Compensating Human Resources 

OVERVIEW: 

Compensation is the set of rewards that organization provide to

individuals in return for  their willingness to perform various jobs and tasks within
the organization. It includes all form of  financial returns and tangible services and
benefits employees receive as part of an employment  relationship. It also
includes various elements such as base salary, incentives, bonuses, benefits,  and
other rewards. 

LEARNING OUTCOMES 
a) Explain the main components of compensation 
b) Identify and describe the different methods of job evaluation 
c) Classify the different forms of compensation 
d) Explain the importance of salary and wages to the employee 
e) Identify and describe the factors influencing pay 
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DISCUSSION: 

Objective of Compensation 

The primary objective of any base wage and salary system is to establish a
structure for  the equitable compensation of employees, depending on their jobs
and their level of  performance in their jobs. 
The objective of compensation is to create a system of rewards that is
equitable to the  employer and employee alike. The following are suggestions to
make the compensation policy  more effective. Compensation should be: 
1. Adequate to meet the needs of the employees and to acquire and retain
qualified. 2. Equitable – Each person should be paid fairly, in line with his/her
efforts, abilities, and  training. Employees will believe their pay is equitable
when they perceive the following  circumstances: 
a. It is fair relative to the pay coworkers in the same organization receive.
b. It is fair relative to the pay received by coworkers in other organizations
who hold  similar positions. 
c. It fairly reflects their input or contribution to the organization to the
organization. 3. Balanced – Pay benefits and other rewards should provide a
reasonable total reward  package. 
4. Cost-effective – taking into consideration the company’s ability to pay. 5.
Secure – Pay should be enough to help an employee feel secure and aid
him/her in  satisfying basic needs. 
6. Incentive-providing – Pay should motivate effective and productive work or
reward  desired behavior. 
7. Acceptable to the employee – The employee should understand the pay system
being  followed by the company and should feel it is reasonable the
organization and for  him/her. 
8. Compliant with legal regulation. 

Main Components of Compensation 

Direct compensation consists of cash directly paid to the employee in
exchange for  his/her work. Include in this category are: 
a. Base pay – the hourly wage or weekly/monthly salary earned. 
b. Premium pay – refers to the additional compensation required by law for
work performed  within eight (8) hours on nonworking days, such as days and
special days. c. Base pay progression – movement of base pay overtime, from
year to year. d. Variable pay – incentive or bonus pay that does not fall into
base pay such as incentive  and bonuses. It may be paid at the individual,
team, group, or organizational level.

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Wages vs. Salaries 

Wages generally refer to hourly compensation paid to skilled and unskilled

workers or those  performing blue-collar jobs, with time as the basis in the
computation. 
Salary on the other hand, I income paid to an individual not on the basis of time
but on the basis  of performance. Salaries are usually given to professional and
managerial employees or those  who are performing white-collar jobs. A salary
compensates an individual not for how much time  he/she spends in the
organization but for his/her overall contribution to the organization’s 
performance. 

Determining Pay Rates 

Most wage and salary systems establish pay ranges for certain jobs based
on the relative  worth of the job to the organization. An employee’s performance
on the same job should then  determine where that employee’s pay fall within the
jobs range. Establishing pay ranges involve  two basic phases: 
1. Determining the relative worth of the different jobs to the organization
(thereby ensuring  internal equity) 
2. Pricing the different job (thereby ensuring external equity) 

Note: Job evaluation is the primary method used to determine the relative worth
of jobs to the  organization. Wage surveys represent one of the most commonly
used methods for pricing jobs. 

The following are some of the basic determinants of pay: 

1. External Factors 
a. Market Factors 
b. Existing pay level in the community 
c. Government regulations and laws 
2. Organizational Factors 
a. Type of Industry 
b. Profitability and company’s ability to pay 
c. Unionized or nonunionized 
d. Size of the company 
e. Capital or Labor Intensive

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f. Value of the job 
3. Job Factors 
a. Skill 
b. Responsibility 
c. Effort 
d. Working Conditions 
4. Individual Factors 
a. Performance, productivity 
b. Experience 
c. Seniority, length of service 
d. Potential, promotability 

Note: These are the factors influencing pay. These factors are divided into four
categories:  external, organizational, job, and individual factors. All of these
should be taken into  consideration to determine the proper compensation to be
given to each employee. 

Establishing Pay Rates 

1. Conduct the salary survey (aimed at determining prevailing wage rates) for the
following  reasons: 
a. Price benchmark jobs 
b. Majority of the positions found in the company are usually priced directly in
the  marketplace. 
c. To collect data on benefits so as to provide a basis on which to make
decisions  regarding employee benefits. 
2. Determining the worth of each job through job evaluation. 
Job evaluation refers to a systematic comparison done in order to
determine the worth  of one job relative to another. This process is used
for designing a pay structure, not for  appraising the performance of
employees holding the job.