BBCM4103 Compensation Management - Edec20

BBCM4103
Compensation Management
Copyright © Open University Malaysia (OUM)

BBCM4103
COMPENSATION
MANAGEMENT
Mohd Faizal Mohd Isa
Wan Shakizah Wan Mohd Noor
Johanim Johari

Fourth edition 2020
Third edition 2013
Second edition 2012
First edition 2009
Developed by Centre for Instructional Design and Technology, OUM.

Copyright © Open University Malaysia (OUM), BBCM4103
All rights reserved. No part of this work may be reproduced in any form or by any means without
the written permission of the President of Open University Malaysia (OUM).
www.oum.edu.my

Table of Contents
Course Guide ixăxiv
Topic 1 Introduction to Compensation Systems 1

1.1 Definition of Compensation 2
1.2 Types of Compensation 3
1.3 Compensation and Organisational Strategy 5
1.4 Compensation Systems 6
1.5 Compensation Dimensions 8
1.6 Non-monetary Compensation System 10
1.7 Compensation Programme 16
1.8 Rate of Pay Determinants 17
1.9 Strategic Compensation Management 22
1.9.1 Strategic Perspective 23
1.9.2 Employees as Critical Resources 26
1.9.3 Employment Levels in an Organisation 28
1.10 Development of an Organisation 29
1.11 Salary Payment: Equity Issues 31
Summary 35
Key Terms 36
Topic 2 Compensation Legislation 37

2.1 Legislation Process 38
2.2 Main Elements of Salary Reform System 39
2.3 Salary Reform System Models 40
2.4 Link between Legislation and Compensation 42
Administration
2.4.1 Employment Act 1955 43
2.4.2 WorkmenÊs Compensation Act 1952 45
2.4.3 Industrial Relations Act 1967 48
2.4.4 Payment System 54
2.4.5 Employment Guarantee 54
2.4.6 Redundancy and Retrenchment of Employees 55
2.4.7 Negotiation Regulations 58
2.4.8 Joint Agreements 58

iv  TABLE OF CONTENTS
2.5 Importance of Law in Determining Salary and 59

Wage Payment Rates
2.6 Legislative Control over Salary and Wage Payment Rates 62
Summary 64
Key Terms 65
Topic 3 Job Analysis 66

3.1 Definition of Job Analysis 67
3.2 Importance of Job Analysis 68
3.3 Objectives for Performing a Job Analysis 70
3.4 Information that Needs to be Acquired in a Job Analysis 74
3.5 Job Analysis Process 75
3.5.1 Determining the Jobs that Need to be Analysed 76
3.5.2 Selecting Job Analysis Methods 77
3.5.3 Conducting Job Analysis 77
3.6 Mistakes During Job Analysis 78
3.7 Definition of Job Description 80
3.8 Importance of Job Description 81
3.9 Job Description Items and Format 85
3.10 Preparation for Writing a Job Description 89
3.11 Process of Preparing Job Description 91
Summary 95
Key Terms 97
Topic 4 Job Evaluation 98

4.1 Definition of Job Evaluation 99
4.2 Importance of Job Evaluation 100
4.3 Job Evaluation Process 102
4.4 Job Evaluation Methods 105
4.4.1 Quantitative Methods 105
4.4.2 Non-quantitative Methods 110
4.5 Job Evaluation Issues 111
Summary 115
Key Terms 115

TABLE OF CONTENTS  v
Topic 5 Salary Market Survey 116

5.1 Definition of Salary Market Survey 117
5.2 Importance of Salary Market Survey 118
5.3 Process of Conducting Salary Market Survey 123
5.4 Sources of Salary Market Survey Data 127
5.5 Salary Market Survey Methods 128
5.6 Problems in Conducting Salary Market Survey 132
Summary 136
Key Terms 137
Topic 6 Salary Structure Design 138

6.1 Compensation Management Process 139
6.2 Salary Structure Design Process 141
6.3 Types of Salary Payment 147
6.3.1 Skill-based Salary Payment 148
6.3.2 Knowledge-based Salary Payment 150
6.3.3 Competency-based Salary Payment 151
6.3.4 Seniority-based Salary Payment 153
6.4 Other Salary Payment Programmes 157
6.4.1 Salary Payment Programme Based on 158
Merit System
6.4.2 Salary Payment Programme Based on 159
Unit of Output
6.4.3 Bonuses and Awards 160
Summary 162
Key Terms 163
Topic 7 Short-term and Long-term Incentives 164

7.1 Definition of Incentive Payment 165
7.2 Incentive Payment Programme Design 166
7.3 Short-term Incentive Programmes 167
7.3.1 Individual Incentive Plans 169
7.3.2 Group Incentive Plan 174
7.3.3 Organisational Incentive Plan 181
7.4 Long-term Incentives 184
7.5 Employee Social Class 185
7.6 Tax Legislation 186
7.7 Designing Long-term Incentive Programmes 187
7.8 Long-term Incentive Programmes 188
7.8.1 Qualified Deferred Compensation Arrangement 188
7.8.2 Thrift Plan 190
Summary 192
Key Terms 192

vi  TABLE OF CONTENTS
Topic 8 Employee Benefits and Services 193

8.1 Definition of Employee Benefits and Services 194
8.2 Employee Benefits 194
8.2.1 Employee Benefits Classification 195
8.3 Employee Services 196
8.4 Flexible Benefits or Compensation Plan 202
8.4.1 Appreciation of Benefits by the Employee 203
8.4.2 Hopes and Priorities of Employees 204
8.4.3 Development of a Flexible Benefits Plan 205
8.4.4 Issues in the Development of a Flexible Benefits 205
Plan
Summary 207
Key Terms 208

COURSE GUIDE

COURSE GUIDE  ix
COURSE GUIDE DESCRIPTION

You must read this Course Guide carefully from the beginning to the end. It tells
you briefly what the course is about and how you can work your way through the
course material. It also suggests the amount of time you are likely to spend in order
to complete the course successfully. Please refer to the Course Guide from time to
time as you go through the course material as it will help you to clarify important
study components or points that you might miss or overlook.
INTRODUCTION
BBCM4103 Compensation Management is one of the courses offered at
Open University Malaysia (OUM). This course is worth three credit hours and
should be covered over 8 to 15 weeks.
COURSE AUDIENCE
This course is offered to all learners taking the Bachelor of Human Resource
Management, and those who specialise in Human Resource Management
programmes.
As an open and distance learner, you should be acquainted with learning

independently and being able to optimise the learning modes and environment
available to you. Before you begin this course, please ensure that you have
the right course material, and understand the course requirements as well as
how the course is conducted.

x  COURSE GUIDE
STUDY SCHEDULE
It is a standard OUM practice that learners accumulate 40 study hours for
every credit hour. As such, for a three-credit hour course, you are expected to
spend 120 study hours. Table 1 gives an estimation of how the 120 study hours
could be accumulated.
Table 1: Estimation of Time Accumulation of Study Hours
Study
Study Activities
Hours
Briefly go through the course content and participate in initial discussion 3

Study the module 60
Attend tutorial sessions 6ă8
Online participation 12
Revision 15
Assignment(s), Test(s) and Examination(s) 20
TOTAL STUDY HOURS ACCUMULATED 120
COURSE LEARNING OUTCOMES

By the end of this course, you should be able to:
1. Describe the importance of compensation management;
2. Point out the roles and functions of compensation in an organisation;
3. Plan a competitive and effective compensation structure; and
4. Combine various methods and techniques in administering compensation

in an organisation.

COURSE GUIDE  xi
COURSE SYNOPSIS
This course is divided into eight topics. The synopsis for each topic is listed
as follows:
Topic 1 introduces the perspective of compensation administration and the

dimension of compensation from the view of employees and employers.
Topic 2 introduces the legislationÊs role in managing compensation. Among

the acts that will be discussed are the Employment Act 1955, WorkmenÊs
Compensation Act 1952 and Industrial Relations Act 1967.
Topic 3 discusses job analysis. Through this topic, you will be exposed to the
reasons for conducting job analysis and the importance of job analysis. Besides
that, this topic also dwells on the meaning and importance of job description
in compensation administration. It also explains job description items and the
process of preparing a job description.
Topic 4 discusses job evaluation and its importance to an organisation. You will
also be exposed to the process of performance appraisal and the methods for
conducting a performance appraisal.
Topic 5 is on consistency issues and market competition. In this topic, you will be
introduced to the concept of market survey and its importance in formulating
a competitive compensation structure as well as the problems faced in
implementing a market survey.
Topic 6 describes the process of forming a salary structure. It covers the process
of forming and administering a salary structure as well as the types of salary
payment in an organisation. Other programmes besides salary payment are also
examined.
Topic 7 explains short-term and long-term incentives as well as types of plans

made available by employers.
Topic 8 focuses on benefits and employee services. This topic discusses different
concepts of benefits and services as well as the types of different plans offered
by the employer for the welfare of employees and their families who are eligible
to receive them.

xii  COURSE GUIDE
TEXT ARRANGEMENT GUIDE

Before you go through this module, it is important that you note the text
arrangement. Understanding the text arrangement will help you to organise
your study of this course in a more objective and effective way. Generally, the text
arrangement for each topic is as follows:
Learning Outcomes: This section refers to what you should achieve after you
have completely covered a topic. As you go through each topic, you should
frequently refer to these learning outcomes. By doing this, you can continuously
gauge your understanding of the topic.
Self-Check: This component of the module is inserted at strategic locations

throughout the module. It may be inserted after one subtopic or a few
subtopics. It usually comes in the form of a question. When you come across this
component, try to reflect on what you have already learnt thus far. By attempting
to answer the question, you should be able to gauge how well you have
understood the subtopic(s). Most of the time, the answers to the questions can be
found directly from the module itself.
Activity: Similar to Self-Check, the Activity component is also placed at various

locations or junctures throughout the module. This component may require you
to solve questions, explore short case studies, or conduct an observation or
research. It may even require you to evaluate a given scenario. When you come
across an Activity, you should try to reflect on what you have gathered from the
module and apply it to real situations. You should, at the same time, engage
yourself in higher order thinking where you might be required to analyse,
synthesise and evaluate instead of only having to recall and define.
Summary: You will find this component at the end of each topic. This component
helps you to recap the whole topic. By going through the summary, you should be
able to gauge your knowledge retention level. Should you find points in the
summary that you do not fully understand, it would be a good idea for you to
revisit the details in the module.
Key Terms: This component can be found at the end of each topic. You should go
through this component to remind yourself of important terms or jargon used
throughout the module. Should you find terms here that you are not able to
explain, you should look for the terms in the module.

COURSE GUIDE  xiii
References: The References section is where a list of relevant and useful textbooks,
journals, articles, electronic contents or sources can be found. The list can appear
in a few locations such as in the Course Guide (at the References section), at the
end of every topic or at the back of the module. You are encouraged to read or
refer to the suggested sources to obtain the additional information needed and to
enhance your overall understanding of the course.
PRIOR KNOWLEDGE
Learners of this course are required to pass the BBPB2103 Human Resource
Management course.
ASSESSMENT METHOD
Please refer to myINSPIRE.
REFERENCES
Berger, L. A., & Berger, D. R. (2000). The compensation handbook: A state-of-
the-art guide to compensation strategy and design (4th ed.). New York:
McGraw-Hill Professional.
Caruth, D. L., & Handlogten, G. D. (2001). Managing compensation (and

understanding it too): A handbook for the perplexed (4th ed.). Westport, CT:
Quorum Books.
Gerhart, B., & Rynes, S. L. (2003). Compensation: Theory, evidence and strategic
implications. London: Sage Publications.
Henderson, R. I. (2000). Compensation management (8th ed.). Upper Saddle River,

New Jersey: Prentice-Hall.
Henderson, R. I. (2005). Compensation management in a knowledge-based world

(10th ed.). New Jersey: Prentice Hall, Inc.
Martocchio, J. J. (2005). Strategic compensation: A human resource management

approach (4th ed.). New Jersey: Prentice Hall, Inc.

xiv  COURSE GUIDE
Milkovich, G. T., & Newman, J. M. (2005). Compensation (8th ed.). Singapore:

Mc-Graw Hill/Irwin.
Mondy, R. W., & Mondy, J. B. (2007). Human resource management. Upper Saddle
River, New Jersey: Pearson Prentice Hall.
Rosenbloom, J. S. (2005). The handbook of employee benefits: Design, funding

and administration (6th ed.). New York: McGraw-Hill.
TAN SRI DR ABDULLAH SANUSI (TSDAS)

DIGITAL LIBRARY
The TSDAS Digital Library has a wide range of print and online resources for the
use of its learners. This comprehensive digital library, which is accessible through
the OUM portal, provides access to more than 30 online databases comprising
e-journals, e-theses, e-books and more. Examples of databases available are
EBSCOhost, ProQuest, SpringerLink, Books247, InfoSci Books, Emerald
Management Plus and Ebrary Electronic Books. As an OUM learner, you are
encouraged to make full use of the resources available through this library.

Topic  Introduction
to
1 Compensation
Systems
LEARNING OUTCOMES
By the end of this topic, you should be able to:
1. Establish the meaning, elements and types of compensation;
2. Relate compensation systems with organisational strategy; and
3. Compare various compensation systems and programmes.
 INTRODUCTION
Various factors contribute to job satisfaction. Among them are a challenging
and interesting career, and having a sense of job security and commitment.
Nevertheless, the ultimate work satisfaction will not be achieved if the incentive
aspects of employment are neglected. Upon being offered a position, an employee
would hope to be paid a salary commensurate with the responsibilities and
duties he will undertake.
Therefore, every employer must develop an employee compensation programme

that is attractive, fair, equitable and based on systematic components. Apart from
pay or remuneration, employees should also be eligible for other benefits. As an
employee or would-be employee, are you aware of the incentives and reward
plans offered by organisations?

2  TOPIC 1 INTRODUCTION TO COMPENSATION SYSTEMS
To answer this question, you have to first know the meaning of compensation,
types of compensation that exist within an organisation, relationship between
compensation and organisational strategy, compensation dimensions, and
compensation and non-compensation systems. All these will be covered in this
topic.
1.1 DEFINITION OF COMPENSATION

Generally, worker compensation is payment that is equivalent to what is given
to an employee for injuries arising out of, and in the course of, his employment
or to an employee who has been retrenched. However, in the context of
human resource management, the definition of compensation is much broader.
Compensation refers to all types of monetary returns, tangible benefits

and clear and evident service which is accepted by an employee as part
of an employment relationship and as contribution towards the work
performance shown by the employee throughout his employment tenure.
In theory, compensation encompasses three elements as illustrated in Figure 1.1.
Figure 1.1: Three elements of compensation
Now, let us look at each element in detail:
(a) Motivation Element

Compensation becomes a motivational factor when the salary and benefits
given can boost employee work performance. For example, Organisation A
provides an incentive to employees who complete their work assignments
efficiently within a specified time frame. Such an incentive motivates
employees to finish their task to the best of their ability within the stipulated
time.

TOPIC 1 INTRODUCTION TO COMPENSATION SYSTEMS  3
(b) Communication Element

Compensation also functions to foster and spread work spirit, culture and
values within an organisation. For example, Sypto Co. wants to encourage
full attendance among its employees every month. Therefore, it offers an
attendance bonus to employees with a perfect monthly attendance. As such,
the compensation will serve to reduce excessive absenteeism.
(c) Strategy Element

Strategy is vital in achieving an organisationÊs aims. The strategic element
of compensation functions to recruit the best employees in the labour
industry. For example, Sypto Co. wants to acquire quality employees to
gain a competitive edge. Therefore, it must offer a good compensation
package to attract high-performing workers.
SELF-CHECK 1.1
We often hear or read about compensation offered to employees who

are retrenched or suffer injuries in the course of employment. What is
your definition of compensation?
1.2 TYPES OF COMPENSATION

Most of us may think that compensation only comes in the form of financial
returns. In reality, there are three types of compensation as described in Figure 1.2.
Figure 1.2: Three types of compensation

These three types of compensation are discussed further as follows:
(a) Direct Monetary Compensation

Direct monetary compensation refers to payment in the form of cash.
This type of compensation includes basic salary, bonus, overtime pay,
commission, profit sharing and cost-of-living allowance.
(b) Indirect Monetary Compensation

Indirect monetary compensation is a type of employee benefit, whether
mandated by law or given by the organisation, which is a form of employee
appreciation. Some examples of indirect monetary compensation are paid
leave (statutory holidays and annual leave), insurance plans (medical,
dental and life), guarantee plans (retirement and disablement) and employee
services (education aid and recreational programmes).
(c) Non-monetary Compensation

Non-monetary compensation is related to the work environment and
the physical and psychological state of the employee. Monetary and
non-monetary compensation are related even though non-monetary
compensation is not part of the remuneration package. Examples of
non-monetary compensation include reinforcing an employeeÊs pride and
dignity through the employerÊs recognition of his efforts and an increase
in job satisfaction.
ACTIVITY 1.1
Based on the given information, list the types of compensation offered

by your organisation. Then, classify these compensations under the
headings of direct monetary compensation, indirect monetary
compensation and non-monetary compensation. You can also discuss
your list with friends in the myINSPIRE forum to see whether the
compensations offered by your organisation are similar to or different
from those offered by their organisations.

1.3 COMPENSATION AND ORGANISATIONAL

STRATEGY
Strategy exists as a result of integration between an organisationÊs mission and
objectives. Without an effective strategy, an organisationÊs objectives cannot be
achieved. Figure 1.3 shows you how a strategic planning process is practised
within an organisation.
Figure 1.3: Strategic planning process
These four strategic planning processes are further discussed in Table 1.1.
Table 1.1: Four Stages of Strategic Planning Process
Process Description
Strategic Evaluation of the organisationÊs mission as well as the internal

Analysis and external environments.
Development Vision, objectives and direction of organisational strategy are

of Strategy developed. The business and corporate strategies are devised to
reduce the gap between the current situation and what the
organisation hopes to achieve.
Implementation Essential activities are carried out to ensure that the organisational
of Strategy strategy is implemented in the most efficient manner possible.
Monitoring of The outcome of the implementation of plans to achieve

Strategy organisational objectives is monitored. The monitoring is done
by identifying deviations and comparing the actual results
achieved with what the organisation hopes for.

Usually, the top management is directly involved in the formation of the

organisationÊs objectives. To ensure that the objectives are achieved, the top
management needs to outline the best and most effective strategy. Therefore,
strategic planning and measures are very important and will define an
organisationÊs direction for its employees.
Every department or division in the organisation has to play its role to

ensure that strategic organisation is implemented as planned. For example, in
compensation administration, the remuneration programme has to fully support
the strategic planning and strategic objectives of an organisation. The benefits
package has to be commensurate with the relative value of the job.
Compensation administration is often linked to employee motivation. Therefore,

the human resource department has to monitor the remuneration programme to
ensure that attractive and competitive benefits packages are offered in order to
recruit the best talent available and to retain a productive and competent
workforce.
ACTIVITY 1.2
Every organisation has its own mission and vision. What are your
organisationÊs vision and mission? Is the compensation programme
offered by your organisation helping you to communicate the vision
and achieve the mission? If you are not working, discuss your
opinion regarding the best mission and vision for an organisation.
1.4 COMPENSATION SYSTEMS

What does compensation system mean?
A compensation system results from the allocation, conversion and transfer

of part of the organisationÊs income to its employees in monetary and
non-monetary forms as payment for the services provided by the employees.
Monetary claim for goods produced and services rendered is in the form of
wages or salary or a form that can be converted into money easily and quickly.
The conversion takes place according to the discretion or wisdom of the
employees themselves.

As a medium that is readily convertible, money will allow an employee to buy

certain products and services. He will enjoy a wide choice of competitively
priced goods and services. The type of purchase and actual amount purchased
will depend on the mechanisms that prompt an employeeÊs habits. Wages and
salary that come in monetary form can be divided into:
(a) Payment offered and taken now; and
(b) Payment offered but put off to a future date (deferred payment).
An in-kind claim is payment made either in full or in percentage to employees.

