HUMAN RESOURCE
MANAGEMENT
MIHE
Mashal Institute of Higher Education
Compensation
Chapter # 06
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Introduction of Employees Compensation

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Compensation is a critical area of human
resource (HR) management, and one that can
greatly affect employee behavior. To be
effective, compensation must be perceived by
employees as fair, competitive in the market,
motivating and easy to understand. HR
professionals might create the pay structure
for their organization, or they might work with
an external compensation consultant.
Definition of Compensation
 “The
total of all rewards provided
employees in return for their services.”
OR
 “Compensation of employees is the total
remuneration, in cash or in kind, payable
by an enterprise to an employee in
return for work done.”
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Types of Compensation
 Direct
 It
Financial Compensation
consists of the pay that a person
receives in the form of wages, salaries,
bonuses, and commissions.
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Types of Compensation
 Indirect Financial Compensation
 All
financial rewards that are not
included in direct compensation.
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Determinants of Individual Financial Compensation
The Organization
The
Labor Market
The Job
The Employee
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Determinants of individual financial compensation
 The Organization
An organization often establishes formally or
informally compensation policies that determine
whether it will be a pay leader, a pay follower, or
strive for an average position in the labor market.
1. Pay Leaders
Pay leaders are those organizations that pay higher
wages and salaries than competing firms.
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Determinants of Individual Financial Compensation
Pay Followers
Companies that choose to pay below the market rate
because of poor financial condition or a belief that
they simply do not require highly capable employees.
Pay Strivers
Average pay to employees.
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Determinants of Individual Financial Compensation
The Labor Market
Potential employees located within the geographical area from
which employees are recruited comprise the labor market.
Large organizations routinely conduct compensation surveys
to determine prevailing pay rates within labor markets.
1. Compensation Surveys
Compensation surveys provide information for establishing
both direct and indirect compensation.
2. Benchmark Job
A job that is well known in the company and industry, one that
represents the entire job structure, and one in which a large
percentage of the workforce is employed.
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Determinants of Individual Financial Compensation
 The Job
Organizations pay for the value they attach to
certain duties, responsibilities, and other jobrelated factors. Techniques used to determine
a job’s relative worth include job analysis, job
descriptions, and job evaluation.
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Determinants of Individual Financial Compensation
1. Job Analysis and Job Descriptions
Before an organization can determine the relative difficulty or
value of its jobs, it must first define their content, which it
normally does by analyzing jobs. Job analysis is the systematic
process of determining the skills and knowledge required for
performing jobs. The job description is the primary by-product
of job analysis, consisting of a written document that describes
job duties and responsibilities. Job descriptions are used for
many different purposes, including job evaluation.
2. Job Evaluation
That part of a compensation system in which a firm
determines the relative value of one job compared with that
of another.
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Determinants of Individual Financial Compensation

The Employee
In addition to the organization, the labor market, and
the job, factors related to the employee are also
essential in determining pay.
a. Performance Based Pay
Performance Appraisal data provide the input for
such approaches as merit pay, variable pay, skillbased pay, and competency-based pay.
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Determinants of Individual Financial Compensation
Types of pay:
 Base pay : receiving a fixed amount per hour, week,
month or year.
 Merit pay: fixed amount and a fixed percentage extra.
This amount is given as increase in salary.
 Performance pay: base and higher rate for units made
above the standard units. It may be individual or group
performance pay.
 Bonus: an extra amount given to employees due to good
performance.
 Stock option: offering the companies shares to the
employees at a lower rates.
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Determinants of Individual Financial Compensation

Seniority
The length of time an employee has been associated
with the company, division, department, or job is
referred to as seniority.

Experience
Regardless of the nature of the task, very few factors
have a more significant impact on performance than
experience.
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