulated.
Being the systematic method, workers of the organisation favor this method.
The scales developed in this method can be used for long time.
Jobs can be easily placed in distinct categories.
Demerits of the Point Method:
The drawbacks of the method are:
(i)
(ii)
(iii)
(iii)
It is both time-consuming and expensive method.
It is difficult to understand for an average worker.
A lot of clerical work is involved in recording rating scales.
It is not suitable for managerial jobs wherein the work content is not measurable
in quantita­tive terms.
What is Market-competitive Pay Plan?
Many organizations simply price their jobs based on what other employers are paying-they
use a market-based approach, in other words, employee friendly pay system. However, most
employers also base their pay plans on job evaluations. These evaluations assign values to each
job which helps to produce a pay plan in which each job’s pay is internally equitable. However,
even with job evaluation approach, managers must adjust pay rates to fit the market, but
managers must ensure employees’ pay to be equitable internally- relative to what their
colleagues in the organization are earning, and this pay should also be competitive to what
other employers are paying in the similar position. In a market-competitive pay plan a job’s
compensation reflects the job’s value in the organization as well as what other employers are
paying for similar jobs in the marketplace. In a nutshell, with a market-competitive pay system,
the employer’s actual pay rates are competitive with those in the relevant labor market as well as
equitable internally. Put simply, according to Gary Dessler, the basic approach is to compare
what the employer is currently paying for each job (internal pay) with what the market (through
salary survey) is paying for the same or similar job (external pay), and then to combine this
information to produce a market-competitive pay system.
Contemporary topics in Compensation Management (Home Task/Assignment)
(i)
(ii)
(iii)
(iv)
(v)
Competency-based pay
Broad banding
Talent management
Comparable worth
Board oversight of executive pay
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(vi)
Total rewards, recognition, and employee performance
Employee Benefits and Services
HR experts define employees’ benefits are forms of value, other than payment, that are provided
to the employee in return for their contribution to the organization, that is, for doing their job.
According to Gary Dessler, Benefits-indirect financial and nonfinancial payments employees
receive for continuing their employment with the organization, are an important part of just about
everyone’s compensation. They include things like health and life insurance, pensions, time off
with pay, and child-care assistance, named a few. The benefits can be tangible and intangible.
Tangible benefits refer to retirement plans, health life insurance, life insurance, disability
insurance, vacation, employee stock ownership plans, etc and intangible benefits refer to
appreciation from a boss, likelihood for promotion, nice office etc. Employees sometimes talk
about the fringe benefits usually referring to tangible benefits, but sometimes meaning both kinds
of benefits. Truly, benefits are increasingly expensive for businesses to provide to employees, so
the range and options of benefits are changing rapidly to include, for example, flexible benefit
plans. Prominent examples of benefits are insurance (medical, life, dental, disability,
unemployment and worker's compensation), vacation pay, holiday pay, and maternity leave,
contribution to retirement (pension pay), profit sharing, stock options, and bonuses.
Employees’ benefits and services can be classified as following categories:
(i)
(ii)
(iii)
(iv)
(v)
Pay for time not worked (holidays, vacations, jury duty, funeral leave, personal days,
sick leave, sabbatical leave, maternity leave, severance pay, and unemployment
insurance payments for laid-off or terminated employees)
Insurance benefits (workers’ compensation, health insurance, and group life
insurance)
Retirements benefits (social security, pension plans, pensions and early retirements)
Personal services benefits (credit unions, legal services, counselling, and social and
recreational opportunities, work-life balance, educational subsidies) and
Flexible benefits programs (cafeteria benefits plan, flexible work schedule-flextime,
telecommuting, job sharing, work sharing)
Dr. Mohd H R Joarder
PGDHRM
Compensation & Benefits