Usually, employees have little or no chance to gain instant profit through in-kind
payments.
Most in-kind payments are allocated by the employer in lieu of monetary

payment if the employees can acquire similar products and services elsewhere.
The organisation will purchase the needed products and services so that the
employees can take advantage of the following:
(a) Current economies of scale through group purchase;
(b) Current benefits accrued from laws and tax regulations; and
(c) Government laws that require certain service.
The value of an in-kind payment to a particular employee indirectly depends

on the employeeÊs perception of its worth. An individualÊs perception is linked
with:
(a) Demographic characteristics (age, gender, education, age and number of

dependants, period of service, position in the organisation, current wealth
and other income); and
(b) Physical and emotional state of the employee.

1.5 COMPENSATION DIMENSIONS

In the previous subtopics, we have discussed the concept of compensation,
types of compensation and compensation systems. Next, we will discuss the
eight dimensions of compensation as illustrated in Figure 1.4.
Figure 1.4: Eight compensation dimensions
These eight compensation dimensions are discussed further as follows:
(a) Payment for Work and Performance

Payment for work and performance includes the disbursement of money
within a short-term period (weekly, monthly and bonus or annual awards)
that will allow an employee to pay or make an agreement to pay for products
and services requested. The total amount of payment given to the employee
will depend on the following:
(i) Needs for the specified job;
(ii) Results that meet or exceed the standards of quantity, quality or time;
and
(iii) Innovations that lead to increase in productivity, loyalty,

trustworthiness and a combination of some or all of these features.
The components that are usually included in the payment for work and
performance are basic pay, premium and premium differences, short-term
bonus, merit payment and certain allowances.
(b) Payment for Non-working Days

The past few years have seen a reduction in working hours. In addition,
employees today enjoy more official non-working days and longer paid
leave. Components of payment for non-working days raise labour costs.
On the other hand, such payment allows for lifestyle change and
enhancement of the quality of life.
(c) Loss of Job Income Continuation Benefit

Job security has always been an important aspect of employment. Employees
need to be assured of their job and economic security. Accidents, personal
problems and work performance are some of the reasons that will cause a
temporary cessation of employment or permanent termination.
Change in the current technological and economic climate will limit and,
at times, eliminate the need and demand for certain products and services.
This will lead to the reduction or disintegration of an organisation. Various
components, such as unemployment insurance, unemployment added
benefits and salary during the severance period are generated to assist
affected employees who have neither been offered any alternative position
by the organisation nor found other work.
(d) Disability Income Continuation Benefit

When an employee suffers from a disability due to an illness or accident,
he is unable to perform his tasks effectively. In addition to daily living
expenses, the employee also has to pay hospital bills. Employee
compensation will be in the form of medical leave and short-term and
long-term disability plans. These will assist an employee who is incapable
of working due to poor health.
(e) Deferred Income

Most employees depend on programmes provided by their employers for a
continuous income after retirement. There are two main reasons why such
programmes exist. Firstly, most people do not have enough savings upon
retirement to enable them to continue enjoying the comfortable lifestyle they
are accustomed to while working. Therefore, programmes like retirement
allocation planning programme, savings and thrift plans, annuities and
additional income plans are drawn up by organisations to provide
employees an ongoing income after retirement. Secondly, laws and tax
regulations make these deferred income plans more attractive to employees.

(f) Spouse or Family Income Continuation Benefit

Employees with families worry that they will not be able to provide, care for
and support their dependants in the event of their death or disability. Certain
plans have been created to provide dependants with the financial means to
carry on if an employee dies or is incapacitated due to temporary or
permanent disability.
(g) Health, Accident and Liability Protection

Apart from income to sustain a comfortable lifestyle, income for products
and services to heal an illness or disability is also of great concern to
employees. Therefore, organisations offer various insurance plans to assist
employees in paying for their medical care and treatment.
(h) Income Equivalent Payments

Income equivalent payments are also known as perquisites or perks. Some
of these special benefits are exempted from tax, which is advantageous for
employers and employees. Examples of special benefits are provision of
credit cards, allowance to attend official meetings, subsidised food and
childcare services.
1.6 NON-MONETARY COMPENSATION

SYSTEM
Did you know that a compensation system not only provides financial benefits
but also non-monetary incentives? These incentives enhance the physical,
emotional, physiological and social conditions of employees and are essential to
increase employee motivation, commitment and productivity. Figure 1.5 shows
you the functions of a non-monetary compensation system.

Figure 1.5: Functions of non-monetary compensation system
These seven functions of a non-monetary compensation system are further

discussed as follows:
(a) Heighten the Feelings of Pride and Contentment from the Job Undertaken
It is often difficult for an organisation to express appreciation to its
employees although it does not require a lot of money or time. Letting them
know their role is important and showing appreciation and recognition for
their hard work will make employees feel proud to be a part of the
organisation and inspire them to do their best.
An organisation can show appreciation for its employees in many ways.

For example, if an employee has achieved a specified target or performed his
work well, he could be given an employee excellence award or a compliment,
which costs nothing but would mean a lot to him (see Figure 1.6).

Figure 1.6: An award ceremony for excellent and dedicated workers

Source: https://www.thestar.com.my/metro/metro-news/2018/02/08/excellent-
service-awards-for-2889-civil-servants-recipients-recognised-for-outstanding-
contributions
(b) Boost Physiological Health, Intellectual and Emotional Development

EmployeesÊ health problems are usually not taken seriously by the employer.
If their health problems become serious, their work performance will be
adversely affected. To enhance employee wellness, the employer must be
committed towards providing a workplace environment that fosters
intellectual development, is safe, comfortable, efficient and free from
exposure to chemical substances and work-related stress that may lead to
industrial accidents.
(c) Promote Constructive Social Interactions among the Employees

Human beings cannot live in isolation. This also applies to a work
environment. Specialisation in todayÊs workplace reduces job content, which
means the involvement of more people in a production as other expertise is
needed. This work interdependence serves to foster social interaction among
employees. Figure 1.7 shows you an example of social interaction.

Figure 1.7: Colleagues having a discussion
(d) Create Jobs that Need Attention and Sufficient Efforts

This function relates to specialisation. Specialisation means doing the same
job repeatedly. It was introduced to increase an employeeÊs efficiency level.
Since specialisation makes jobs routine, it breeds boredom and burnout
among employees. Indirectly, this affects an employeeÊs attitude, work
satisfaction and attendance.
To overcome this problem, a new approach should be implemented.

Employees should be encouraged to give suggestions about how their
job needs to be performed. This is because employees have a better
understanding of their jobs than anyone else. They know the best way
to get their jobs done. Employee input led to job rotation and enlargement
in some organisations. One way to get this input is through meetings
(see Figure 1.8).

Figure 1.8: Employers are encouraged to motivate their

employees to share ideas with them during meetings
Source: http://www.dpmm.org.my
(e) Allocate Sufficient Resources to Allow Employees to Execute Work

Assignments Efficiently
When employers direct employees to undertake work assignments, they
should ensure that the employees have sufficient resources at their disposal
and the relevant knowledge and skills to ensure success. If not, the employers
will suffer losses and the employees will not be able to achieve job
satisfaction.
(f) Give Employees Sufficient Control over their Work to Enhance Motivation
and Personal Growth
Some employees prefer to receive instructions on how to perform their tasks,
while others prefer to perform tasks with minimum supervision. Today,
more employees want to have a say in determining how their jobs should be
carried out. Work activity schedules and location of work assignments are
among the important decisions that should be made by the employees
themselves and not by the employer or supervisor.
(g) Offer Leadership and Management Support

Employees need support and guidance in order to perform their jobs well.
Every employee needs a respectable and influential individual who is able to
give him guidance and bring about the needed changes in the organisation.
Subordinates should trust that their supervisor or manager has their best
interests at heart.
At the same time, the manager or supervisor should listen to the

subordinates and take care of their needs. With the existence of this kind of
atmosphere, the workplace will be a much healthier and happier place.

EXERCISE 1.1
Multiple Choice Questions
1. The following are examples of indirect monetary compensation,

EXCEPT:
A. Adjustments of living costs.

B. Holidays and annual leave.
C. Disability insurance and pension.
D. Educational support and recreational programmes.
2. The statements below are TRUE about in-kind claims, EXCEPT:
A. They are allocated by the employer for the purpose of

replacing monetary payments for an employeeÊs total
income.
B. An organisation purchases needed products or services so
that the employees can take advantage of the economies of
scale through group purchase.
C. An individual outlook on the in-kind payment value
depends on demographic characteristics.
D. In-kind payment is the payment acquired and taken now,
and not at some future date.
3. Payment for work and performance means the payment is

disbursed within a short-term period, such as on a weekly or
monthly basis. The total payment made out to the employees
depends on the following factors, EXCEPT:
A. Need for the specified job.

B. Loss of job income continuation benefits.
C. Results that meet or exceed the standards of quantity, quality
or time.
D. Innovations that lead to increase in productivity, loyalty,
trustworthiness and a combination of some or all of these
features.
Essay Question
Describe any five dimensions of a compensation system.

1.7 COMPENSATION PROGRAMME

To better understand the labour costs of an organisation, the first step is to
identify the main elements of its compensation programme. The four main
elements of a compensation programme are shown in Figure 1.9.
Figure 1.9: Four main elements of compensation programme
The four main components of a compensation programme are further discussed

as follows:
(a) Wages and Basic Salary

The most important component for employees would undoubtedly be
salary and wages. This is because the quality of life for most employees
and their dependants is largely determined by the income earned. Wages
and salary received will determine the type and quantity of food, clothing,
accommodation and means of transport that an employee can afford.
(b) Increment in Wages and Salary

This type of compensation programme includes payment for overtime work,
work shifts and premium payment for work performed during weekends
or public holidays. This type of payment increases an employeeÊs total net
income.
(c) Payment of Incentives (Long Term and Short Term)

Incentives will be awarded if an employee manages to achieve output of a
certain quantity and quality. This is a traditional method of reward and
includes short-term and long-term incentives.

(d) Employee Benefits and Services

A compensation programme in terms of employee benefits and services
can be:
(i) Imbursement upon discharge;
(ii) Imbursement upon suspension or termination of an employee;
(iii) Imbursement upon inability to work due to an accident or illness;
(iv) Imbursement for protection and medical attention;
(v) Retirement imbursement, imbursement to a deceased employeeÊs

dependants; and
(vi) Allocation of products and services required, such as company cars,

cafeteria service, childcare or eldercare, and recreational activities.
Employee benefits and services can influence an individualÊs current and

future lifestyle.
ACTIVITY 1.3
Based on some of the examples of compensation given in Subtopic 1.2,

try to classify those types of compensation according to the four main
components.
1.8 RATE OF PAY DETERMINANTS

Have you ever wondered how your rate of pay was determined? What factors
influenced the pay rate determined by your employer? There are 13 determinants
of the rate of pay of an employee in an organisation. These factors are listed in
Figure 1.10.

Figure 1.10: Rate of pay determinants
Take note that these factors are mutually dependent in determining an employeeÊs
pay. Therefore, you should thoroughly understand how these factors influence
the rate of payment of salaries. Let us discuss them in detail:
(a) Knowledge, Skills, Ability and Other Characteristics

The most important factor that influences the rate of pay is the type of job
that one does. Therefore, in classifying or differentiating jobs for purposes
of salary payment, the most important factor is the knowledge and
skills possessed by the job holder. Information about the job such as
the qualifications required can be obtained from the job specifications.
Figure 1.11 shows two types of jobs that require certain knowledge and skills.

Figure 1.11: Rate of pay for doctors and

lawyers is influenced by their knowledge and skills
(b) Type of Entity

The salary rate will also depend on the type of business an organisation is
engaged in. For some high-level posts, the private sector offers higher
salaries compared to the public sector. Besides the type of business involved,
other factors such as whether the organisation is profit-based and the type of
goods produced will also affect the rate of pay.
(c) Trade Union or Non-trade Union Status

Broadly speaking, an employee who is a member of a trade union can enjoy
a higher rate of pay. This is because trade unions are more alert to the needs
of employees, especially from the aspects of salary and benefits. Claims that
can be made via collective negotiations will give an advantage to job holders
who are trade union members.

(d) Capital or Labour Strength

A business that has low labour costs compared to its earnings will be able to
offer higher salary rates. For example, if the labour costs of a business are
just 10% to 15% of its earnings, the pay for its employees will be higher
compared to an organisation with labour costs that range from 35% to 60%
of its earnings.
(e) Size of Entity

Large entities usually offer a higher rate of pay than smaller entities. An
organisation will increase in size when demand for its products and services
increases. Higher sales means the organisation will make higher profits
and is thus able to pay higher salaries to its employees.
Figure 1.12 shows you two types of entities which are large and medium
in size.
Figure 1.12: Large and medium entities

Source: http://projekti.it.jyu.fi and http://www.gascom.ru
(f) Management Philosophy

Management philosophy differs from one employer to another. Some
employers only pay salaries based on the minimum rate mandated by law.
Nevertheless, there are also employers who are more sensitive to the rights
and interests of employees. They will pay higher salaries because they
believe that by paying competitive salaries, they can recruit and retain
quality employees.

(g) Total Compensation Package

The difference between current salaries and those in the past is very obvious.
In the past, employees received only a basic salary and did not get health
insurance, paid leave, paid public holidays or pension schemes. TodayÊs total
reward packages include not only basic pay but also some or all of the
following: bonus, family health and life insurance, paid vacation, sick days
and leave, disability insurance, transport allowance, relocation expenses,
bonus and retirement plan.
(h) Geographical Location

The rate of pay is also determined by the geographical location of a particular
business. For example, the rate of pay for employees working in an industrial
site in Petaling Jaya, Selangor, is higher compared to that for employees
working in the industrial zone of Mergong, Kedah. Such a situation exists
because of the lifestyle level and the higher cost of living in the city.
Figure 1.13 depicts a city and a village, where differences in cost of living
lead to differences in the rate of pay.
Figure 1.13: Geographical locations drive pay differences for most jobs
(i) Supply of and Demand for Labour

The forces of supply and demand jointly determine the wage rate. However,
despite the often higher labour offerings compared to demand, there are
individuals who are head-hunted constantly by employers. They are offered
high salaries to join certain organisations. This is because they have the
knowledge and skills that employers are always on the lookout for.
(j) Company Profit

An employee in a highly profitable organisation will have the opportunity
to enjoy a higher rate of pay.

(k) Job Stability

As an employee, what do you hope to get from your organisation, apart
from a commensurate pay? Naturally, you want job and income stability.
The income guaranteed by your employer will allow you to support your
family and pay for all your current and future needs.
(l) Gender Differences

The gender factor is a main contributor to the problems of justice and fairness
in the payment of salaries. On average, men earn higher salaries than women.
However, the gender gap in wage rate is not too obvious in Malaysia.
(m) Length of Service and Employee Performance

In general, an increment in pay is consistent with oneÊs seniority in job rank,
length of service and work performance.
ACTIVITY 1.4
Try to recall the time you got your first job and how your pay was
determined. Compare that with the experience of getting your second
and subsequent jobs. If you have not been employed before or if you
have not changed jobs, ask your colleagues or a family member who
has had the experience of changing jobs and imagine the above scenario.
1.9 STRATEGIC COMPENSATION

MANAGEMENT
In this subtopic, we are going to learn about:
(a) Strategic perspective;
(b) Employees as critical resources; and
(c) Formation of an organisational hierarchy.
Let us learn more in the following sections.

1.9.1 Strategic Perspective

Strategy is an important aspect of management. This is because an effective
strategy is critical towards the development of expected habits, achievement of
targets and the foundation of an organisationÊs competitiveness. Before we explore
the functions of strategy within an organisation, let us first understand the
important aspects that lead to the formation of a strategy. The first aspect is
mission.
An organisationÊs mission is a statement which specifies the purpose of the

establishment of the organisation. This mission will determine the direction of
the organisation and its employees in ensuring focus towards the same target.
The main aspects of a mission statement are:
(a) Main product or service;
(b) Target market; and
(c) Overall strategy in ensuring the success of an organisation in the long run.
A business strategy and a corporate strategy will be formed based on these

three main components of a mission. Let us look at an example of a mission.
Example 1.1:
The mission of Al-Saddim College is to become the main college that offers
various programmes for Bachelor of Science degrees in northern Peninsular
Malaysia. The learning programmes include innovative programmes in the
field of science and technology such as medical, nuclear sciences and
engineering. Therefore, the collegeÊs strategy should be developed to fulfil
the three missions.
The second aspect is the objective. The objective is a decision or result that an
organisation intends to achieve. It has to be detailed in the form of quantity or
quality. With the specific statement of the objective, decision makers or managers
can determine the next course of action towards achieving the objective.
The objective can be achieved by implementing the right strategies. Therefore,

an appropriate strategy has to be planned, formed, implemented and controlled
by the managers. In this context, the role of a manager in an organisationÊs
effectiveness is very significant.

Figure 1.14 shows you the correlation between an objective and an organisational
strategy along with a compensation system in achieving an organisationÊs
competitive edge.
Figure 1.14: Strategic choices

Among the factors that influence a business unitÊs strategy are the objectives,
strategic planning and corporate values of the organisation. Take note that a
business unitÊs strategy will influence its human resource strategy. Let us look at
the following example.
Example 1.2:
Bakti Co. is a direct-selling company that operates in southern Peninsular

Malaysia. The objective of this organisation is to achieve an increase of 50% in
profits within a year to ensure that it is more competitive in the direct-selling
industry. An organisational strategy is formed, which is to expand its share
of the market throughout Peninsular Malaysia.
The strategy used by the human resource department is to recruit more

salespersons who have good communication skills and are highly motivated
to achieve the specified sales targets. To ensure that quality salespersons are
recruited and retained, the salary and benefits offered should be attractive
and competitive. This is one of the factors the compensation strategy needs to
take into account besides the social, competition and legal environment factors.
The formulated compensation system should be based on changes in the

organisationÊs earnings, as well as the allocation and transfer of part of those
earnings to its employees. This is based on the monetary claims and others,
for products and services rendered.
Besides this, any change in a compensation system has to be communicated to all

the employees concerned. The purpose of this is for the employer to evaluate
the behaviours and attitudes of the employees towards the compensation system,
that is, whether they are satisfied with it or not.
If there is dissatisfaction among the employees, the compensation system should

be re-evaluated. If all employees are happy with the offered compensation system,
it proves that the organisation has succeeded in achieving a competitive edge from
the aspects of compensation administration and quality human resources.

1.9.2 Employees as Critical Resources

From a strategic and tactical perspective, an organisationÊs quality and quantity
of output directly depend on the skills, interests and efforts of its employees.
Job positions that receive higher salaries are a critical contribution to the
success of an organisation. Nevertheless, productive contributions and efforts
from other parties within an organisation are just as significant.
It cannot be denied that emotions do affect the attitudes and behaviours of human
beings. Therefore, it is important for strategic experts to understand the correlation
between pay satisfaction, job satisfaction and organisational satisfaction on an
individualÊs productivity. Figure 1.15 shows four types of employee satisfaction.
Figure 1.15: Four types of employee satisfaction
(a) Pay Satisfaction

In developing a compensation system, an employer needs to identify those
who will be involved in the decision-making process. Other parties who
can be utilised for benchmarking purposes are:
(i) Nearest colleagues;
(ii) Other colleagues who have similar job tasks or assignments;
(iii) Other colleagues who undertake different activities; and
(iv) Employees of other organisations who undertake similar or different

tasks or who have different rates of pay.

