Compensation
Unit V
Introduction
• Compensation is the HRM function
• It deals with every type of reward individuals receive
in exchange for performing organizational tasks
• Employees trade labor & loyalty for financial & nonfinancial compensation (pay, benefits, services,
recognition etc.)
• Non-financial rewards like praise, self-esteem &
recognition, affect employees' motivation,
productivity, satisfaction
Concept of Compensation
•
Workers exchange work for rewards. Probably the important reward, and certainly the
most obvious, is money
•
Organizations generally seek to pay the least that they have to in order to minimize
costs. Workers also want fair compensation
•
Government policies set minimum wages and benefits that employers must meet, and
these policies provide protection for certain groups.
•
Apart from this, compensation administration policies depend upon condition of
labour market, trade union influences, internal factors such as attitudes of top
management
•
Compensation administration seeks to design the lowest-cost pay structure that will
not only attract, motivate and retain competent employees but also be perceived as
fair by these employees
•
Trend changing in compensation management from seniority based to performance
based
•
Compensation structure should be reviewed from time to time to adapt to changes in
the environment and cost of living
Definition of Compensation
• “Compensation refers to all the extrinsic rewards
that employee receive in exchange for their work.
It is composed of the base wage or salary, any
incentives or bonuses, and any benefits”.
Byars and Rue
• “Compensation refers to all forms of financial
returns, tangible services, and benefits
employees receive as part of an employment
relationship”
Milkovich
Compensation can be in the form of:
• Wages and salary
– Wage: Remuneration paid periodically to a worker. It is usually the
hourly rate paid to blue collar workers
– Salary: Weekly or monthly rates paid to white-collar workers
• Incentives: Extra pay for extra performance in addition to
regular salary & wages. It is based on performance
• Employee benefits: Usually known as “fringe benefits”. They are
supplements to wages received by employees. E.g. insurance,
paid vacations, and holidays, pension & telephone etc.
• Services and Perquisites (privileges): related with quality of
work life of the employees such as car, housing loans,
reimbursement of the children’s education costs, discounts on
company products, recreation etc.
Compensation
Intrinsic & Extrinsic Rewards
Intrinsic Rewards
Personal Satisfaction
Extrinsic Rewards
• Comes from the job itself
• Comes from a source outside the
job, offered mainly by management
• Pride in one's work, feelings
of accomplishment, being
part of a work team,
interesting work,
responsibility, job freedom,
growth opportunity,
participation etc.
• Includes rewards, promotions,
benefits
• Within Extrinsic Rewards:
– Financial Vs. Non-financial Rewards
– Performance Based Vs. Membership
Based
– Direct Compensation Vs. Indirect
Compensation
Total Compensation
Intrinsic Rewards
(Job Factors)
Extrinsic Rewards
(Monetary)
Indirect Compensation
Protection
Programs
Pay for time
Not worked
Employee Services
&
Perquisites
Direct Compensation
Basic wages
Performance
based pay
Financial Compensation
Direct, Indirect
Direct Financial Compensation
• Consists of pay an
employee receives in the
form of wages, salaries,
bonuses or commissions
Indirect Financial Compensation
• Benefits consist of all
financial rewards that are
not included in direct
financial compensation
• E.g. vacation, insurance,
child care etc.
Purposes of Compensation
• To attract potential job applicants by providing sufficient
compensation
• To retain qualified and competent employees by paying
them more than what competitors are paying for similar
positions
• To motivate employees by compensating on the basis of their
performance
• To administer pay within legal regulations for avoiding any
sort of legal violation
• To help in achieving organizational strategic objectives by
enhancing innovation & quality
PATTON suggests 7 criteria for effective compensation policy
1.
Adequate: Minimal governmental criteria, union, managerial levels should
be met
2.
Equitable: Each person should be paid fairly in line with his effort, abilities &
training
3.
Balanced: Pay, benefits & other rewards should provide a reasonable total
reward package
4.
Cost-effective: Pay should not be excessive, considering what the
organization can afford to pay
5.
Secure: Pay should be enough to help an employee feel secure & aid him in
satisfying basic needs
6.
Incentive-providing: Pay should motivate effective & productive work
7.
Acceptable to the employee: The employees should understand the pay
system & feel it is a reasonable system for the enterprise & himself
Job Evaluation System
Methods and Process
• Job evaluation is a process whereby an organization
systematically establishes its compensation program
• In this process, jobs are ranked in order to arrive at
each job's appropriate worth
• By job evaluation, we mean using the information in
job analysis, to systematically determine the value
of each job in relation to all jobs in the organization.
