The World of Pay and
Compensation Management
Jayendra Rimal
Introduction
 It was standard to allocate 40% of revenue for labor
costs in the manufacturing industries.
 With a move towards automation, this figure has
considerably come down.
 With more people employed by the service industry,
(more than 70% employed by service-sector organizations
in the US) the costs of the employee compensation can
easily surpass 40% of the generated revenue.
 This would suggest that compensation needs to be
managed with even more tenacity by organizations.
The Compensation Program
The major parts of a compensation program can be included
in (i) Base Wages and Salaries (ii) Wage and Salary Add-ons
(iii) Incentive Payments and (iv) Employees Benefits and
Services.
 Base Wages and Salaries:
 Seen as the most critical component by employees as their
lifestyles including the food, clothing, housing and other
necessities are determined by the paycheck after taxes
that they receive.
 Wage and Salary Add-Ons:
 This includes overtime pay, shift differentials, working on
weekends/holidays, on call pay etc. For some type of
companies these add-ons can be of permanent nature.
The Compensation Program, Contd…
 Incentive Payments:
 This type of payment is usually given for a specified output.
This is among the oldest of compensations also referred to as
pay-for-output systems. This enabled individual activities to be
monitored precisely, daily output measured and pay tied to the
outputs.
 With the rise of the service sector in many countries this type
of payment is neither feasible nor practical for many types of
jobs.
 Benefits and Services:
 This includes time off with pay due to sickness, retirement,
pay to dependants upon death of employee. Other would
include company car, cafeteria services, tuition
reimbursements, child and elder care and recreation.
 Efforts to limit the rising cost of benefits as there has been a
increasing trend.
Determining Rates of Pay
How are decisions made that determines Mr. Anil Shah will be
paid a hefty amount whereas another person with similar
experience, expertise, competencies is paid much less? Some
logical and rational reasons:
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Kinds and levels of required knowledge and skills
Kinds of business
Union-nonunion status
Capital intensive versus labor intensive
Size of business
Philosophy of management
Total compensation management
Geographic location
Supply and demand of labor
Profitability of the firm
Employment stability
Gender difference
Employee tenure and performance
Determining Rates of Pay, contd…
1. Kinds and levels of required knowledge and skills:
 In differentiating jobs for pay purposes, knowledge and skill
required carries greatest significance. It seems that highly paid
people have a common set of skills – their ability to influence
others; mastered skills in a particular discipline helping them to
reach eminence etc.
2. Kind of Business:
 Private sector jobs pay higher than public sector jobs all over the
world. Rates of pay for lower level employees do not vary to the
degree that rates of pay for top executives vary. But in Nepal it
is true that the increase in pay by the government leads to
pressure to raise pay for the private sector workers.
3. Union-Nonunion Status:
 Unionized organizations pay employees more in many countries. In
Nepal unions resort to collective bargaining for higher pay.
Determining Rates of Pay, contd…
4. Capital Intensive versus Labor Intensive
 Organizations that have low labor costs relative to revenue pay
employees higher rates of pay. Labor casts has a great influence
on profits. Labor intensive organizations require larger number of
low skilled laborers. For capital intensive companies, using more
sophisticated technology require less employees with higher levels
of knowledge and skills resulting in the demand for higher pay.
5. Size of Business:
 Larger businesses provide higher wages than smaller ones. When
products are in demand, come economies of scale and the
opportunity to increase profits resulting in increased pay.
6. Philosophy of Management:
 Some organizations pay employees as much as possible while
others have a bias about high pay. For others minimum wage laws
and market established rates prevail. Some pay high end to
attract and retain the pool of best available workers.
Determining Rates of Pay, contd…
7. Total Compensation Package:
 What does the total compensation package involve? Supplemental
wage packages include vacations, holidays, pensions, gratuity,
insurances, overtime, profit sharing etc. But incentive plans are
increasing the complexity of compensation packages.
8. Geographic Locations:
 When jobs disappear in certain areas, people move to locations
where opportunities for jobs exists. Certain regions have
historically paid employees higher wages than others. May be
related to higher costs of living or per capita incomes.
9. Supply and Demand of Labor:
 During unemployment individuals with certain sets of skills or
abilities are in demand. “Exotic” jobs with necessary skills can
demand and receive premium wages. In essence the supply and
demand has a direct bearing on the wage levels across industries.
Determining Rates of Pay, contd…
10. Profitability of the Firm:
 Employees working in highly profitable firms have greater
chances of receiving higher wages than lower earning firms. Why
do some companies hire and retain best employees by paying them
above average rates?
11. Employment Stability:
 Employees that seemingly have more permanent jobs are willing to
work for less pay knowing that the pay check will come on time as
long as they deliver. For example Government jobs
12. Gender Difference:
 Even now women earn less than men for doing similar jobs. This
was more pronounced but lately the gap has narrowed. In
companies where women are dominant the pay rates are lower
than in companies where men are the dominant workforce
13. Employee Tenure and Performance:
 Usually as an employee’s pay increases with years of service but
individual performance also is a determining factor. Companies
note that senior employees are more dependable.
Any questions?