Every individual employee is bound to make comparisons, the effect of

which will influence his or her decision to continue working or quit; to give
the best performance or let the organisation down. Therefore, the
management and professional human resources group should act wisely to
positively influence the outcome of these comparisons.
(b) Job Satisfaction

Among the factors that contribute to job satisfaction is the capability to
perform a task effectively and efficiently, recognition, and the opportunity
for a job promotion or career change. Although pay satisfaction and job
satisfaction are different, both aspects nevertheless interact and influence
each other greatly. If employees feel that the pay they get is competitive,
they will most probably be satisfied with their job, and vice-versa.
Therefore, the most important thing in ensuring job satisfaction is for an

employer to continually identify and improve the factors which enhance job
satisfaction. Organisational strategic issues are also important in ensuring
that job satisfaction continues to grow.
(c) Organisational Satisfaction

Organisational satisfaction embraces two main processes: assurances from
the employer and fairness in decision-making. Disappointment and work
pressure that exist due to pay dissatisfaction and job dissatisfaction can be
reduced with assurances from the employer.
Also, fairness in decision-making that relates to employee matters

can guarantee organisational satisfaction. Recognition, understanding
and acceptance of an organisationÊs philosophy and policy are important
aspects in creating organisational satisfaction.
(d) Satisfaction from the Employment Perspective

In the creation, development and implementation of a reward system that
could increase job, organisational and pay satisfaction, it is important for us
to understand satisfaction from the employment perspective. Satisfaction
is a process. Some parties think that satisfaction is a fulfilled need while
others are of the opinion that it means a fulfilled responsibility or obligation.
The word „obligation‰ identifies at least two parties who are involved in
the satisfaction process, the employee and employer.
The model and definition of satisfaction have to match a situation where a

particular job is undertaken. The satisfaction model has to identify that
satisfaction depends entirely on the individual. This means factors that
contribute to satisfaction among individuals will differ.

It is necessary that the opportunity to acquire satisfaction is analysed and

observed from the perspectives of various parties. This is because satisfaction
is a reciprocal relationship, whereby in analysing and weighing satisfaction
at the workplace, opportunities for satisfaction for all parties have to be
identified and understood. Therefore, an organisation must realise that
satisfaction involves the contract between an employer and an employee,
namely, what an employee expects from the organisation, and the offered
reward is driven by the availability of the employeeÊs skills, interests
and efforts.
1.9.3 Employment Levels in an Organisation

The basic approach in giving rewards to employees focuses on the job level within
an organisation. The higher the job level, the greater the responsibility and
rewards. The organisational structure of large and medium enterprises usually
comprise a managing director, operations manager (senior, middle and lower
level/supervisor), professional and administrator groups and operating staff.
Table 1.2 shows the classification of employees from different aspects. A notable
increase in job responsibility means higher and more complex skills and
knowledge are required. Therefore, payment of compensation rewards will also
be higher.
Table 1.2: Various Levels of Employment in an Organisation
Operational and Supervisory and

Job Categories Professional
Technical Managerial
Job Levels Level 1 Entry Level 1 Supervisor 1
Level 2 Intermediate Level 2 Supervisor 2
Level 3 Experienced Level 3 Manager 1
Advanced Level 4 Manager 2
Expert Level 5 Manager 3

1.10 DEVELOPMENT OF AN ORGANISATION

The development of an organisation involves the achievement of its long-term and
short-term goals. At the start of the establishment of an organisation through the
generation of products or services, such activities will all be related to human
resources. The human resource function acts as part of the value system in an
organisation. A value system consists of everything that an individual
understands and learns. On the other hand, the rules in an organisation will direct
the thinking and behaviour of an individual. These rules will also determine his
likes and dislikes, and rational and irrational judgment.
A particular idea that comes up will develop in oneÊs thinking. When this process
requires the assistance of others, the output process will begin. A team needs to be
established when this process involves efforts from various individuals. As such,
the coordination of efforts is important to ensure that the team successfully
produces the required output. The value system among leaders and team members
will influence the direction and intensity of their productive efforts. There are
seven main steps towards the development of an organisation as illustrated in
Figure 1.16.
Figure 1.16: Main activities in the development of an organisation

These seven main activities are further discussed as follows:
(a) Forming the Organisational Philosophy

An organisationÊs philosophy is its set of corporate values. The feelings
(expression) and actions of the leaders form an operating philosophy.
A philosophy statement describes the values of the top management and
leaders. Conflicting values are the greatest barriers to the success of an
organisation.
(b) Identifying the Mission

The mission of an organisation aligns the organisation with the environment,
and identifies the results hoped for. The results are then defined in the form
of the next action to be taken. A mission will describe in detail what needs
to be achieved by an organisation in the long term. There are three main
components in a mission statement, namely, the main products and
services, target market, and overall strategy towards ensuring the long-term
success of the organisation.
(c) Developing the Policy

A policy ensures that the operations fulfil the accepted criteria and are of
the required standard. The policy has to support the mission to ensure its
effectiveness in directing the employeeÊs behaviour. A policy is a guideline
for the managers in their decision making. Therefore, the policy of an
organisation has to be understood by every member in an organisation.
(d) Forming the Strategy

Strategy is the extension of a planning process. It gives the basis to the
development and expansion of an organisationÊs future. The strategy has to
be realistic and contain achievable objectives as well. A strategy has to be
clear and give similar purpose to all members of the organisation. A clear
strategy will invite constructive efforts towards attaining a competitive
edge for the organisation.
(e) Determining the Objectives and Sub-objectives

The next step is determining the organisationÊs objectives and
sub-objectives. The main objective is to translate a broad mission statement
into a more detailed output. A statement based on results will then be
translated into short-term sub-objectives for the organisationÊs work units.
At this level, the organisation identifies the operating needs, which start off
with the development of the performance level required to achieve the
organisationÊs mission. In the transition from strategic operations to tactical
operations, an organisation has to determine an effective and efficient
method to achieve the mission.

(f) Identifying Activities of Work Units

After an organisationÊs objectives and work units have been determined,
each unit has to develop its function statement. A function statement is a
charter for every work unit. The charter identifies the principal activities
of a work unit and combines the organisationÊs objectives from top to bottom,
and the sub-objectives for every work unit.
(g) Collating Tasks for Jobs

The activities of each work unit will be segregated into tasks that will be
performed by every member of the work unit. An activity of a work unit is
also known as the tasks, duties and responsibilities of a certain job. Through
this cascading process, ideas are spelled out to a workforce that will
produce the required output.
Figure 1.17 illustrates the five steps of converting an idea into a product.
Figure 1.17: Five steps to convert idea into product
1.11 SALARY PAYMENT: EQUITY ISSUES

Equity in salary payment is an important issue that is often debated among
employees. Equity will be evaluated through these questions:
(a) Is my salary reasonable compared to the salary received by my workmates?
(b) Is the payment of salary offered by this organisation equivalent to that of

my friends who have the same job in other organisations?
Generally, the payment of salary is made based on various factors. There are
13 factors that determine the payment of salary for a specific job which
has been discussed in Subtopic 1.8. These factors include, among others, level of
knowledge and skills, size of an organisation and geographical location.

In addition, the relative value of a job which means the importance of the job
within an organisation, and the relative value of an employee which means the
importance of an employee within an organisation, also determine the rate of pay.
Let us look at Example 1.3.
Example 1.3:
A managerial post is more important than a clerical post. A manager is directly

involved in decision making that will affect an organisationÊs performance,
such as profit and productivity. Although a clerk is also involved in decision-
making, it does not have a significant effect on the overall performance of
the organisation. Therefore, given the greater responsibility, a managerial post
commands a higher salary than a clerical post.
In conclusion, every employer has to justify the payment of salary for every post.
ACTIVITY 1.5
Ponder over the following situation: Zul is a university graduate.

Right after graduation, he applies for the post of executive at Qeemee &
Partners, a construction company in Kuala Lumpur. ZulÊs application is
accepted and he is paid RM2,500. This causes dissatisfaction in Azhar,
one of the employees in the company. Azhar, who has a diploma,
has worked in the company for two years, and is the same age as Zul
but only gets RM2,000 a month. Azhar plans to voice out his
dissatisfaction to Ms Mitha, their employer. What are your views on
this matter? Give your opinion and discuss it in the myINSPIRE forum.
Before we conclude this topic, try the following exercise to test your understanding
of what has been covered.

EXERCISE 1.2
1. The following statements on the determinants of rate of pay are

FALSE, EXCEPT:
A. An organisation that has a trade union usually offers a

lower rate of pay compared to an organisation that does not
have a trade union.
B. A business that has high labour costs compared to its earnings
is capable of paying a higher rate of pay.
C. An organisation that is small in size usually offers a higher
pay compared with an organisation that is large in size.
D. If salary is determined by geographical location, then pay in
the industrial area of Shah Alam, Selangor, would be higher
than in the industrial area of Bukit Kayu Hitam, Kedah.
2. The following statements are TRUE about a compensation

programme, EXCEPT:
A. The fast emerging service sector which has overtaken the

manufacturing sector today has encouraged service sector
employers to look for alternatives in providing incentives.
B. Wage and pay increment increase the total net earnings of
an employee.
C. Examples of employee benefits and services include payment
upon discharge, overtime pay, payment upon suspension
or termination of employment, and payment of pension.
D. The salary received can determine the type and quantity
of food, clothing, accommodation and vehicle that an
employee can afford.
3. Syarikat Maju Jaya Sdn Bhd has appointed you as the senior human
resource officer in the compensation and benefits department. You
have been instructed to observe and review the payment of basic
salary that is implemented by the company.
(a) Define basic salary.
(b) Describe six factors that determine the rate of pay for basic
salary.

4. Match the factors that influence the rate of pay (listed in the left-hand
column) to the appropriate statements (listed in the right-hand
column):
Factors Statements Relating to an Organisation

(a) Business type (a) Total annual sales is less than
RM25 million.
(b) Total (b) Convert raw petroleum into
compensation various chemical substances.
package
(c) Management (c) Pay highly qualified researchers.
philosophy
(d) Type and level of (d) Provide food and lodging
expertise required services.
(e) Business size (e) Employees receive a rate of pay
that is higher than that of workers
in other organisations in the same
industry.
5. Match the non-compensation components (listed in the right-hand

column) to the appropriate statements on non-compensation
dimensions (listed in the left-hand column).
Non-compensation Non-compensation
Dimensions Components
(a) Increase self-respect and (a) Total annual sales is less
satisfaction from the job than RM25 million.
done.
(b) Promote constructive (b) Convert raw petroleum
social relationships among into various chemical
employees. substances.
(c) Provide sufficient (c) Pay highly qualified
resources in the researchers.
implementation of jobs.
(d) Give employees enough (d) Show appreciation for the
control over their job to employeeÊs efforts and
allow fulfilment of contributions.
personal needs.
(e) Design jobs that require (e) Opportunity to get
sufficient attention and involved in a flexible
effort. work plan.

 An organisation has to design a compensation remuneration programme

that is fair, attractive and systematic for its employees.
 Apart from the payment of compensation, an organisation has to structure

various incentives and benefits that should be given to employees.
 Compensation can be described as all forms of monetary returns, evident

benefits and other services received by employees as rewards for their efforts.
 The compensation remuneration system includes the distribution of an

organisationÊs earnings to its employees.
 Compensation has three elements ă motivation, communication and strategy.
 Organisations use three types of compensations ă direct monetary

compensation, indirect monetary compensation and non-monetary
compensation.
 To ensure that an organisation achieves its goals and vision, it should carry
out strategic planning, which comprises strategic analysis, development of
strategy, implementation of strategy and monitoring of strategy.
 A compensation system should contain dimensions such as payment for

work performance, overtime payment, loss of job income continuation
benefits and incapacitation or death benefits.
 A non-monetary compensation system covers matters such as taking care of

an employeeÊs self-respect, physiological health and emotions.
 Among the main components of a compensation programme are basic wages

and pay, increment, incentives and service benefits.
 The rate of pay considers factors such as level of knowledge, type of skill
and expertise as well as type of business.

Basic rate of pay Incentive

Compensation Indirect monetary compensation
Compensation system In-kind claims
Deferred income Labour demand
Demand for labour Non-monetary compensation
Direct monetary compensation Supply of labour

Topic  Compensation
Legislation
2
LEARNING OUTCOMES
1. Describe six elements and two models of a salary reform system;
2. Discuss the importance of legislative frameworks and system in
the determination of the rate of pay and wage; and
3. Assess the functions of legislative control over the rate of pay
and wage.
 INTRODUCTION
During your employment, has your employer ever neglected to pay or delayed
paying your salary due to financial reasons? Have you ever received a bonus,
incentive or pay increment that you were not satisfied with? If you have never
been employed, have you ever heard of such incidents?
Even though an employer has the full right to determine employeesÊ rates of pay,
the legislative aspects should not be ignored. The role of legislation in
compensation remuneration is vital. Employers should make the employment
Acts as their guide in shaping their organisationÊs compensation policies or
systems.
In this topic, the functions of three main Acts, the Employment Act 1955, the
WorkmenÊs Compensation Act 1952 and the Industrial Relations Act 1967, will be
discussed. There will also be a discussion of the legislative process, which is the
role of law, in determining an employeeÊs salary. LegislationÊs importance and
control over the rate of pay and wages will also be elaborated on.

38  TOPIC 2 COMPENSATION LEGISLATION
2.1 LEGISLATION PROCESS

The economic transformation programme implemented by the Government has
spurred rapid economic growth and created employment opportunities. For the
good of all parties, steps to increase efficiency and productivity have to be
implemented. This will guarantee the countryÊs competitive edge in the future
apart from contributing to employeesÊ overall development and quality of life.
Realising the importance of this matter, the National Labour Advisory Council
(NLAC) formulated Guidelines on the Salary Reform System. These guidelines
benefit unionised employees, non-unionised employees, employers and the
country, both in the short and long terms. The guidelines can assist employers
and employees in formulating salary reform systems that are most appropriate to
the needs and environment of their company.
The guidelines aim to:
(a) Create a closer linkage between salary and productivity to enhance

competitiveness and foster employee stability;
(b) Allow employers to create a broader and more orderly approach to increase
employee productivity and salary through more active involvement and
cooperation among employees; and
(c) Allow employees to enjoy their share of the organisationÊs earnings.

Adherence to the guidelines can foster fairness and social solidarity and
enhance employeesÊ quality of living apart from developing opportunities
for career advancement and increased work satisfaction.
SELF-CHECK 2.1
If your employer delays or fails to pay your salary or other compensation

as stated in your contract of employment, are you in a legal position to
sue your employer? Justify your answer.

TOPIC 2 COMPENSATION LEGISLATION  39
2.2 MAIN ELEMENTS OF SALARY REFORM

SYSTEM
Do you know that there are a few key components in a monthly pay slip? Can you
name one of the components?
Six main elements need to be taken into account in determining the salary reform
system. These elements are as follows:
(a) The salary has to cover a combination of monthly salary or other frequent
payments, annual salary increment, annual bonus and other non-frequent
bonuses.
(b) The salary has to have fixed components, which include basic pay and
additional components in the form of variable payments.
(c) The fixed and variable components are as follows:
(i) Fixed Components

Basic pay, annual salary increment and contractual bonus (whichever
is relevant).
(ii) Variable Components

Annual salary increment is based on growth in productivity or profit
distribution formula.
(d) Change in basic pay needs to consider factors such as cost of living.
(e) Fixed salary components should portray work values. The payment of salary
increment is the recognition of an employeeÊs period of service and
performance.
(f) Variable salary components can be determined by correlating productivity

and an individualÊs performance, workforce or organisation. The indicators
used should be transparent and measurable.
These elements are important to avoid conflict, as shown in Figure 2.1, which
shows a conflict between a manager and a staff due to the staffÊs dissatisfaction
with his salary.

Figure 2.1: Salary dissatisfaction
2.3 SALARY REFORM SYSTEM MODELS

Do you know that the salary reform system is made up of the profitability
model and productivity model? An organisation can combine both models by
taking into account company profit and employee productivity.
For the salary reform system to be successfully implemented, it requires both the
cooperation of the employer and employee and contains the following
characteristics:
(a) Sufficient flow of information and appropriate timing between employer

and employee; fostering of employee confidence in the system; and
continuous observation and evaluation between employer and employee.
Sensitive corporate information supplied should be handled appropriately;

(b) Effective employee consultation and involvement in decisions that concern

them;
(c) Training for managers and employees in the incorporation, consultation

and implementation of the system;
(d) Representatives of the employer and employees should strive to come to a

consensus according to the consultationÊs objectives; and
(e) Both parties should create a framework for consultation including agreeing
upon a common consultation agenda.
There are two models for the salary reform system. These are as follows:
(a) Profit Model

In the profit model, fixed salary components consist of basic salary, annual
salary increment and contractual bonus (whichever is relevant).
Variable components consist of performance bonus determined according

to the profit distribution formula and other correlated variables:
(i) The formula should be agreed upon by the management and union
and clarified in joint agreements or through consultations for sectors
that are not represented by unions; and
(ii) Salary increment will be paid when profit is greater than the
determined level or value that is calculated based on return on
investments, return on assets or return on equity and the average profit
acquired in the past few years.
(b) Productivity Model

In the productivity model, fixed salary components consist of basic salary,
annual salary increment and contractual bonus (whichever is relevant).
Variable components consist of the payment of variable productivity. It is
determined as follows:
(i) The management and union will negotiate the pay increase incentive
based on increase in productivity for the related year;
(ii) The pay incentive for a particular year should match the productivity
increase;
(iii) Annual increment will be deducted from the agreed amount of pay
increase and the remainder given as a payment of variable
productivity, made periodically;
(iv) The payment of variable productivity depends on an organisationÊs

performance. If the performance clearly deteriorates, the variable
payments might not be paid;
(v) At the outset, a formula or strategy of mutual understanding has to be

created to make adjustments for the payment of variable productivity;
(vi) An organisation that does not have its own productivity indicators
can use the industry indicator, the countryÊs productivity or growth
indicator as a guide to determine salary adjustments for a particular
year; and
(vii) The productivity indicators used should be based on the added values
of every employee or other methods.
ACTIVITY 2.1
Based on the given information, what is the difference between the

profit model and productivity model of salary reform? Which model
is used by your organisation? Explain why the human resource
department of your organisation uses the model. If you have never
been employed, list the differences between the profit model and
productivity model based on what you have learned.
2.4 LINK BETWEEN LEGISLATION AND

COMPENSATION ADMINISTRATION
When we outline an organisationÊs compensation programme, we need to
scrutinise the laws of the country. This is because the laws of the country give
employers guidelines regarding types of compulsory compensation and types of
compensation which, although optional, are necessary.
There are three main Acts related to compensation programme. These are:
(a) Employment Act 1955;
(b) WorkmenÊs Compensation Act 1952; and
(c) Industrial Relations Act 1967.

2.4.1 Employment Act 1955

What is the Employment Act 1955?
The Employment Act 1955 is provisioned to control the rights and

obligations of employers and employees in the private sector. This Act
spells out the minimum standards for the employeesÊ payment of wage
conditions and protects not only full-time employees but also part-time
and temporary/fixed-term contract employees from being exploited by
employers.
The following make up the categories of employees who are subject to the Act:
(a) Those who work in the private sector in Peninsular Malaysia and Federal
Territory of Labuan.
(b) Those whose wages do not exceed RM2,000 per month under a contract of
service with an employer or without taking into account their total earnings.
This applies to those who:
(i) Work as manual labourers;
(ii) Engage in the operation or maintenance of mechanically propelled

vehicles operated for the transport of passengers or goods or for
reward or commercial purposes;
(iii) Supervise and oversee employees in manual labour who are employed
by the same employer in and throughout the performance of their
work;
(iv) Engage in any capacity, in any vessel registered in Malaysia with

certain exceptions; and
(v) Engage as a domestic servant.