– Decenzo & Robbins
Methods for
Evaluating Jobs
Ranking
Job Classification
Point
Method
Factor
Comparison
Methods of Job Evaluation
1. Job Ranking or Ordering method
•
Requires a committee composed of both management & employee representatives to
arrange jobs in a simple rank order, from highest to lowest
•
Involves ranking each job relative to all other jobs, usually based on overall difficulty
•
First 2 jobs are compared, then they are compared with another job until all the jobs have
been evaluated & ranked
•
Ranking each job relative to all other jobs, usually based on some overall factor
•
Steps in job ranking:
1. Obtain job information.
2. Select and group jobs.
3. Select compensable factors.
4. Rank jobs.
5. Combine ratings.
Advantage
• Simple and economical to use
Disadvantage
• Difficult to use if no. of employees is large
• Subjectivity of the method, no standards to justify the ranking
Example of a Job Ranking Method
Ranking order of the jobs
Monthly pay scale
Manager
Supervisor
Foreman
Machine operator
Rs. 25, 000
Rs. 15, 000
Rs. 10, 000
Rs. 5,000
Job Ranking by Olympia Health Care
Ranking Order
1. Office manager
Annual Pay Scale
$43,000
2. Chief nurse
42,500
3. Bookkeeper
34,000
4. Nurse
32,500
5. Cook
31,000
6. Nurse’s aide
28,500
7. Orderly
25,500
Methods of Job Evaluation
2. Job Classification or Job Grading
• Made popular by the U.S. Civil Service Commission
• Job are categorized in different class or grades for different jobs requiring similar
skills, efforts, difficulty and responsibility
• Raters categorize jobs into groups or classes of jobs that are of roughly the same
value for pay purposes
– Classes contain similar jobs
• Administrative assistants
– Grades are jobs similar in difficulty but otherwise different
• Mechanics, welders, electricians, and machinists
– Jobs are classed by the amount or level of compensable factors they contain
Methods of Job Evaluation
2. Job Classification or Job Grading (conti…)
• There are several ways to categorize jobs:
– Write-up class or grade descriptions (similar to job descriptions) and place
jobs into classes or grades based on how well they fit these descriptions
– Draw up a set of guidelines for each class (for instance, how much
independent judgment, skill, physical effort, and so on, does the class of
jobs require?). Then categorize the jobs according to these rules
• Advantages
• simple
• easy to use for large numbers of jobs
• one rating scale
Disadvantages
• Difficult to write the class or grade descriptions (ambiguous)
Example of a Grade Level Definition
This is a summary chart of the key grade level criteria for the GS-7 level of clerical and assistance work. Do
not use this chart alone for classification purposes; additional grade level criteria are in the Web-based
chart.
Source: www.opm.gov/fedclass/gscler.pdf. Accessed May 18, 2007.
Methods of Job Evaluation
3. Factor Comparison
•
The factor comparison method entails deciding which jobs have more of the chosen
compensable factors
•
The method is actually a refinement of the ranking method
•
With the ranking method, you generally look at each job as an entity and rank the jobs on
some overall factor like job difficulty
•
With the factor comparison method, you rank each job several times—once for each of several
compensable factors
•
Compensable factors that can be applied to each jobs is identified like responsibility, skills,
mental and physical effort, working condition
•
According to the difficulty and complexity of task related with each factor certain amount is
given and the total amount in each job is calculated as wage rate
+
Advantage: More accurate, systematic and quantifiable than previous methods; Easy
to understand
-
Disadvantage: Complex and difficult to operate; Difficult to identify compensable
factors
Determination of Wage Rate of a Machinist under Factor Comparison Method
Rs
Factors for comparison
Responsibility
Skills
Mental efforts
Physical efforts
Working conditions
Total wage per hour
12
16
12
6
4
50
Methods of Job Evaluation
4. Point Method
•
The point method is more quantitative, Most widely used method
•
Identifies compensable factors
•
Compensable factors necessary for successful completion of the job is determined like
responsibility, skills, mental efforts, physical efforts, working condition
•
Factors are evaluated in a scale and points are given to each factors
•
Total points are calculated and each job is evaluated according to the points and pay scale is
determined
Advantages
• more specific and larger numbers of factors
• more precise measurements
Disadvantages
• Time-consuming process
• More difficult to understand
Figure: Point System Matrix
Compensable Factors
Responsibility
I) equipment process
II) material/product
III) safety of others
IV) work of others
Minimum
1
Level (Degrees)
Low
Moderate
2
3
High
4
5
5
5
5
10
10
10
10
15
15
15
15
20
20
20
20
I) education
II) experience
III) knowledge
14
22
14
28
44
28
42
66
42
56
88
56
I) physical
II) mental
10
5
20
10
30
15
40
20
Job Condition
I) working conditions
II) hazards
10
5
20
10
30
15
40
20
Total points 1000
100
200
300
400
Skill
Effort
Job Evaluation System
Process
Job Analysis
Determinants of
compensation factors
Determine the relative
importance of
compensable factors
Deciding about job
evaluator
1. Job Analysis
• Provides information through job description and
job specification
• Using these sources of information, the evaluator
can assess job duties & responsibilities &
correspond skills or knowledge required
2. Determinants of compensable job factors
• The next step is to identify the main compensable
factors
• These factors differ as per the job position
• E.g. Accountability, know-how, problem-solving
ability, physical demands etc.
3. Determining the relative importance of
compensable factors
• The next step is to assign the relative weight
according to their importance
• A manager’s judgmental & decision making abilities
will be required to weight these factors
4. Deciding about the job evaluator
• The final step is to decide on who evaluates the jobs
in the organization
• A number of experts are available to evaluate jobs
• The policy of job evaluation is made by the HR dept.
whereas the method is selected by the team of job
analysts