Section 61 of the Employment Act 1955 compels employers to state in detail

information related to employees such as name, gender, age, identification
card number, permanent address, job post, employment commencement
and end date, terms and conditions of employment, along with the pay and
allowances received by the employees for each employment period.
All the information should be given by the employers to the employees in a copy
that contains the terms of employment. The employees should also receive a copy
of the pay slip every time they receive their pay for a specified period.
Besides this, employees must abide by all terms and conditions of service which
have been mutually agreed upon with the employers. For example, if an employee
wishes to cease employment, he has to give a resignation notice. The notice period
depends on the period agreed upon by the employee and employer, according
to the contract of employment signed by both parties. If there is any action by
the employer which contradicts labour laws or terms in the service contract,
the employee can report the matter to the Labour Department for action to be
taken.
Figure 2.2 shows you eight important regulations documented in the Employment
Act 1955.
Figure 2.2: Eight important regulations in the Employment Act 1955

2.4.2 Workmen’s Compensation Act 1952

The WorkmenÊs Compensation Act 1952 was enforced in Peninsular Malaysia on
1 April 1953 and in Sabah and Sarawak on 1 June 1981. This Act was introduced
with the purpose of giving compensation to employees who are involved in
accidents, suffer injuries at the workplace or suffer illness caused by their
employment. This Act also covers the payment of compensation to an employeeÊs
dependants if the employee dies as a result of a work-related accident.
On 1 April 1993, this Act was amended; it deems that all local and foreign workers
in the private sector should be protected according to the Social Security Act 1969.
An amendment to employee protection was also made on 1 November 1996.
Through this amendment, a non-manual employee with a wage of not more than
RM400 per month in the private sector will be protected. A foreign worker with a
wage of not more than RM500 or who works as a manual labourer will be protected
by the Foreign Workers Compensation Insurance Scheme (FWCIS) 1952. Under
the WorkmenÊs Compensation Act 1952, an employer must ensure that a
legitimately hired foreign worker is insured with any one of the insurance
companies appointed to the FWCIS panel.
The insurance companies listed in the FWCIS panel as of 23 March 2011 are:
(a) Allianz General Insurance Malaysia Berhad;
(b) Berjaya General Insurance Berhad;
(c) Lonpac Insurance Berhad;
(d) Malaysian Assurance Alliance Berhad;
(e) Mayban General Assurance Berhad;
(f) Malaysia National Insurance Berhad;
(g) Syarikat Takaful Malaysia Berhad;
(h) Takaful Nasional Sdn Berhad;
(i) Tahan Insurance Malaysia Berhad;
(j) Jerneh Insurance Berhad;
(k) Etiqa Takaful Berhad;
(l) Multi-purpose Insurance Berhad;

(m) MUI Continental Insurance Berhad;
(n) QBI Insurance (M) Berhad;
(o) RHB Insurance Berhad;
(p) Royal & Sun Alliance Insurance (M) Berhad;
(q) Takaful Ikhlas Sdn Bhd;
(r) The Pacific Insurance Berhad;
(s) Tokio Marine Insurans (M) Berhad;
(t) Uni Asia General Insurance Berhad;
(u) Am Assurance Berhad;
(v) AXA Affin Assurance Berhad; and
(w) Commerce Takaful Bhd.
The benefits employees are entitled to, based on the coverage of the Act, are listed
in Figure 2.3.
Figure 2.3: Benefits that employees are entitled

to according to the WorkmenÊs Compensation Act 1952

Various employee benefits are also detailed in the Social Security Act 1969,
which is administered by the Social Security Organisation (SOCSO). SOCSO is
responsible for managing matters related to workersÊ compensation. Therefore,
benefits offered under the WorkmenÊs Compensation Act 1952 are almost
similar to the benefits available under the Social Security Act 1969. Figure 2.4
provides the statistics of SOCSO beneficiaries in 2017.
Figure 2.4: Statistics of SOCSO beneficiaries in 2017

Source: https://myhos.mohr.gov.my/ebook/istatistik1_2019/mobile/index.html#p=78
Figure 2.4 indicates that there were 568,578 recipients under SOCSO in 2017.
The main claims were for survivorsÊ pension (268,540), temporary disability
(65,477), pension and emergency assistance (63,947) and benefits for dependants
(45,509).

2.4.3 Industrial Relations Act 1967

Before the Industrial Relations Act 1967 was introduced, employers and
employees were encouraged to resolve problems based on two ordinances:
(a) Industrial Courts Ordinance 1948 (voluntary conciliation through third

parties); and
(b) Trade Disputes Ordinance 1949 (voluntary arbitration by the Industrial

Court).
The enforcement of the Industrial Relations Act 1967 allowed the intervention of
the Government in industrial conflicts. Harmonious relations between employees
and employers can exist when the interests of both parties are protected.
Section 1 of the Industrial Relations Act 1967 describes the Act as follows:
„An Act to promote and maintain industrial harmony and to provide for the
regulation of the relations between employers and workmen and their trade
unions and the prevention and settlement of any differences or disputes
arising from their relationship and generally to deal with trade disputes and
matters arising therefrom.‰
This Act stipulates principles and guidelines for employers and employees on
the practice of industrial relations to achieve better industrial harmony.
Part I of the Act defines important terms while Part II states employee protection
rights and their unions. Section 5 of the Industrial Relations Act 1967 affirms
that employers should not:
(a) Prevent employees from participating in unions;
(b) Terminate employees who participate in unions;
(c) Reject applications of employees who participate in unions; or
(d) Compel employees to participate in unions.

Other matters laid down in the Act are:
(a) Recognition and scope of union representation (Part III);
(b) Collective bargaining and collective agreement (Part IV);
(c) Conciliation (Part V);
(d) Representation towards dismissal (Part VI);
(e) Industrial Court (Part VII);
(f) Research and investigation (Part VIII);
(g) Trade conflicts, strikes and lockouts and matters arising therefrom (Part IX);
and
(h) Miscellaneous (Part X).
Table 2.1 shows you the number of unions in Malaysia in 2017 and 2018.
Table 2.1: Number of Unions in Malaysia in 2017 and 2018
No Item 2017 2018
1. Trade Union
(a) Private 491 497
(b) Government 164 167
(c) Statutory Body or Local Authority 87 87
Total 742 751
2. Trade Union Memberships
(a) Private 369 389
(b) Government 489 471
(c) Statutory Body or Local Authority 69 69
Total 927 929
Source: https://myhos.mohr.gov.my/ebook/istatistik1_2019/mobile/index.html#p=83
Table 2.1 indicates that the total number of unions formed between 2017 and
2018 increased from 927 to 929.

This Act involves two main parties: the Malaysian Employers Federation as a
representative of employers in general and the Malaysian Trade Union Congress
as a representative of employees in general. Both parties should abide by their
belief in the concept and principles contained in the National Pillars (Rukun
Negara).
Therefore, the relevant parties should be aware of their responsibilities towards

the community and those whom they represent. They should also acknowledge
that industrial peace is important for a stable economy, especially during a period
of stagflation.
They should also acknowledge that a stable economy is very important in

achieving the aims of the countryÊs development plans. This is vital for a united
Malaysia, righteous in the social aspect and impartial as well as advanced in the
economic aspect.
As such, employers and employees in Malaysia are encouraged to adhere to the

provisions related to the Industrial Relations Act 1967, which are to:
(a) Avoid taking measures that are not appropriately related to any industrial
conflicts;
(b) Resolve all dissensions, complaints and conflicts in line with the rules of
conflict in joint agreements or by holding peace negotiations and equal
weights, if there are no joint agreements;
(c) Determine that all matters in a conflict are managed by the appointed vehicle
for that purpose throughout the period;
(d) Encourage constructive and positive cooperation at all levels in an industry

and hold tight to the spirit of the agreement that has been jointly agreed
upon;
(e) Have regulations (if none exists) to determine a complete and quick
investigation for joint settlements towards any complaints;
(f) Follow all steps in the regulations with regard to complaint settlement
and avoid taking any improper measures (that do not heed the regulations);
(g) Avoid using force, fear, abuse and „job tardiness‰, „job reluctance‰ and
„strike at the workplace‰; and
(h) Complete the knowledge of the management and employees about their
obligations to one another.

Table 2.2 shows you the number of trade dispute cases handled by the Department
of Industrial Relations (2015ă2018).
Table 2.2: Number of Trade Dispute Cases
2015 2016 2017 2018

Year
*JanăDec **JanăDec ***JanăDec ****JanăSept
Number of
292 300 247 213
cases handled
Number of
248 262 189 138
cases resolved
Note:
1. Trade dispute is defined under Industrial Relations Act 1967 (Akta 177) as a dispute
between an employer and his workmen which is connected to the employment
or non-employment or the terms of employment or the conditions of work of
such workmen.
2. *Cumulative data from January 2015ăDecember 2015
3. **Cumulative data from January 2016ăDecember 2016
4. ***Cumulative data from January 2017ăDecember 2017
5. ****Cumulative data from January 2018ăSept 2018
Source: Statistics Department of Industrial Relations Malaysia
Source: http://www.data.gov.my/data/dataset/a771ba36-592f-4c0e-b86c-
c15dd66a7cf0/resource/e6f2148f-6d53-4f2d-b5f6-
3f9ac3abd491/download/jad2jppsept2018.xlsx
Table 2.2 indicates that the total number of trade dispute cases handled by the
Department of Industrial Relations decreased from 2016 to 2018. The number of
cases resolved in 2018 is relatively low compared to previous years.
Both the employer and employee should adhere to industrial relations practices
and to what has been agreed upon from time to time between the Malaysian
Employers Federation, as a representative for employers in general, and the
Malaysian Trade Union Congress, as a representative for employees in general
and accepted by the Ministry of Human Resources.

Employers should also agree not to support or encourage any unfair labour
practices such as:
(a) Disturbing trade union affairs and employeesÊ right to form a union;
(b) Discriminating against or restraining employees who perform legal trade

union activities; and
(c) Abusing power in any instance.
Trade unions should agree not to support or encourage unfair labour practices
as shown in Figure 2.5.
Figure 2.5: Unfair employee practices
The Industrial Relations Act also affirms that employers cannot stop their
employees from participating in trade unions. An employer cannot refuse the
application of an employee solely because the applicant has participated in a
trade union.
In addition, an employer cannot threaten to terminate an employee if he decides

to participate in a trade union. A trade union also cannot compel or influence
any employee to participate.
Test your understanding by doing the following exercise before continuing to

the next subtopics.

EXERCISE 2.1
1. The Employment Act 1955 aims to protect these employees,

EXCEPT:
A. Manual labourers.
B. Supervisors of manual labourers.
C. Legal foreign workers.
D. Employees with a wage of not more than RM2,500 a month.
2. The following are guidelines that should be obeyed by employers

according to Section 5 of the Industrial Relations Act, EXCEPT:
A. Prevent employees from participating in unions.

B. Terminate employees who participate in unions.
C. Reject applications of employees who participate in unions.
D. Avoid taking any appropriate measures in relation to any
industry conflicts.
3. The following are important legal aspects in the formation of an

organisationÊs compensation administration system, EXCEPT:
A. Achieve justice and equality.

B. Avoid oppression and discrimination among employees.
C. Avoid good relations between employers and employees
within a harmonious job environment.
D. Adhere to the procedures and laws in the protection of
employersÊ and employeesÊ rights.
Essay Question
State the three Acts that Malaysian employers would refer to for
guidelines on forming their compensation administration system.

2.4.4 Payment System

Even though a payment system may differ according to the type and arrangement
of a job, current situation and other factors, the following principles have to be
adhered to in order to ensure that the payment system being practised is founded
upon employment ethics. In addition, it can reduce conflicts.
These principles are as follows:
(a) The payment system must be prepared in the easiest manner possible;
(b) The rate differences must be related to the employment needs, and if
required, the rates should be considered with methods that have been agreed
upon or accepted;
(c) Overall work rate, performance bonus and other remuneration have to be
determined according to definite methods; and
(d) The payment rate must be negotiated between employers and employees,
or their representatives.
2.4.5 Employment Guarantee

Concerns that arise due to non-guaranteed employment, excess of workers in the
job market and various problems related to retirement have a major influence on
the attitudes of employees towards their jobs and towards harmonious industry
relations. To ensure the efficiency and success of an industry, an employer has to
create a stable and conducive employment relationship. Besides that, an employer
needs to do the following:
(a) Give hope for advancement and promotion in the industry by giving
opportunities for any required training; and
(b) Make provisions for retirement schemes, employee reduction and paid leave
in addition to the statutory provisions.

2.4.6 Redundancy and Retrenchment of Employees

When there is an excess of employees, employers have to take the necessary steps
to take care of their own interests and those of the employees. Apart from
consultations with representatives of trade unions and the Ministry of Human
Resources, employers have to take positive steps to avoid or reduce retrenchment
of the workforce. These steps are listed in Figure 2.6.
Figure 2.6: Protecting employeesÊ interests
The employer has the last say in determining the size of the workforce.
Nevertheless, before any decisions are made about retrenching employees,
employers have to consult the employees or trade unions. If retrenchment still
needs to be done despite taking specific measures, employers have to undertake
the following steps:
(a) Immediately inform the relevant employees;
(b) Propose retrenchment schemes and voluntary retirement schemes;
(c) Pay benefits to the employees;
(d) Offer retirement to employees who are past the normal retirement age;
(e) Assist employees in looking for jobs outside the industry with the
cooperation of the Ministry of Human Resources;

(f) Extend the process of employee termination to a longer period; and
(g) Ensure that the announcement of employee termination is not made prior to
informing the employees and their representatives or trade unions.
Employee termination has to be done according to an objective measure. The

measure must be discussed first with the employeesÊ representatives or trade
unions and must contain the following:
(a) The need to operate the workplace or industry site efficiently;
(b) An employeeÊs job capability, experience, expertise and qualifications

that are needed by the workplace or industry site under item (a) above;
(c) Consideration due to long service and employee position (non-citizen,

part-time, temporary or permanent);
(d) Age; and
(e) Other measures that might be formulated in the context of national policies.
Employees who have been terminated due to an excessive workforce must be

given priority to be re-employed by their employers when they can afford to take
in employees again. Specific objective steps and measures must be part of the
working policy of a workplace or industry site.
Table 2.3 shows you the data on retrenchment by state, sector and job category
from January to September 2018.

Table 2.3: Retrenchment by State, Sector and Job Category from JanuaryăSeptember 2018
HIGHEST EMPLOYEE RETRENCHMENT ACCORDING TO STATES

01 JANUARYă30 SEPTEMBER 2018
No State Number of Employees
1. Kuala Lumpur 4,494 (28.2%)
2. Selangor 3,501 (22.01%)
3. Pulau Pinang 2,981 (18.74%)
4. Johor 1,442 (9.07%)
5. Sabah 908 (5.71%)
HIGHEST EMPLOYEE RETRENCHMENT ACCORDING TO SECTORS

No Code Sector (MSIC) Number of Employees
1. C Manufacturing 8,356 (52.5%)
Wholesale and retail trade, motor

2. G 1,083 (6.8%)
vehicle repairs and motorcycle
Professional, scientific and technical

3. M 882 (5.5%)
activities
4. J Information and technology 815 (5.1%)
Accommodation and food and

5. I 810 (5.09%)
beverages activities
HIGHEST EMPLOYEE RETRENCHMENT ACCORDING TO JOB CATEGORY

Employment Category & Code

No Code Number of Employees
(MASCO)
1. 2 Professional 3,056 (19.2%)
2. 1 Administration, management 2,678 (16.8%)
3. 5 Services, shop and sales work 2,263 (14.2%)
4. 9 General work 2,089 (13.1%)
Operators, plant installer and

5. 8 1,957 (12.3%)
machinery
Source: http://jtksm.mohr.gov.my/images/personalisation/warga-
jtksm/statistik%20jabatan/sept_2018.pdf

2.4.7 Negotiation Regulations

Joint negotiation agreements must be performed in the simplest manner possible
and for that purpose, employers and unions must agree on the regulations they
must abide by. The regulations should have:
(a) Similar conditions of employment that could be used effectively within

the entire industry;
(b) General guidelines for negotiations on matters that could not be finalised
satisfactorily at the industry level; and
(c) A regulation to resolve conflicts whether for the industry as a whole or as

an example, for use at the industry site or workplace level.
2.4.8 Joint Agreements

Joint agreements operate on important matters, which can be included in
one document or elaborated on separately. Nevertheless, specific provisions
must exist so that revision can take place to ensure that the regulation provisions
are always updated.
Regulation provisions must affirm the formal laws of the joint negotiating body
and they should embrace:
(a) Matters that need to be negotiated and the level at which the negotiations
should take place;
(b) Important methods of negotiating agreements on employment conditions,

including period of agreement and how a party can terminate and
renegotiate the agreement; and
(c) Regulation on excessive employees and temporary lay-offs, discipline

and termination.
These important provisions should cover wages and pay, overtime rates, bonus if
applicable and systems for determining income in relation to performance;
working period; provisions for overtime work and work shifts; leave and salary
adjustments.

The provisions should cover other matters including side benefits such as paid
leave, pension, guaranteed salary scheme and work study. These provisions are
important to determine level of performance and output capacity including job
categorisation measures such as method of study, work measure and work
evaluation; trade union fee deduction and other deductions from the employeesÊ
salary by the management; facilities of trade union activities at the workplace;
and others.
SELF-CHECK 2.2
Based on discussions in the previous subtopic, what will happen to the

employer if the payments of salary and wages are not in accordance
with the three main acts, the Employment Act 1955, the WorkmenÊs
Compensation Act 1952 and the Industrial Relations Act 1967? List down
your answer.
2.5 IMPORTANCE OF LAW IN DETERMINING

SALARY AND WAGE PAYMENT RATES
The importance of legislation in designing a compensation administration
system cannot be argued. This is because legislative aspects can guarantee the
welfare of an employee so that he will be better protected and not oppressed by
the employer. The importance of legislation in four aspects of a compensation
administration system is illustrated in Figure 2.7.

Figure 2.7: Legislation and the four aspects of the compensation administration system
Source: http://creative.gettyimages.com
The following are descriptions of the four aspects of a compensation

administration system:
(a) Achieve Justice and Fairness

To ensure that proportionate salaries are given to employees, the
Employment Act 1955 lays down a few regulations and conditions in salary
determination. For example, salary determination for public holidays, off
days and overtime are set at reasonable rates.
Employers must adhere to the regulations in this Act to ensure fairness

in the payment of employee salaries. The WorkmenÊs Compensation
Act 1952 guarantees that employees who suffer from accidents get fair
treatment from their employers, that is, receive compensation which is
proportionate to the severity of the accident.

(b) Avoid Oppression and Discrimination

Apart from the Employment Act 1955 that aims to prevent the exploitation
of employees by their employers, the WorkmenÊs Compensation Act of 1952
was also introduced to award proportionate compensation to employees
who suffer from accidents in the workplace, or service or employment
illnesses, which are illnesses due to the job. Therefore, oppression will not
happen to employees who are disabled due to workplace accidents.
Employers will assume full responsibility for the welfare of these employees.
The various benefits that employees qualify for should include lifetime
hospitality allowance, given to employees who are disabled and need
someone, such as a nurse, to take care of them. This allowance is used to pay
the nurse who will take care of the disabled employee.
(c) Maintain Good Relations between Employers and Employees in a Work

Environment
An employeeÊs welfare can be better protected with the existence of a trade
union. The purpose of a trade union is to ensure that the rights of employers
and employees are adhered to impartially. If both parties abide by the
regulations that have been determined and agreed upon, there would not be
any industrial conflicts which would have an adverse impact on an
organisationÊs performance and productivity.
(d) Adhere to Procedures and Legislation in Protecting the Rights of Employers

and Employees
Each process in any work activity must follow the procedures laid down.
The procedures developed by the employers should be guided by the Acts
specified by the Government. For example, the WorkmenÊs Compensation
Act 1952 requires employers to submit written reports on accidents to the
Labour Department within 10 days from the date of the accident. This is part
of the accident reporting procedure which needs to be adhered to by
employers. If an employer fails to do so, he or she could be fined up to
RM5,000.
The enforcement of fines or penalties is one method to ensure that employers

and employees obey the regulations in the respective Acts.

2.6 LEGISLATIVE CONTROL OVER SALARY

AND WAGE PAYMENT RATES
Acts related to employment were created by the Government to, among others,
control salary and wage payment rates. Legislative control over the rates was first
introduced when there was low unemployment. This caused the salary and
wage rates to increase and resulted in an increase in demand for services and
products. Such economic conditions will lead to inflation, hence the need for the
Government to step in. Employers are allowed to determine salary and wage rates
but they must abide by the regulations set by the Acts. As an example, take the
Wages Council established through the Wages Council Act 1947. The main aim of
the council is to regulate the minimum remuneration and conditions of
employment of certain categories of employees. Currently, the council covers
four areas:
(a) Wages Regulation (Catering and Hotel) Order 1967;
(b) Wages Regulation (Shop Assistants) Order 1970;
(c) Wages Regulation (Cinema Workers) Order 1972; and
(d) Wages Regulation (Penang Stevedores and Cargo Handlers) Order 1967.
Before we end this topic, test your understanding through Exercise 2.2.

EXERCISE 2.2
1. Legislative control over salary and wage rates was introduced to

control:
i. Unemployment.
ii. Increase in salary and wage rates.
iii. Increase in demand for services and products.
iv. Inflation.
A. i and ii
B. i, ii and iii
C. i and iii
D. i, ii, iii and iv
2. The WorkmenÊs Compensation Act 1952 was introduced to provide

compensation to employees if they suffer:
i. Service illness.
ii. Death or permanent disability during the course of
employment.
iii. Permanent disability.
iv. Temporary disability.
A. i and iii
B. iii and iv
C. i, iii and iv
D. i, ii, iii and iv
Essay Questions
1. State four reasons why legislation is important for the

compensation administration system.
2. Explain how legislative control determines rate of pay.

 A salary reform system has six elements, among which are fixed and variable
components, portray work values and cover the combination of monthly
salary.
 The salary reform system model is of two types, profit model and productivity
model.
 Although an employer has the full right to determine the rate of pay, legislative
aspects should also be taken into account.
 Acts that control the payment of employee compensation in Malaysia are

the Employment Act 1955, WorkmenÊs Compensation Act 1952 and Industrial
Relations Act 1967.
 An employer should make the Acts related to compensation the basis of its
compensation administration system.
 A good compensation system is important to increase an organisationÊs

efficiency and productivity, in addition to protecting employeesÊ welfare and
improving their quality of life. In light of this, the National Labour Advisory
Council formulated Guidelines on the Salary Reform System.
 These guidelines can benefit union and non-union employees, employers

and the country, both in the short run and long run.
 The guidelines will assist employers in formulating a salary reform system

which is most appropriate for the interests and environment of their
organisation.
 Employers and employees should cooperate on the issue of compensation

payment so that they can protect the interests of both parties.

Employment Act 1955 Permanent disability benefits

Employment illnesses Rehabilitation expense benefits
Industrial Relations Act 1967 Salary reform system
Legislation Temporary disability benefits
Medical benefits WorkmenÊs Compensation Act 1952

Topic  Job
Analysis
3
LEARNING OUTCOMES
1. Discuss job analysis, job description and their importance in human
resource management;
2. Specify the objectives and process of a job analysis and job
description; and
3. Examine the different types of mistakes commonly made during
a job analysis.
 INTRODUCTION
Do you know that job analysis is the main process in compensation
administration? In the previous topic, we discussed organisational aims as well as
the internal and external environments that could influence the formation of
an organisationÊs compensation structure.
When doing a job analysis, we need to retrieve and collate accurate and systematic
information about the job to help the organisation formulate a salary structure
that is compatible with its capabilities and demands. We will also collate and
form a list of applicable knowledge, skills and abilities that the applicants must
possess to do the job.
In this topic, we will examine the importance of job analysis for an organisation
and discuss how to implement the job analysis process correctly and avoid making
common job analysis mistakes.

TOPIC 3 JOB ANALYSIS  67
3.1 DEFINITION OF JOB ANALYSIS

We often use the term „job analysis‰ but do we really understand what it means?
An accurate understanding of the term will help us grasp the job analysis process
better and consequently, enable us to form the salary structure of a job.
Job analysis refers to the process of obtaining descriptive information on

a specific job. It is a systematic process to determine the tasks performed on
a job.
The process identifies the skills, knowledge and abilities required of applicants
to perform the job. Let us look at an example.
Example 3.1:
To hire an administrative clerk, we have to first identify all the tasks performed
by an administrative clerk. Among these tasks are typing letters and filing
relevant documents as well as records of a companyÊs internal and external
correspondence. After identifying the duties of an administrative clerk, we need
to identify the types of skills and knowledge required for the post.
Since the three main skills involved are writing and typing letters, answering
telephone calls correctly and using the computer, based on the analysis, the
person the organisation hires has to possess all the skills so that the clerical
tasks are efficiently executed.

68  TOPIC 3 JOB ANALYSIS
3.2 IMPORTANCE OF JOB ANALYSIS

Do you know how important job analysis is to an organisation? It is an important
human resource management practice because each activity in human resource
management involves gathering and collating data which has the potential to
facilitate decision-making.
Figure 3.1 shows you the importance of job analysis in human resource
management.
Figure 3.1: Importance of job analysis
These six points are further explained in Table 3.1.

Table 3.1: Importance of Job Analysis for Human Resource Managers
Job Analysis Description
Valuation of a Organisations will value a certain job to form an impartial

Specific Job internal wage structure. Through the process of job analysis,
detailed and accurate information related to a specific job can be
collected and this eases the process of setting a salary or wage
structure that will satisfy all employees.
Redesigning Organisations redesign components of jobs to make the jobs

Jobs more efficient and in sync with current changes. Therefore,
descriptive and up-to-date information about the jobs is needed
to allow the organisations to redesign themselves fast and cost
effectively.
Human Resource Human resource planners are always trying to adapt the human
Planning resource needs of their organisations to the constantly changing
business environment to allow the organisations to function
dynamically. Therefore, a job analysis will supply the necessary
information related to the job to enable the planners to match
candidates to the organisationÊs needs.
Selection Organisations can easily identify qualified applicants for a

specific job. This is done using information supplied by the
job analysis. Some of the information includes qualification
match, knowledge, skills, abilities and job scope.
Performance Through job analysis, organisations can assess an employeeÊs

Evaluation level of skills in executing his job and his work performance.
Performance evaluation through job analysis will determine
the rewards to be received by each individual employee.
Training and Identify the skills, abilities and knowledge of employees

Development that need to be enhanced. Information from job analysis can
assist organisations in developing training programmes for their
employees to keep their employeesÊ skills, knowledge and
abilities as up to date as possible so that the employees can move
forward with the organisations.
SELF-CHECK 3.1
Earlier in this topic, we discussed the definition of job analysis. What will
happen in an organisation if job analysis is not carried out?

ACTIVITY 3.1
1. Identify the tasks that you need to perform in the organisation

that you are currently working in. List down the knowledge and
skills required to perform the job.
2. Note down the tasks for the following jobs according to your
understanding:
(a) Doctor;
(b) Lawyer;
(c) Nurse;
(d) Bank manager; and
(e) Religious officer of the Islamic Religious Department.
3.3 OBJECTIVES FOR PERFORMING A JOB

ANALYSIS
Before an organisation decides to perform a job analysis, it should identify the
purpose for doing the job analysis. This is important to ensure that the job analysis
is in line with the organisationÊs aims and objectives. A good job analysis is one
that can help the organisation gain a competitive edge in the market. The following
Figure 3.2 summarises the objectives for performing a job analysis.
Figure 3.2: Four objectives of job analysis

Let us now learn further the objectives in the following sections.
(a) To Clarify the Importance of a Job that has been Identified from the Aspects
of Status, Area and Job Scope
Through a job analysis, an organisation tries to clarify the situation or status
of a job to members of the organisation and external parties. For example, an
organisational hierarchy shows the categorisation of each job in the
organisation according to status. This is to enable the employees to
differentiate between the reporting and working hierarchy. For example, the
chief clerk directs the general clerk. He is above the general clerk in the chain
of command. Meanwhile, the general worker and typist work under the
general clerk, that is, they report to him.
Apart from this, a job analysis is also performed to provide information

on the scope of work of a specific job. This is explained in the following
Example 3.2.
Example 3.2:
An administrative clerk knows precisely the scope of his or her work,

which is to ensure that all the organisationÊs documentations are properly
filed. This scope of clerical work is characteristic of the post of the
administrative clerk.
(b) To Form a Better, Clearer and More Accurate Understanding of the

Knowledge, Skills and Abilities Required for the Job
Through job analysis, the organisation would know the knowledge, skills
and abilities that are required for a particular job. For example, the applicant
for the post of clerk would have to know how to do filing, telephone and mail
duties (Figure 3.3). Therefore, by doing a job analysis, an organisation tries
to accurately and precisely spell out the skills, knowledge and abilities
required to accomplish specific tasks.

Figure 3.3: Generic duties of a clerk
(c) To Determine the Measures of Performance that would be Accepted by the

Job Holder
One of the objectives of a job analysis is to determine the standard indicator
for each job in an organisation. Let us look at Example 3.3.
Example 3.3:
An administrative clerk has to ensure that all important files are stored
safely and properly and that the documentation is done in a complete
and orderly manner.
The performance indicator for an administrative clerk is set at a standard

indicator, which is the achievement of at least 80% of an administrative
clerkÊs task efficiency. The value of 80% is the performance indicator
that needs to be attained by administrative clerks at any organisation.
How a rate is determined as a standard indicator depends on the listed

tasks and jobs. The officer or supervisor will consider the performance
level that can be achieved and which is in line with the organisationÊs
aims. After an agreement has been reached, an indicator, in this
case 80%, will be used to represent the performance value of the
administrative clerk.

(d) To Determine the Main Tasks of the Job, the Job Specifications and the
Job Environment
Through job analysis, tasks are listed out and arranged according to priority.
Let us analyse Example 3.4.
Example 3.4:
Which one of these two duties of an administrative clerk is of greater

priority: filing documents or typing letters? If filing documents is more
important, it will be placed at the top of the to-do list. Each job list has
priorities that need to be adhered to.
A job analysis will also clarify the job specifications; for example, the kind
of person needed to do the job is someone who is healthy and strong to
handle the physical demands of the work. It is also similar with
qualifications that are more specific in nature such as short hand and
typing skills. The job environment will also be explained such as the
equipment used and the surroundings at the location where the
administrative clerk will be working.
The following Figure 3.4 shows you an office environment that is complete
with equipment used by a clerk.
Figure 3.4: An office environment
The ultimate objective of a job analysis is to assist the compensation

administrator in designing a compensation system. Information obtained
from a job analysis is used to structure an organisationÊs compensation
system.
Salary scales, leave, medical as well as other benefits will be determined

based on the information collated through job analysis.

3.4 INFORMATION THAT NEEDS TO BE

ACQUIRED IN A JOB ANALYSIS
A job analysis should gather information in the areas as listed in Figure 3.5.
Figure 3.5: Job analysis information
The information displayed in Figure 3.5 must be acquired during a job analysis for
it to serve its purpose.
(a) Information related to each task and duties of a job that is being researched.
This means that we need to compile a list of job activities that are performed
by the respective job holders.
(b) Descriptive and accurate listing of the knowledge, skills, abilities and
behaviour which are required to properly execute the tasks and duties listed
out.
(c) Information on the machinery and equipment used in the execution of a job.
This is to make the organisation aware of the type of equipment required to
ensure a smooth work or task flow such as a computer and a photocopier.
(d) Information relating to the job context. Job context means all information
relating to the situation or physical condition at the workplace. For example,
heavy machineries are used in the workplace.
(e) Performance standards that determine the performance required and the
criteria that will be used to evaluate the work performance of a job holder.
This will ease the process of giving bonuses and other awards.
The information acquired during a job analysis process can provide clarifications
which are related to the tasks and work of a specific job. Thus, during the process
of collating information, we must ensure that all information is accurate and
complete.
ACTIVITY 3.2
What are the consequences of inaccurate or insufficient information

collected through a job analysis? In your opinion, what are the causes
of inaccuracy?
Let test your understanding by doing this exercise below.
EXERCISE 3.1
1. Discuss five reasons for performing a job analysis.
2. State three objectives for performing a job analysis.
3.5 JOB ANALYSIS PROCESS

A few factors can influence the accuracy of the information obtained through
job analysis. These factors must be considered prior to doing a job analysis:
(a) Job analysis is a time-consuming process. The duration is quite lengthy

as it involves gathering information from the parties who have something
to do with the jobs being analysed;
(b) Job analysis involves a large workforce. The information-gathering process

involves task research, interviews with job holders and supervisors, analysis
and report writing;

(c) Job analysis calls upon the expert knowledge of the analysts. The
involvement of the experts will ensure that the analysis is performed
correctly; and
(d) Certain skills are required to ensure that the job analysis process runs
smoothly. These include writing skills and the ability of the analysts to
understand various habits and human behaviour.
An organisation is able to execute job analysis properly only after considering the
above factors. The process of a job analysis involves three stages (see Figure 3.6).
Figure 3.6: Job analysis process
The following subtopics describe these three stages further.
3.5.1 Determining the Jobs that Need to be Analysed

Which job should be evaluated? This is a very important decision in the job
analysis process. Often, a job has to be evaluated because the job content
has changed drastically due to developments in technology, work process and
skills. These changes will transform the nature of a job.
A job analysis also has to be done when an organisation is newly set up or if a

new job is created. In some organisations, job analysis is done according to a
scheduled plan e.g. once in three years.

3.5.2 Selecting Job Analysis Methods

Various methods can be used to gather information in a job analysis. The person
who does the job analysis has to understand the research objectives before
selecting the most appropriate method. Apart from research objectives, other
factors such as cost, time, accuracy of data and financial resources have to be
considered in selecting a method.
A combination of methods may be required to ensure that the information

obtained is correct and comprehensive. Four methods that can be used are listed
in Figure 3.7.
Figure 3.7: Four methods of job analysis
3.5.3 Conducting Job Analysis

The person who is assigned to do a job analysis has to thoroughly understand the
job that is being researched. This can be done by checking the organisationÊs
reports and maintaining good relationships with the employees.
The gathered information is processed to prepare a job description, job

specifications and performance standards. Table 3.2 describes these three
components of the job analysis process.

Table 3.2: Three Components of Job Analysis
Component Description
Job Description A document that explains the scope, functions, tasks, duties
and other aspects of the job. It gives a brief description of the
responsibilities of a given job.
Job Specification A document that describes all the characteristics, qualifications

and nature of behaviour which are required for an employee to
perform a given job well. Qualification requirements such as
experience, education and skills are specified.
Job Performance This document states the job indicator that needs to be attained
Standards by the job holder. The actual job performance will be compared
with the set job performance indicators. If the performance is
below par, corrective action has to be taken to improve the
execution of the job.
All the processed information will assist organisations in identifying the skill
levels of their employees. The level of skills and achievements will indicate the
eligibility of an employee for the compensation system that is to be formed.
3.6 MISTAKES DURING JOB ANALYSIS

The job analyst has to understand the purpose of the information collated in order
to avoid making mistakes that will affect the accuracy of the job information.
Table 3.3 gives you examples of mistakes that are often committed by an analyst.

Table 3.3: Mistakes of an Analyst
Mistake Description
Important facts not taken into This will result in inaccurate data being collected.
account during a job analysis. This mistake can be avoided if the job analyst
understands beforehand the job that is being
evaluated and the organisation.
Mistakes in selecting the method Research objectives will help the analyst to select
for collecting job data. the appropriate methods to use in a job analysis.
He should not confine himself to using only one
research method.
Failure to evaluate the difficulty The job analyst must understand employee
level of a job. behaviour because some employees may give a
false impression of their level of job difficulty, for
example, making it sound more difficult than it
actually is, to protect their ego or secure a higher
rate of pay.
Inability to create good relations A close relationship is needed to convince

with employees who are involved employees that it is in everyoneÊs best interests to
in the information-gathering present accurate information.
process.
Mistakes that happen during a job analysis must be minimised as much as

possible. How well a job analysis is done depends on the ability of job analysts to
obtain information as accurately as possible.
Lastly, test your understanding by answering the questions in the following

activity.
ACTIVITY 3.3
What will happen to a job analysis if there are mistakes? What will be
the effects on the job description, job specification and performance
standards derived from the job analysis?

3.7 DEFINITION OF JOB DESCRIPTION

Most employees understand what a job description is. The question is: How far
will understanding help a human resource officer to act fairly in administering
compensation? A human resource officer needs to understand precisely the
definition of a job description because it can help him in completing the
introductory job documents for each job in the organisation.
A job description is a written statement that identifies, clarifies and

elaborates on the tasks, scope, functions and duties of a particular job.
In a job description document, the conditions of a job are briefly stated e.g.
how it is to be executed and situations that are likely to occur during the
performance of the job. Therefore, the job description must implicitly describe
the job.
A good job description states job details such as duties and responsibilities,
how to perform the job and the situation in which the job duties need to be
perfected. It must also include details such as those shown in Figure 3.8.
Figure 3.8: Seven components of a job description
Table 3.4 further describes these seven components.

Table 3.4: Components of a Job Description and Their Purposes
Component Purpose
Main duties of a particular job. Helps to prioritise tasks.
Percentage of time that is allocated to fulfil Ensures that ample time is allocated for
each duty. each task.
Performance standards indicator. Indicates the job quality or performance

outcome that needs to be attained by the
job holder.
Job situation and obstacles faced during Observes the work environment and its
the job process. relationship with the individualÊs tasks.
Number of employees who perform Ensures an organisation is aware of the

similar jobs. number of employees who are actually
involved in a particular job.
Supervisor or person to whom employees Clarifies to the employees the parties they
report. are accountable to.
Equipment used in the execution of a job. Observes the level of employee skills in
the execution of a job.
3.8 IMPORTANCE OF JOB DESCRIPTION

The main objective of writing a job description is to record the contents of a
particular job such as responsibilities, relationships with other employees, tasks
and duties, power, expected performance standards, working conditions as well
as the job specifications. Therefore, the writer of the job description must be
qualified to produce concise job descriptions.
Job descriptions that are concise and precise can help an organisation to run its
operations smoothly. Poorly written job descriptions can have negative effects
on an organisationÊs performance. However, there are also situations that require
the written job description to be general. The comprehensiveness, or lack of it,
depends on why the job description is being prepared in the first place.
Why are job descriptions so important to human resource planners or an

organisation? The reasons are provided in Figure 3.9.

Figure 3.9: Importance of job descriptions
Let us now study the functions of job descriptions in detail.
(a) Clarifies the Tasks and Duties of the Employees

There are occasions when employees refuse to perform certain tasks which
are part of their job. Most of the time, the reason given is: The tasks do not
fall under their job description so why should they do them?
Figure 3.10 shows a scenario where an employee is complaining to his

superior about having to perform a task that falls outside his job scope.

Figure 3.10: A job description must be clear
To avoid this situation, an organisation has to come out with job descriptions
that are clear and include other tasks and duties to be carried out upon
instruction from the department head. This will help an organisation to
give out new instructions which are appropriate to the changing business
environment.
(b) Clarifies Part of the Employment Contract between the Organisation and
the Employees
With a job description, employees will be directly informed of matters that
they need to adhere to and execute upon accepting a job. The managers,
on their part, will inform the employees of the expectations of the
organisation before the employees can state their salary expectations.
This ensures that the organisation will not be sued by potentially disgruntled
employees. Take note that the job description should not be viewed as similar
to an employment contract because a job description can be revised or
changed and it is not dependent on the working environment of the job.

(c) Informs Employees of Their Job Duties and Other Employment Matters
Based on the job description, employees can re-evaluate all their work
activities, whether they are part of their job description or otherwise. In other
words, employees can do a task check to see whether it is as per what has
been set by the organisation. Furthermore, if the employees get little
supervision from their supervisor or head, the employees can still carry on
their work by performing the duties spelled out in the job descriptions.
Therefore, a job description can make it easier for an employee to understand
and learn the tasks, duties, job scope and functions.
Indirectly, a job description can enhance the work environment and help
to boost relations between employers and employees.
(d) Helps in Designing the Organisation and New Jobs, Modifying Existing Jobs,
Planning of Staffing and Setting Career Enhancement Indicators
A job description allows an organisation to devise strategies to improve its
operations through the activities that have been laid out. Job descriptions
supply information related to the employeesÊ daily activities and thus ensure
that each employee will execute his tasks as per the requirements of
the organisation.
SELF-CHECK 3.2
1. When you started your new job, were you informed about your
tasks and duties? Was the information conveyed verbally, or were
there any documents that explained your tasks and duties?
2. How important is a job description to an employee? What will

happen to employees if job descriptions do not exist?
ACTIVITY 3.4
Imagine your dream job. Try to list your job description and that of
one of your colleagues who is with another department. What are the
similarities and differences between both job descriptions? List the
similarities and differences. In your opinion, why do the similarities
and differences arise?

3.9 JOB DESCRIPTION ITEMS AND FORMAT

Before an organisation decides to create a job description, it should decide on the
details that should be covered, so that the job description is accurate and precise.
We need to bear in mind that good job descriptions enable an organisation to
function smoothly and efficiently.
Figure 3.11 shows you eight significant items in a job description.
Figure 3.11: Items in a job description
Let us examine these items one by one:
(a) Job Title

Job title is an identity that describes a particular job. The description must be
clear and accurate. This means that if an evident change occurs in relation
to the job, the organisation must update the information and this has to be
stated in the job title.
The job title must be stated clearly and accurately to ease the flow of
information and allow for expression of employee appreciation. The job title
must show its reporting and working relationship with other jobs. For
example, a job identity may show the network of other jobs, departments,
units and functions for the purpose of job promotion, transfer and career
development.

(b) Job Status

Job status refers to the level or grade of a particular job e.g. a managerial
post or rank and file. The job status must be formed accurately, easily
identified and more importantly, the job category must be based on the
Employment Act 1955.
(c) Job Code

Job code is formed to facilitate reference checks in the organisation. Usually,
every department in an organisation is assigned a job code. For example,
the finance department of an organisation uses the job code 010. Thus,
all jobs related to finance will use the code 010. Figure 3.12 shows you an
example of a job code.
Figure 3.12: Job codes related to academic field

Source: www.ua.edu/.../ois/sysdev/k2budget/jobclass.htm
(d) Job Summary

A job summary, which is part of the job description, describes the overall
job activity. It identifies and differentiates the main functions of each
activity in the job.
(e) Job Introduction

This explains the duties and overall responsibilities of the job activities.
In a job introduction, each task and duty has to be described exactly and in
detail.
(f) Responsibility
Responsibility describes the obligations of an employee. It is also the
description of a job that drives the employees to execute their tasks and
the jurisdiction in which they can execute the tasks or job.
(g) Job Specification

Job specification is a document that describes all characteristics,
qualifications and behaviours that are required of an employee in
performing a job or task in the best manner possible. This document
contains and clarifies the conditions for a jobÊs minimum qualifications.
These conditions include work experience, level of education, personal traits,
mental and physical abilities.
(h) Standards of Performance

Standards of performance are standard measurements used to measure
employeesÊ level of performance. This means that for every completed
assignment, there is a standard measure to ensure that the gap between
actual performance and the performance required of employees by the
organisation is not wide. The actual performance of employees will be
compared with the standards of performance. Table 3.5 depicts the
eight items on a sample job description.
Table 3.5: Eight Items on a Job Description Sample
Job Title/Job Name: Administrative Clerk
Job Status: Support Group
Job Code: 015-09-25022003
Job Summary: To type letters, file documents and record the

movement of mail in the organisation.
Job Duties: (i) To type all letters as directed by the head of the
administrative department.
(ii) To file all documents related to administrative
meetings, stationery and office fittings as well as
purchase and travel documents.
(iii) To ensure that all letters received and sent out are
number coded to facilitate reference checks.
Responsibilities: To ensure that all tasks assigned are completed. To

work under the supervision of the chief clerk.
Job Specification: Three main skills are needed: typing, telephone and
computer skills. Typing proficiency of 40 words per
minute is required. An SPM qualification with a credit
in Bahasa Malaysia is desired. No hand or eye
disability.
Standards of Must complete 85% of work assigned.

Performance:

After all the information to prepare a job description is collected, the human
resource department will form job descriptions for all positions in the organisation.
Job descriptions must contain all the items discussed earlier.
Figure 3.13 depicts a sample job description for an administrative clerk post.
Figure 3.13: Job description sample

3.10 PREPARATION FOR WRITING A

JOB DESCRIPTION
After studying the important job description items, the next step is to make the
necessary preparation for writing the job description. This is to ensure that the
job description is written accurately. There are six steps to take before a job
description can be written. The following Figure 3.14 lists these six steps.
Figure 3.14: Six things to do before writing a job description
This early preparation is to ensure that all the information regarding a particular
job is collected fast, well and accurately.

The following Table 3.6 explains you the six steps further.
Table 3.6: Six Steps to Consider Before Writing a Job Description
Step Explanation
Step 1 Identifying the type of information needed to ensure the job description is
complete. It is necessary to decide which information must be obtained to
write a good job description.
Step 2 Deciding on the method to be used in collecting information regarding the

particular job. Methods that can be used are questionnaires, interviews,
observation, participation diaries and expert reference.
Step 3 Listing the tools and number of employees to be used in preparing the job
description. If new employees are assigned, a training programme must be
implemented so that they have a good foundation in preparing job
descriptions.
Step 4 Preparing the budget and fixing the time period to write the job description.
Step 5 Revising the collected data based on the organisational structure, operations
and work as well as the total number of employees. This is to ensure that we
know the links between departments as well as between employees.
Step 6 Deciding on the positions that need job descriptions by accurately listing
information regarding the positions, departments and employees.
Now, test your understanding through the following exercise.
EXERCISE 3.2
1. Explain the meaning of job description.
2. Explain four reasons for creating job descriptions in an

organisation.
3. Briefly discuss the following concepts:
(a) Job specification;
(b) Responsibilities;
(c) Work standard performance; and
(d) Job summary.

3.11 PROCESS OF PREPARING JOB

DESCRIPTION
Preparing a job description requires a high level of concentration. This is to
avoid the problem of inaccurate data which can jeopardise the job description
of a particular employee. Early preparation will help us to ensure that complete
and accurate information is obtained. There are six steps in the process of
preparing a job description, as shown in Figure 3.15.
Figure 3.15: Six steps in preparing a job description
These six steps are further explained as follows:
(a) A Job Analyst is Selected to Prepare a Job Description Questionnaire

The human resource department must select a job analyst to prepare a
questionnaire to collect information regarding the job description. Experts
in job analysis must be selected to oversee the process of preparing job
descriptions so that the overall running of the organisation is not disrupted.
Moreover, they have a better idea of which information is important and
must be taken into account so that the job description is complete.

(b) The Human Resource Department Distributes the Job Description

Questionnaire
After the questionnaire is finalised, the human resource department will
distribute it and instruct all employees to complete the questionnaire
within a specified period. The directive from the human resource
department must be clear so that all employees understand why the
questionnaire must be completed.
(c) The Job Incumbent Completes the Job Description Questionnaire

Every employee or job incumbent will complete the job description
questionnaire that is distributed by the human resource department.
(d) The Questionnaires are Checked and Approved by the Job Analyst and
Returned to the Human Resource Department
After the questionnaires are completed by the job incumbents, they must be
checked and approved by the job analyst to ensure that no information
has been left out. If a questionnaire is incomplete, it will be returned to the
job incumbent to be completed.
(e) The Job Incumbent is Interviewed by the Job Analyst

There are occasions when a job incumbent may find it difficult to provide
written information regarding a job description. In order to overcome this,
the job analyst will interview the job incumbent to get a better understanding
of the job description and the information is then recorded. Job analysts
are not bound by just one method of collecting information. In fact,
a combination of methods such as observations, interviews and
questionnaires would be wise to ensure a complete job description.
(f) The Job Analyst Prepares the Job Description

After all the information has been obtained, the job analyst will begin
analysing the information in order to prepare detailed job descriptions
based on it.
The human resource department must ensure that every step listed is
followed when collecting information about job descriptions. This is to
ensure that no information is left out and the time and cost incurred are in
accordance with the preparation of the job description.

EXERCISE 3.3
1. The following are statements of why job analysis is important

to an organisation, EXCEPT:
A. Helps to restructure components of every job in the

organisation.
B. Helps to re-evaluate a specific job to determine the wage
scale.
C. Helps to identify the types of training required for a particular
job.
D. Helps to prepare a plan that is related to the environment
in the organisation.
2. Which of the following are an organisationÊs objectives for doing

a job analysis?
i. To clarify the importance of a job that has been identified

from the aspects of status, area and job scope.
ii. To form a better, clearer and more accurate understanding
of the skills, knowledge and abilities required for a job.
iii. To determine staff performance.
iv. To clarify the duties and environment of a job.
A. i, ii and iii
B. i, ii and iv
C. i, iii and iv
D. All of the above

3. The following are mistakes that might be made by a job analyst,

EXCEPT:
A. Leaving out important facts which are closely related to the job
and organisation.
B. Not selecting the appropriate data collection method.
C. Not fostering good relations with the top management when
obtaining information.
D. Not ensuring the difficulty level of a job that is being analysed.
4. The following are true statements about job descriptions, EXCEPT:
A. Job descriptions are written documents to recognise, explain

and describe the scope, duties and functions of a job.
B. Good job descriptions need to state the type of job to be done,
how it is done and the responsibilities of the job.
C. Job descriptions can measure the job performance of an
individual.
D. Job descriptions must contain the main and other
responsibilities of a job, the amount of time spent at work and
the physical conditions of the job.
5. The following are the functions of job descriptions:
i. Explain the tasks and duties of employees.

ii. Help employees learn the duties and elements of the job.
iii. Explain the contract of employment to the employees.
iv. Help to plan the human resources and organisational structure.
A. i and iii
B. ii and iv
C. i, ii and iv
D. i, iii and iv
Essay Question
1. Briefly describe the process of a job analysis.
2. Briefly explain the job description process.

 Job analysis refers to the process of obtaining descriptive information on

a specific job. It is a systematic process to determine the tasks performed
on a job.
 There are six reasons why job analysis is important in human resource
management. Among these are human resource planning, selection and
performance evaluation.
 The four objectives of implementing a job analysis are to:
 Clarify the importance of a job that has been identified from the aspects
of status, area and job scope;
 Form a better, clearer and more accurate understanding of the knowledge,

skills and abilities required for the job;
 Determine the measures of performance that would be accepted by the

job holder; and
 Determine the main tasks of the job, job specifications and job environment.
 The three processes of job analysis are determining the jobs that need to be
analysed, selecting job analysis methods and conducting the job analysis.
 The four types of mistakes commonly made during a job analysis are:
 Not taking into account important facts;
 Mistakes in selecting the method for collecting job data;
 Failure to evaluate the difficulty level of a job; and
 Inability to create good relations with employees involved in the

information-gathering process.

 A job description is a written statement that identifies, clarifies and elaborates

on the tasks, scope, functions and obligations of a particular job. Some of
the components of a job description are time percentage, main obligations
and equipment.
 The four reasons that a job description is important in compensation

administration are that it:
 Clarifies the tasks and duties of employees;
 Clarifies part of the employment contract between the organisation and

the employees;
 Informs employees of their job duties and other employment matters; and
 Helps in designing the organisation and new jobs, modifying existing

jobs, planning staffing and setting career enhancement indicators.
 The eight important items related to job description are:
 Job standards;
 Job title;
 Job status;
 Job code;
 Job summary;
 Job introduction;
 Responsibility; and
 Job specification.
 In order to prepare a suitable job description, we need to identify the type

of information needed, decide the methods of collecting information, list the
tools and numbers of employees, prepare the budget, revise the data collected
and decide the jobs that need descriptions.

 The six steps of preparing a job description are as follows:
 Human resource department selects a specialist to prepare a job

description questionnaire and then the department distributes the
questionnaire to job incumbents.
 The job incumbents complete the questionnaires.
 The questionnaires are checked by the job analyst to make sure that
everything is in order.
 Incomplete questionnaires are returned to job incumbents to complete.
 An interview session is held with the job incumbents in order to ensure

that no information is left out.
 The job analyst prepares the job description based on the information
collected.
Duties and responsibilities Job status

Job analysis Job summary
Job description Job title
Job specification Performance standards

Topic  Job
Evaluation
4
LEARNING OUTCOMES
1. Explain the importance and steps of job evaluation;
2. Appraise job evaluation methods; and
3. Examine issues that influence the decision to do a job evaluation.
 INTRODUCTION
We have studied two work analysis tools: job analysis and job description.
Now, let us turn our attention to job evaluation which is the third tool. This
procedure completes the work analysis process. Job evaluation is a systematic
assessment of the demands of different jobs in an organisation. It is a slow
process and not easy to execute. This is because it is a problem-solving and
decision-making process which requires subjective evaluation by experts who
understand the organisational structure inside out. This subjective evaluation
is an evaluation of a jobÊs worth.
In performing job evaluation, we should consider the methods that will be used to
gather information about the job value. This is because it will also influence
the information collected regarding equity in an organisation. Through job
evaluation, an organisation will know if the wages it pays its employees reflect
the value of their job and the contributions of the employees.
Under this topic, we will discuss the definition of job evaluation from the
compensation administrationÊs viewpoint. We will also touch on the importance,
process and methods used. Finally, we will identify the issues that influence
the decision to evaluate a job.

TOPIC 4 JOB EVALUATION  99
4.1 DEFINITION OF JOB EVALUATION

Job evaluation was introduced by Frederick W. Taylor in 1900 in the aftermath
of the Second World War. The countries involved in the war were suffering
from economic decline, high inflation and price freeze, which prevented the
wage administration institution from increasing the wages of employees. This
situation forced employers to transform the wage administration system into
a system that pays according to the type of job.
Henderson (2005) states that job evaluation is a systematic process in

determining the relative value of all positions or jobs in an organisation.
Job evaluation considers every criterion recorded in the job description and
specification. Every task and responsibility related to knowledge, skills, experience
and abilities should be identified since they will determine the value of payment
for each type of job.
According to Armstrong and Murlis (1998), job evaluation is a process of

evaluating the relative size of a job or post in an organisation. Size refers to the
comparison or importance of a job to an organisation. An easier way to understand
job evaluation is by viewing it as:
(a) A comparison process where the size of a job is compared with that of
other jobs. Factor analysis and scale usage could help in the measuring
process to ensure comparisons are made accurately.
(b) A process to gauge the subjectivity of the assessment carried out to maximise
equality across the same job, always. This process is needed to interpret
facts and situations. The conclusion derived helps to identify the relative
value of a job.
(c) An analyst assesses the degree to which certain factors are present in a
job and compiles them into a common format.
(d) A constructive process, meaning that job evaluation will help to reconstruct
a complete job profile, to assist an evaluator in assessing a jobÊs worth
in a rational way.

100  TOPIC 4 JOB EVALUATION
For example, the job of an administrative clerk is evaluated and given a value.
The job is then compared with the post of an accounting clerk, a job with
similar levels of complexity and responsibilities. The purpose is to compare
and determine the relative value of a job with another. This information will
form the basis of a fair wage system.
SELF-CHECK 4.1
In our working life, most of us would have gone through a job

evaluation process. Normally, the process is performed at the end of
the service year. Based on your working experience, what do you
understand by this process?
ACTIVITY 4.1
Your job performance as an employee is being evaluated all year long.

Has this contributed to the job evaluation process which will boost
your chances of a promotion or raise?
4.2 IMPORTANCE OF JOB EVALUATION

Job evaluation is important to compensation administration because it determines
whether the wage and compensation given to employees are suitable and fair.
John Stacy AdamÊs equity theory explains why organisations should perform
job evaluation. The theory focuses on individualsÊ perceptions of how they are
treated in comparison to others. Employees believe they are being treated fairly
when their salaries are equitable relative to each other.
Some of the functions of job evaluation are as follows:
(a) Comparing EmployeeÊs Contributions with the Rate of Payment Received

Job evaluation sets the internal logic of relation of jobs. Through job
evaluation, an organisation can differentiate between the contributions
made by each employee to the organisation, which will then be valued and
compared to obtain the relative value that will determine whether the
current wage rate is suitable.

(b) Forming the Basis of Wage Payment System

Through job evaluation, an organisation can identify the main criteria to
measure and evaluate employee job performance. This will enable the
organisation to differentiate between individual contributions to determine
the relative value of each different job to the organisation. The relative
value will form the basis of the organisationÊs wage structure.
(c) Comparing the Payment Rate with That of Other Organisations

When an organisation performs a job evaluation, the information obtained
will help the organisation to determine the payment rate for each job in
the organisation. The organisation will also compare the wages received
by its employees to wages outside the organisation to see their suitability.
(d) Determining the Compensation Rate

An organisation could use the relative job value to not only set the wage
rate but also determine the compensation package. Such a package would
reflect the relative value to the organisation of the work done and reward
performance based on the contributions of individual or groups of
employees to the organisation.
(e) Forming EmployeeÊs Rank in the Organisational Hierarchy

An employeeÊs rank in the organisation's hierarchy is based on the value of
his job to the organisation. The proposed value for each post in the job
evaluation report determines the significance of each job in the organisation.
SELF-CHECK 4.2
If you are an employer, what is the importance of a job evaluation to

your employees?
ACTIVITY 4.2
Identify the tasks performed in the organisation where you or your

friend work. Think of the knowledge and skills that you in perform
your job. Compare the value of your skills with the salary you are
getting. Then, compare your salary with the salary provided elsewhere
in the job market. Are they equivalent?

4.3 JOB EVALUATION PROCESS

Before an organisation conducts a job evaluation, it should first have an
understanding of how to perform a good and accurate job evaluation. This is
important to ensure that the job evaluation is not disputed by any party.
Figure 4.1 shows the six steps of the job evaluation process.
Figure 4.1: Steps in executing a job evaluation

There are six steps in the job evaluation process. These are as follows:
(a) Form Job Evaluation Team

Job evaluation is usually conducted by a well-trained team. It may consist
of employeesÊ immediate supervisors, management and labour union
representatives as well as job analyst experts. If the organisation lacks the
skills, it could use outside evaluators.
(b) Determine Benchmark Job

Job evaluation is often based on a sample job which is called a benchmark
job. A benchmark job is one that can be related to other jobs. It is a reference
point for other jobs to allow a comparison of the job evaluations performed.
Benchmark jobs are used as a basis for establishing pay structure.
(c) Form Compensable Factors

Compensable factors are factors that are used as the base in job compensation
calculation. These factors provide a common measurement link between
jobs. They are used to determine the relative value of a job. Examples of
commonly used compensable factors are skills, efforts and responsibilities.
These three factors will assign the value for each job or task performed
by individuals.
(d) Form Dimensions for Organisational Job Value

This step helps an organisation to identify the contributions made by
individual employees in performing their tasks and responsibilities. The
measurement dimensions used are:
(i) Frequency of job execution.
(ii) The amount of time needed to execute a given job.
(iii) The error impact in executing a job, which is to differentiate the level
of caution in executing a job and task.
(iv) The level of a job that is the rank of a post in the organisational
structure.

(v) The complexity and difficulty in executing a job, which is to

differentiate the level of difficulties of the job executed.
(vi) The overall connection to organisational performance. This shows the

connection of the evaluated job with the overall achievement of the
organisation.
(e) Choose Job Evaluation Method

Generally, an organisation would choose a job evaluation method which
best suits the organisationÊs capabilities. The method selected is also
dependent on the objective of implementing the job analysis. In order to
obtain complete information, a combination of methods is needed.
(f) Determine Job Value in Dollar Amount

After the relative value of each job has been determined, these values have
to be converted into a monetary amount through job pricing. Job pricing
involves establishing suitable wage rates for every job within an organisation
to form a wage structure that could be managed efficiently.
For example, an administrative clerk is paid RM700 a month; this is the value of
the individualÊs contributions to the organisation. This will also be the relative
value of the administrative clerkÊs job to the organisation.
Job evaluation should be done following the steps prescribed in Figure 4.1.
This is to make sure the objective of implementing job evaluation is achieved.
The objective is to assist the compensation administrator in designing the
organisationÊs compensation system. Job evaluation rates essential job attributes
with respect to their perceived value to the organisation. These values often
form the basis of the compensation system.
ACTIVITY 4.3
Who was your job evaluator? What were evaluated and what was
the outcome of the job evaluation process for you?

4.4 JOB EVALUATION METHODS

Job evaluation assists organisations in forming an inner equity, which is fairness
in wage payment of various jobs in the organisation. Generally, organisations
could use quantitative and non-quantitative methods to perform job evaluation.
Figure 4.2 shows the types of quantitative and non-quantitative methods.
Figure 4.2: Types of quantitative and non-quantitative methods
4.4.1 Quantitative Methods

There are two types of quantitative methods in job evaluation. They are:
 Factor comparison method; and
 Point method.
(a) Factor Comparison Method

Jobs are compared based on several factors. The jobs are also compared with
each other, but one factor at a time to obtain a numerical value for the jobs.
The following Figure 4.3 shows you the steps that are involved in the factor
comparison method.

Figure 4.3: Eight steps in factor comparison method
The following explains the steps listed in Figure 4.3.
(i) Determining the jobs to be measured: Choosing the jobs which usually
exist in every organisation and relevant labour markets.
(ii) Determining and acknowledging the compensable factors in the

jobs to be evaluated: The usual compensable factors used are
mental requirements, physical requirements, skill requirements,
responsibilities and job conditions.

(iii) Ranking each main task on each compensable factor: The decision to
rank each task is based on the information contained in the job
description. The first stage is to arrange the compensable factors
according to priority. For example, for the position of a lecturer,
the most important compensable factors are expertise, mental capacity
and physical capacity.
(iv) Apportioning the pay rate on each compensable factor. For example,
a lecturerÊs salary is rated according to the following compensable
factors: mental requirements RM50, physical requirements RM10,
expertise RM30 and responsibilities RM10. These values are then added
to obtain the lecturerÊs daily wage.
(v) Ranking the main tasks according to the salary scale, from the highest
position to the lowest paying job.
(vi) Comparing Step 3 with Step 5 to determine the consistency of data

collected. If the results of the two sets show an obvious difference,
then we cannot use those jobs as the main jobs of the organisation.
(vii) Forming a scale or job comparison matrix and putting the main jobs
which we have obtained on a scale.
(viii) Evaluating other jobs with a job comparison scale. Other jobs to be
evaluated can be placed on the scale, factor by factor, by comparing
every job with the main jobs found on the scale.
(b) Point Method

What is point method?
The point method uses a point system to evaluate job factors. All the
points allocated to each factor will be added to obtain the total points for
a particular job. The total is used to determine the salary rate for the job.
The point system involves the following steps:
(i) Determining the job group to be evaluated, for instance, administrative

work, clerical work etc.

(ii) Choosing the compensable factors to be used in evaluating jobs. The

number and type of compensable factors used will depend on the
job group to be evaluated.
(iii) Acknowledging the chosen compensable factors according to the

importance of the relative factors to the job groups being evaluated.
(iv) Apportioning the different phases to each compensable factor

according to the importance of the relative factors to the job groups
being evaluated.
Let us refer to Figure 4.4 for the evaluation of job groups.
Figure 4.4: Evaluating job groups
(v) Determining the degree of each compensable factor and defining

each degree. For example, for administrative work, the education
qualification has three degrees: bachelorÊs, masterÊs and doctorate.
(vi) Determining the total points to be used in the point method and
apportioning the values among the compensable factors. For example,
500 points are allocated. Thus, the factor for educational qualifications
is 500  40%, making it 200 points out of 500 for educational
qualifications.
(vii) Determining the degree of points for each compensable factor, in other
words, through calculating the points for each assumed compensable
factor.
(viii) Preparing a guide or a job evaluation manual to enable the proper, and
logical distribution of points.

(ix) Totalling the points for every job evaluated. The highest points show
the most important value where employees should receive a higher
salary.
These steps are summarised in Figure 4.5.
Figure 4.5: Point factor method

4.4.2 Non-quantitative Methods

There are two basic non-quantitative methods to evaluate job content. These
methods are summarised in Figure 4.6.
Figure 4.6: Non-quantitative methods
These methods are called non-quantitative methods because they do not result
in a quantitative number that can be manipulated by mathematical operations.
Let us now look at each of the two methods.
(a) Ranking Method

This is the easiest job evaluation method to execute. It requires the evaluator
to arrange jobs in terms of priority. Usually, jobs are arranged based on
general perception of that job. However, particular compensable factors are
used to determine the rank of a post in the work hierarchy. This method uses
index cards to rank jobs. The index cards contain the job description for every
job to be evaluated and will be arranged later. This method organises job
ranks, from the highest post to the lowest one in the organisational hierarchy.
(b) Classification Method

This method categorises jobs into certain groups called job class or grade.
Steps in implementing this method are as follows:
(i) List the details needed to clarify the amount or level of compensable
factors needed to be prepared for each pay grade.
(ii) Evaluate jobs by comparing the job description of each job with the
job grade.
(iii) Determine the job classification by matching the closest class detail
with the job description.
(iv) Ensure that each job is classified properly in its class or grade based
on the similarities between job description and class description.

Different jobs could be classified into the same class if the difficulty, responsibility
and qualification levels are the same. An example of this method is the
classification of public service sector employees into different classes and pay
grades prescribed in the New Remuneration Scheme (Sistem Saraan Malaysia).
4.5 JOB EVALUATION ISSUES

During a job evaluation, we will encounter several issues that will challenge
the accuracy of the information gathered.
Some of these issues are as follows:
(a) What is the most suitable job evaluation method to be used in the
organisation? We need to consider financial resources and skills in deciding
which method to use. It is important to ensure that the method selected
would not burden the organisation and more importantly, the data or
information collected would be accurate.
According to Henderson (2005), the market price method is the most

commonly used method. This is followed by the point factor method and
job ranking method. The question is, do outside market factors have to be
taken into account in job evaluation? The answer is no. Even though market
price is commonly used, it is not suitable for use in job evaluation. This is
because job evaluation only takes into account inner factors that influence
the pay level of an individual.
Outside factors will be analysed through market surveys.
(b) Should more than one method of job evaluation be implemented? Some
organisations use more than one method, but is this necessary? If the first
method implemented by the organisation cannot provide enough
information, then it is necessary to use another method.
According to Henderson (2005), the percentage of organisations which use

more than one method is high. This is because organisations will try to
gather as much information as possible regarding a job to ensure a fair
and equitable wage structure and compensation system.

(c) How effective and valid is a job evaluation? Does it measure what it is
supposed to measure? What about the information obtained through the
selected job evaluation method? Does the information reflect the actual
inner labour market situation? This is important because if the information
is not valid, we cannot possibly evaluate a job done.
(d) Does job evaluation minimise the practice of unfair and illegal payment
or does it hide or disguise the practice? Can the information obtained from
a job evaluation help organisations in planning a fairer wage structure for
their employees? A wage that is less than the minimum of the wage range
for a position would result in dissatisfaction, low motivation and a drop in
organisational productivity. In addition, the image of the organisation
will be negatively affected for practising an unfair wage structure.
In conclusion, to ensure that the information collected during a job evaluation

is accurate, an organisation should take into account the issues discussed above.
ACTIVITY 4.4
Which job evaluation method is used in your organisation or your

friendÊs organisation? List all the methods which have been used in the
organisation. What is the conclusion that you can make from that list?
Share your answer in the myINSPIRE forum.
SELF-CHECK 4.2
The job evaluation process is a subjective process. Based on your

experience, is the process fair? What were the difficulties or issues
that had arisen during your job evaluation?

EXERCISE 4.1
Essay Question
1. Discuss briefly what you understand about job evaluation.
2. Discuss briefly how to implement job evaluation in your

organisation.
3. Explain briefly the following job evaluation methods:
(a) Point factor method.
(b) Job classification method.
4. Discuss in detail two issues that have arisen during the course
of job evaluation in your organisation.
1. The following are the roles of job evaluation EXCEPT:
A. Set the basic rate to determine a wage payment structure.

B. Determine and form the type of employee payment.
C. Determine a wage payment that is equivalent to the market
rate.
D. Determine terms in collective bargaining.

2. Choose the sequence in which the job evaluation process is carried

out:
i. Form a team to execute job evaluation for the organisation.

ii. Decide on the compensable factors.
iii. Determine the benchmark for the jobs to be evaluated.
iv. Form the measurement dimensions for organisational job
value.
v. Determine the value of a job in dollar amounts or dollar values.
vi. Select the job evaluation method.
A. i, ii, iii, iv, v and vi

B. i, iii, ii, iv, vi and v
C. ii, iii, i, v, iv, and vi
D. iii, ii, i, iv, v and vi
2. When determining the job evaluation method, an organisation

should consider these factors EXCEPT:
A. The method that will be used

B. Funds for the job evaluation
C. Time allocated to carry out the job evaluation
D. The accuracy of information and the result of the job evaluation
3. The following are reasons why an organisation uses more than one
method for job evaluation, EXCEPT:
A. The result from the first method is incomplete and inaccurate.

B. The effectiveness and validity of the job evaluation are
questionable.
C. The organisation thinks that it can obtain more detailed
information if it uses more than one method.
D. Job evaluation ethics requires the use of at least two job
evaluation methods.

 Fairness in distributing compensation to employees is often a bone of

contention for employers and employees or labour unions.
 Through job evaluation, a guideline could be formed for employers to

determine a wage rate or compensation that is fair and equitable.
 In this topic, we have discussed both quantitative and non-quantitative

methods in conducting a job evaluation.
 We have also considered the issues that will affect the accuracy of the
data collected in the job evaluation process.
Benchmark job Job evaluation

Classification method Point factor method
Compensable factor Ranking method
Factor comparison method

Topic  Salary Market
Survey
5
LEARNING OUTCOMES
1. Examine the meaning and importance of salary market surveys
in compensation management;
2. Discuss the steps in conducting a salary market survey;
3. Discuss sources of salary market data and methods of conducting
a salary market survey; and
4. Discuss problems in conducting a salary market survey.
 INTRODUCTION
Before we learn about salary market surveys, let us look at compensation
administration first. Compensation administration refers to human resource
functions that deal with all forms of payments received by employees in return
for their contribution at work. Compensation is in monetary and non-monetary
forms, depending on the needs of the employees in an organisation. The factors
deciding pay rates in a compensation system are level of knowledge, expertise,
ability and responsibility. All these factors are evaluated through a performance
appraisal process, as explained in the previous topic.

TOPIC 5 SALARY MARKET SURVEY  117
Developing a compensation package that can fulfil the needs of all concerned
parties is difficult. However, constructing a compensation system that is
relatively fair internally and externally is important for an organisation to have
competitive edge. Internal payment rate is compensation decided by an
organisation based on organisational rules and regulations. External payment
rate is compensation based on the market rate offered by most competitors.
It enables the organisation to identify salary or wage trends in the market
based on competition in the same industry.
In this topic, we will discuss compensation and the process of conducting a

market survey. We will also discuss the importance of market surveys in
compensation management and the sources of information that can be referred
to in deciding on salary structures.
5.1 DEFINITION OF SALARY MARKET SURVEY

Efficient compensation management increases an organisationÊs ability to compete
with other organisations. The compensation structure must be able to satisfy an
organisation as well as its employees. Internal and external factors have to be
considered in constructing a compensation structure.
Internal factors refer to the number of employees, organisational finance,

policies and corporate culture, type of business and employee conditions. External
factors refer to current market rate of salary and wage, government policies,
union demands and economic situations.
It is important for those involved in compensation management to clearly

understand market surveys as these help an organisation to shape its
compensation structure.
According to Henderson (2005), salary market survey is a process which collects

information regarding compensation payment practices in the market as well as
from the organisationÊs own compensation payment practice.
This means organisations will collect information on their competitors with

regard to starting salary and maximum salary for a particular job, and the
allowances and benefits that they offer. This information will help them to
understand labour market trends and labour requirements regarding salaries
and allowances. Other information such as knowledge, ability, expertise,
qualifications, job scope and incentives offered by other organisations is
important to help them determine the salary rate to be paid to employees.

118  TOPIC 5 SALARY MARKET SURVEY
For example, to determine the form of compensation for an administrative clerk,

an organisation needs to pre-determine four factors. Look at Figure 5.1 to find out
what the factors are.
Figure 5.1: Four determinants of a clerkÊs compensation
Organisations need to conduct salary market surveys to collect information and

make comparisons between organisations. The organisations will then be kept
informed of salary market trends, thus avoiding issues such as difficulty in finding
new employees, losing good employees or budget problems which may lead to
higher prices and lay-offs. If salaries and other compensations offered are not
satisfactory, an organisation will find it difficult to obtain and retain labour that
is of high quality and suited to its needs. However, if the rates are set too high,
the organisation may experience financial problems. Either situation will
indirectly affect the basic objectives of the organisation.
5.2 IMPORTANCE OF SALARY MARKET

SURVEY
The labour market is the place for industry competitors to compete with each other
for good employees. An organisation needs to conduct a salary market survey
to solve problems related to underpayment or overpayment of employees.
The organisation will suffer in both instances.
Figure 5.2 shows three factors that cause dissatisfaction among employees and
how these result in negative attitudes and low motivation. It is likely that a
dissatisfied employee will not continue to remain in an organisation.

Figure 5.2: Three factors that cause employeesÊ job dissatisfaction
We know that a salary market survey is a means for organisations to find out
about the salary scales prevalent in the market. If an organisation fails to conduct
the survey well, it will have adverse effects for the organisation. This includes
difficulty in attracting good employees who have potential and keeping
experienced employees in the organisation.
Therefore, other compensation systems and payment practices that are relevant
to the organisation must be studied. The survey can be done directly or indirectly
and can be carried out by the organisation itself or external consultants hired
by the organisation.
Whether the survey is done by the organisation or external consultants, the most
important thing is that the information obtained from the market must be reliable.
This section discusses why market surveys must be done in detail. This will help
us understand the importance of salary surveys to organisations. Let us refer to
Figure 5.3 to get a general picture of the importance of salary surveys.

Figure 5.3: Importance of a salary market survey to an organisation
Salary market surveys enable organisations to develop a competitive salary and

wage rate and in this way, they also help organisations to:
(a) Recruit and Retain Good Employees

The success of an organisation depends on the ability of its employees in
terms of expertise, knowledge and ability in contributing towards increasing
the output and productivity of the organisation. Good compensation
management will guarantee that employees with high potential will remain
with the organisation. This is because the compensation they receive will
bring such satisfaction that they will not think about leaving the
organisation. Additionally, a competitive compensation system will help
attract new employees.
(b) Maintain the OrganisationÊs Competitive Edge

A salary market survey allows an overall comparison of the compensation
system of an organisation with that of other organisations in the same
industry. This means that the information obtained from a market survey is
useful for determining the strength of the competitors and could be the
foundation of a compensation structure that is better than the competitorsÊ
and in accordance with the capability and financial position of the
organisation.
Through a salary market survey, an organisation can also obtain information

regarding gratuity payments that would be suitable for employees.

Figure 5.4 shows you a method of calculating gratuity for employees, which
is used by external consultants in India.
Figure 5.4: Calculating gratuity

Source: https://www.moneychai.com/gratuity-formula-rules-limit-eligibility-
calculation.html
(c) Construct the Organisational Salary Structure

The information collected through a salary market survey enables an
organisation to construct a salary structure that will be accepted by
employees. This is because the compensation structure will be created
based on market survey information on knowledge development, job
responsibilities and incentives for contribution in order to encourage
employeesÊ personal and career growth.
Through salary market surveys, an organisation can check the payment

rates of the organisation against the market payment rates so that the
salary structure formed is not too different from the competitorsÊ.
Additionally, salary market surveys also acknowledge the salary trends in

the market. They provide valuable information regarding labour market
trends like minimum and maximum wage rates for a particular job. Salary
market surveys also enable an organisation to check whether its
compensation payments are in line with the countryÊs laws.

(d) Set the Salary and Wage Rate

The problem of low salaries can result in a reduction in work performance
and, ultimately, in adverse consequences for an organisation. Conducting a
salary market survey enables an organisation to analyse the strength of
the organisation in terms of the salaries offered to employees. This allows
the organisation to take remedial action, if necessary.
For example, giving higher compensation to senior employees based on

their experience and contributions to the organisation.
(e) Integrate Internal and External Equity in Wage System

Internal and external equity problems are a constant issue in compensation
management. What do they mean?
External equity refers to compensation payments received by

employees that are relatively equal to those received by employees
in other organisations.
Internal equity refers to fairness of compensation payments within the

organisation. Employees are paid within a salary range and according
to their performance.
Salary market surveys will help an organisation to form a compensation payment

system that can be accepted by everyone. This is to ensure that dissatisfaction,
discrimination and bias do not exist in the compensation system.
ACTIVITY 5.1
Compare the compensation payments received by two employees

holding the same position but working in different organisations. List
the similarities and differences.

5.3 PROCESS OF CONDUCTING SALARY

MARKET SURVEY
Before an organisation decides to conduct a salary market survey, it has to give
the reasons for conducting the survey. There are five reasons why a salary market
survey is important. In your opinion, do salary market surveys seek to make
comparisons of salary structures or evaluate the capability of an organisation,
or both?
Actually, it depends on the current position of the organisation in the industry.

Is it facing difficulties in finding new employees and keeping existing ones,
or vice-versa? It is important that the organisation understands the salary market
survey process so that it is ever ready to collect information on market trends to
prevent these situations from happening.
A salary market survey facilitates the understanding of competitive market

forces. This will be an advantage to an organisation in maintaining its competitive
edge in the market. Figure 5.5 explains the five steps of conducting a salary market
survey.
Figure 5.5: Process of conducting a salary market survey
These steps are further explained as follows:
(a) Evaluate and Develop the Ability to Conduct a Salary Survey

Before an organisation decides to conduct a market survey, it needs to
evaluate its capability and ability to conduct one. This means the
organisation needs to evaluate whether its internal strength, in terms of
expertise, is sufficient to conduct a salary market survey.

The expertise of personnel in conducting a salary market survey will ensure

the smooth process of a salary market survey and the accuracy of information
collected. Expertise includes expertise in structuring and conducting the
market survey and analysing the information obtained. On the other hand,
if an organisation does not have sufficient expertise, it can hire others to do
the survey.
The personnel must be competent in collecting data from various sources.

This is so that important information and not so important information
can be differentiated. Besides that, the personnel must also be competent in
using tools to process the data obtained e.g. the software to analyse data.
(b) Determine the Need for a Salary Market Survey

An organisation has to decide whether there is a need for a salary market
survey, in other words, whether to conduct a survey. The need for a salary
market survey depends on the budget available and the use of the
information. The budget also includes the allocation for tools and computer
applications to analyse data.
The extent of the use of the information from a salary market survey depends
on the objectives of the market survey. For example, some organisations
may find that their compensation structures are not competitive and want
to make them more attractive. Therefore, salary market surveys will help
to strengthen the competitive advantage of the organisations.
The process of identifying job classification and the jobs that need to be
surveyed is very important. This is because not all jobs need a salary market
survey and so money and time otherwise spent on conducting the salary
market survey could be saved. Usually, the human resource department
gets a clear sign from the recruitment unit as to which positions are not
attractive during recruitment drives.
Organisations must decide whether the salary market survey is a planned

activity, e.g. conducted once every five or ten years. This is to ensure that
past records can be used as a reference for future salary surveys.

(c) Determine the Sources of Salary Market Data

Organisations need to explain the sources of reference for their salary market
survey data. Is it possible to use readily available data from the market,
or does data need to be specific to the current problem? An organisation
may be able to use data from other organisations that have the same
objectives in conducting a salary market survey and are facing similar
problems. This will help the organisation to make decisions quickly and
accurately.
The organisation needs to determine whether the salary market survey

covers the use of local or global labour. For example, if data from the
Malaysian labour market is sufficient, then the organisation will be able to
expedite the survey. If the organisation needs additional information from
overseas, the organisation needs wider comparative data to evaluate its
position against that of external competitors.
(d) Determine the Methods of Conducting Salary Surveys

Organisations can use any of the following five methods:
(i) Job matching;
(ii) Job class matching;
(iii) Job survey;
(iv) Job evaluation; and
(v) Wide classification.
The decision regarding which method is suitable depends on the capability

of the organisation and the objectives of the salary market survey.
A combination of methods can be used to obtain complete or maximum
information.

(e) Determine the Method of Data Collection in the Salary Market Survey
Process
Examples of data collection methods are shown in Figure 5.6.
Figure 5.6: Three methods of collecting data
The telephone survey method involves telephoning organisations in the

same industry to obtain information. This method is suitable if the survey
interviewer has many acquaintances who can give complete and accurate
information.
Questionnaires can be posted or sent via e-mail to other organisations. This

method is easier as we can post as many questionnaires as we wish to all
suitable organisations.
Structured interviews can be done if the number of respondents from

the postal questionnaire is low. In a structured interview, data is collected
by the interviewer. The questions are read in the same order as they appear
on the survey questionnaire.
Organisations can combine the data collection methods. Additionally, they

need to think about the statistical tools which will be used to analyse the
data collected. Will the average method be used, or would specific ones be
needed to analyse the data?

5.4 SOURCES OF SALARY MARKET SURVEY

DATA
In order to conduct a salary market survey, we need to know the exact sources
of data. There are two sources of data, internal sources and external sources.
Internal data sources are sources within the organisation e.g. its employees.
The organisation can conduct an internal salary market survey to find out
whether the employees are satisfied with the salaries given by the organisation.
If the data obtained shows a high level of satisfaction, then the organisation
does not need to compare its salary rate against that of other organisations or
conduct an external market salary survey.
External data sources are needed if an organisation finds it difficult to

attract and retain good employees. External sources refer to sources outside
the organisation e.g. its competitors.
The labour market upon which the survey is based must be similar to the labour
market from which the organisation draws its workforce. This is to ensure that
the information obtained will be accurate. Table 5.1 explains the three types
of information that an organisation needs to assess in order to obtain accurate
information.
Table 5.1: Information that Should be Assessed by an Organisation
Type of Information Explanation
Information on the This is information about the similarities and differences that
organisationÊs exist in organisations under study. Information regarding
environment organisational finance, size and structure usually influences
the form of compensation studied.
Information on the Types of compensation offered by every employer. This is to

overall compensation facilitate comparisons between organisations in the same
system industry.
Specific data on salary This includes total remuneration, total hours worked, date
payments for every job and total increments at year end as well as incentive
position analysed payments to employees.

Therefore, before determining the source of data to be referred to, organisations

must ensure the information collected to structure salaries can be compared with
information from the relevant labour market; otherwise, the aims of conducting
the market survey will not be achieved.
Test your understanding with the following exercise.
EXERCISE 5.1
1. Discuss five reasons for conducting a salary market survey.
2. Explain the five steps in conducting a salary market survey.
5.5 SALARY MARKET SURVEY METHODS

Before making a decision regarding the method to be used in a salary market
survey, the human resource department needs to first find out what the data will
be used for. This is because the method to be used depends on the purpose of
the salary survey. For example, if the information needed is to increase the
organisationÊs competitive edge, the department must choose a method that
provides quick and accurate information appropriate for that purpose. Attention
must be given to the constraints of time and cost because they will influence
the findings of the salary market survey.
There are five methods of salary market survey that can be used by the human
resource department. These methods are listed in Figure 5.7.

Figure 5.7: Five methods of salary market survey
Now, let us take a look at all five methods in detail:
(a) Job Matching

Job matching is the most common salary market survey method used by
organisations. This method uses a job benchmark and will fit respondents
into this job benchmark by comparing the identification data obtained
from a salary market survey.

The job benchmarking process identifies the traits and qualities of an ideal
candidate and then matches the talent to the job to ensure that the needs of
both the individual and the organisation are met.
Respondents are required to identify the data through positions and they
are also asked to indicate the similar position, rate of pay, payment range
and the number of employees. The job talent requirements in three categories
will be identified. The categories are reward, behavioural traits and job
attributes. The matching of respondents will be more accurate with more
identifiers.
The benchmark method is suitable to obtain initial information for job

matching. When conducting a market survey using the job matching
method, we have to be careful in matching the job titles. To ensure accuracy,
the following factors need to be considered when selecting the titles:
(i) The title commonly used; and
(ii) The accuracy of information in defining work.
The best way to ensure this method produces accurate information is for
the organisation to use a standard weight measurement for wages in the
evaluation of the value of similar work.
(b) Job Class Matching

The job class matching method requires us to group equivalent jobs into
the same class. This work group is evaluated based on compensable factors.
According to the Bureau of Labour Statistics (BLS), this method of

matching job class utilises alphabets and numbers to identify service
classes according to hierarchy. For example, letters A to Z or numbers
1 to 10 will reflect the value of work; the smaller the letter or the number,
the higher its relative value.
To acquire and identify job data, we have to look at similar job titles,
pay rate, payment range and number of workers. As in job matching,
the more identifiers there are, the more accurate the matching.

Under this method, a job is valued quantitatively based on compensable

factors contained in the job. These factors are skills, effort, responsibilities
and work environment. First, the selected factors determine whether a
particular job is more or less important compared to other jobs and,
ultimately, the value of the job to the organisation.
(c) Job Survey

A job survey method identifies the main job groups in an organisation,
such as human resources, accounting and production. All the jobs are
then listed in similar occupation groups based on these main groups. The
respondents will be asked to indicate jobs based on groups, lowest rate
and time of payment and write a report.
Under this method, information and matching results will be more accurate
and simple. In addition, this method makes data administration easier as
respondents need not be specific and the data reports are more objective.
It is easier to analyse the information obtained.
(d) Job Evaluation

This method is used in most organisations because it is easy to classify jobs
in an organisation. It requires all jobs in the organisation to be classified and
grouped into an existing grade structure according to level of job difficulty.
The higher the job grade, the higher the level of work responsibility, skills,
knowledge, ability and other factors.
The first step to implement work assessment is to classify jobs based on

available job descriptions. The next step is to fix the rules of job classification
which involves determining the form and skill levels, effort, decision making
etc. that are required to perform a job in that class.
Next, choose the factors that can be used to measure the levels of the workers,
such as skill level, effort, responsibility and state of the workplace. After
deciding on the compensable factors, we can form a job description for
each class and job grade that is being studied. The compensable factors
identified and set will define the job grades in an organisation.
(e) Wide Classification

This method makes use of the maturity curve and frequency distribution
curve. This means, based on the two curves, the wage dispersion will
equate to the maturity in work. The two major curves are used as a guide
to understand compensation in a group of organisations. Through this
method, individuals can provide data that is required accurately, using a
yardstick, based on the employeeÊs job summary.

This method encourages employees to develop skills laterally, that is to

have multiple skills and to understand equal work using different skills.
It enables the management faced with problems to spread out tasks or
redeploy employees without having to adjust the employeesÊ salary.
The human resource department can choose to use any of the five methods.
The methods could also be combined to obtain more accurate information.
Figure 5.8 shows human resource officers discussing the choice of a salary
market survey method.
Figure 5.8: A discussion on identifying a suitable salary market survey method
5.6 PROBLEMS IN CONDUCTING SALARY

MARKET SURVEY
Conducting a salary market survey requires a high level of detail to ensure
that the information gathered is accurate and valid. For example, the use of less
suitable methods will give less accurate information. This will lead to errors in
reporting to the organisation.
Therefore, every time an organisation conducts a salary market survey, it has to

consider the problems that may crop up during the survey process.
Problems in conducting a salary market survey are described in Figure 5.9.

Figure 5.9: Salary market survey problems
Let us examine the problems mentioned in Figure 5.9 further.
(a) Difficulty in Matching Jobs Accurately

Matching applicants to jobs in the organisation is difficult. This is because
not all jobs with similar titles carry similar duties and responsibilities.
These depend on the needs of organisations. In addition, the qualifications
required for a job differ from one organisation to another.
The requirements also depend on the size of the operations. For example,
an organisation which is categorised as a small enterprise may require
only an administrative clerk with basic typing and letter-writing skills.
If the organisation is a big enterprise, higher qualifications may be required
for the same job.

(b) Difficulty in Obtaining a Job Sample that Can be Used

Sometimes it is difficult for an organisation to obtain samples of jobs that
can be used. Not all jobs in a similar industry have the same level of
difficulty.
For instance, positions in small industries in Selangor are not the same as
positions in small industries in Kedah and Perlis. This is because of different
lifestyles due to geographic differentials. The operations level of an
organisation, the job scope and the skills needed are also influenced by
geographical location. Therefore, it is difficult to choose a representative
sample of work.
(c) Difficulty in Linking Data with an OrganisationÊs Wage Policy

It might be difficult to link the data obtained from a market survey with an
organisationÊs wage structure. One of the reasons is the lack of transparency
on the part of the respondents in answering survey questions, therefore,
the information obtained is less accurate.
When this happens, it will be difficult to link the data obtained with the
organisationÊs policy. It could also be that the interviewers are not skilful
enough in handling market surveys. These factors more or less affect the
data analysis and the accuracy to link available wage policies.
(d) Difficulty in Integrating Market Wage Data with Internal Work Value Data
and Wage Structure Design Data
This will make it difficult to assign value to the compensable factors that
decide the wage levels of a job or responsibility. This is because each
organisation has its own criteria for the selection of candidates for a
particular job. Let us see an example in Figure 5.10.

Figure 5.10: Each organisation has its own criteria for a clerk
Every organisation has different views of their job properties. The titles
may be similar but differ in terms of tasks and responsibility. These
differences influence the setting of job values in an organisation.
(e) Failure to Recognise Salary as just a Component of the Total Compensation

There are organisations where salary is just one component of compensation,
not the absolute component that determines the rate of work compensation.
Failure to realise this will result in inaccuracy of the information collected.
Last but not least, other compensations in the form of leave, medical and
insurance benefits, etc. have also to be considered in determining the
compensation rate and salary of a certain job.

EXERCISE 5.2
1. Briefly explain the following salary market survey methods:
(a) Job matching;
(b) Job class matching; and
(c) Wide classification.
2. State five main problems encountered in market surveys.
 According to Henderson (2005), salary market survey is a process to obtain

information regarding practices of compensation payment in the market as
well as from the organisationÊs own compensation payment practice.
 Salary market survey is important in compensation management because it

helps the organisation to:
 Recruit and retain employees;
 Maintain the organisationÊs competitive edge;
 Construct the organisational salary structure;
 Set the salary and wage rate; and
 Integrate internal and external equity in a wage system.
 The five steps of conducting a salary market survey are:
 Evaluating and developing the ability to conduct a salary survey;
 Determining the need for a salary market survey;
 Determining the sources of salary market data;
 Determining the methods of conducting salary surveys; and
 Determining the method of data collection in the salary market survey

process.

 Two sources of salary market data are internal and external data sources.
As for methods of conducting a salary market survey, there are five of them ă
job class matching, job survey method, wide classification method, job
evaluation method and job matching.
 Among the problems in conducting a salary market survey are:
 Difficulty in matching jobs to applicants;
 Difficulty in obtaining a job sample that can be used;
 Difficulty in merging data with an organisationÊs wage policy;
 Difficulty in integrating market wage rate with value of internal work

and data of salary structure; and
 Failure to recognise pay as just a component of total compensation.
External equity Job matching

Internal equity Labour market
Job class matching Wide classification

Topic  Salary
Structure
6 Design
LEARNING OUTCOMES
1. Discuss the steps in an organisation's compensation management
process;
2. Differentiate between a few types of salary payment; and
3. Review other salary payment programmes.
 INTRODUCTION
Generally, employers provide financial or non-financial compensation or both,
depending on employee needs in an organisation and the laws and regulations
that govern salary. Information on employee needs is generally obtained from
market surveys that are carried out by the organisation. Based on the information
that has been collected, the organisation will determine a salary structure that is
fair to both the employees and the organisation.
Designing a compensation structure generally and a salary structure specifically

requires a person to be knowledgeable about the jobs and the industryÊs
wage structure and their effects on the organisation. This is necessary to ensure
that the organisation stays competitive. Thus, the major benefit to the
organisation in carrying out a salary market survey is being able to be informed
about the current labour market conditions and market compensation trends.
This information helps the organisation to decide on the salary structure to be
implemented in an effort to maintain existing employees or attract new
employees to join the organisation.

TOPIC 6 SALARY STRUCTURE DESIGN  139
Salary structure is an arrangement of salary grades for positions that are created
by the organisations. The person who designs the salary structure should be
aware that designing a salary structure is very much related to the other human
resource management activities. For example, an organisation may incur a higher
salary cost if the salary offered is much greater than what is supposed to be
received by the employees.
In this topic, we will discuss important issues pertaining to designing a salary

structure in accordance with the economic situation and the firmÊs ability to pay.
This topic will introduce you to salary design and implementation processes
and also the types of salary payment made by an organisation.
6.1 COMPENSATION MANAGEMENT PROCESS

Take note that before organisations design their salary structure, they have to
first clearly understand how the compensation management process is carried out.
This is important because it will influence the design of the salary structure.
Figure 6.1 briefly explains the compensation management process.
Figure 6.1: Compensation management process
There are seven steps in the compensation management process as shown in

Figure 6.1. Let us study the compensation management process by referring to
Table 6.1.

140  TOPIC 6 SALARY STRUCTURE DESIGN
Table 6.1: Seven Steps in Compensation Management Process
Steps Process
Step 1: Understanding and identifying an organisationÊs structure.

Organisational Organisational structure is explained through a job hierarchy.
Structure and This identifies the highest and lowest job positions, support
Hierarchy groupÊs positions and the managementÊs positions. The higher
the job position in an organisation, the higher the salary level
and all other forms of compensation received.
Step 2: Designing and determining job description and job specification

Job Description for each job in an organisation. This explains the qualification
and Job level, experience, knowledge and skills required by a job. The
Specification higher the qualification, experience, knowledge and skill level of
an individual, the higher the salary obtained by that individual.
Step 3: Determining the salary scale for a job position. Employees doing
Salary Scale the same kind of job and with equal qualification, knowledge,
skills and experience are classified into the same grade and paid
within a salary range.
Step 4: Obtaining information relevant to each jobÊs market rate. The

Market Rate organisationÊs rate is compared against the market rate to see
whether it is too high or too low. Generally, organisations will
conduct market surveys to gauge the competitiveness of the
salary offered to their employees.
Step 5: Designing salary grades for organisations. This can be done by

Salary Grade collecting market information on the lowest and highest salary
rates paid to employees in the same position. This step is
important in ensuring the salary grade is not too narrow or
otherwise.
Step 6: Determining an employeeÊs performance measure through

Performance individual job performance evaluation. This is for the purpose of
Evaluation differentiating each individualÊs achievement based on the job
performance displayed. Generally, the higher the value or score
for an individualÊs job performance, the higher the salary will be.
Step 7: Designing and determining salary payment individually for each

Individual employee. This is to encourage every employee to work hard
Payment and effectively.

ACTIVITY 6.1
Before an organisation determines its salary structure, it has to

understand clearly how the compensation management process is
carried out. Obtain information regarding the compensation
management process at your workplace if you are working but if you
are not, try to acquire information about the process at any
organisation. Based on the information obtained and the seven
steps that have been described, sketch a plan depicting how salary
structures are designed and how differences exist.
6.2 SALARY STRUCTURE DESIGN PROCESS

We know that market surveys will provide us with information regarding salary
structures in the market and the organisation. An organisation has to analyse
information and data obtained regarding the internal and external salary structure
so that the organisation can design an accurate and competitive salary structure.
There are six steps to be adhered to in carrying out a salary structure design.
The following are the six steps:
(a) Determine a salary policy line or a salary trend line;
(b) Decide whether or not more than one salary structure is needed;
(c) Interpret data obtained from market surveys;
(d) Identify the highest and lowest salary payment rates for each salary grade
and for each job position designed;
(e) Determine the lowest to the highest salary payment increment rates; and
(f) Design salary structures in organisations.

The following explanation describes these steps further.
(a) Determine a Salary Policy Line or a Salary Trend Line

Organisations need to decide on the method for determining and drawing
random plots for the salary designed or for the salary information obtained.
An organisation can use either the line-of-sight method or the two-point
method.
The line-of-sight method requires an organisation to determine the

middle point for each and every salary grade for job positions in the
same category. After the middle point for each salary grade has been
determined, each and every point will be connected to form one salary
policy line (refer to Figure 6.2).
As for the two-point method, it requires that we obtain two points,

which are the lowest salary rate point and the highest salary rate point
for each job category. Then we will connect all the points at the lowest
salary rate forming a line and at the highest salary rate forming
another line. This is known as the payment policy line based on the
two-point method (see Figure 6.3).
The following are examples that will explain the line-of-sight and two-point
concepts clearly. In Company A, a clerkÊs position has three fixed salary
grades: A, B and C. Table 6.2 shows the maximum salary, mid-point salary
and minimum salary for all the three grades.
Table 6.2: Salary Grades for a ClerkÊs Position in Company A
Salary Grade A B C
Minimum Salary 400 500 600
Mid-point Salary 500 600 700
Maximum Salary 600 700 800
If Company A uses the line-of-sight method in determining the salary

policy, it will use the mid-point salary for all the three salary grades.
Connecting all the salary mid-points (marked X) will form a salary policy
line for the clerkÊs position in Company A. This is shown in Figure 6.2.

Figure 6.2: Line-of-sight method for determining salary policy
If Company A wishes to use the two-point method, it has to connect all

the maximum salary points for all the salary grades to form the maximum
point for the salary policy line. All the minimum salary points for the
salary grades will also have to be connected to form the minimum point
for the salary policy line. Company A will refer to both salary lines to
determine the salary for the clerkÊs position. This can be seen in Figure 6.3.

Figure 6.3: Two-point method for determining salary policy
(b) Decide Whether More than One Salary Structure is Needed

Organisations can choose to use one salary structure for each job category
or otherwise. For example, two salary structures can be used to differentiate
semi-skilled employees from non-skilled employees.
This is for the purpose of depicting a clearer salary grade for each post
with different qualifications, experiences, knowledge and skills.
Figure 6.4 shows an employer attempting to deceive an employee by

providing false information regarding salary grades.

Figure 6.4: Employees need to know their own salary grades
(c) Interpret Data Obtained from Market Surveys

Organisations need to be careful when they interpret data. This includes
ensuring accurate use of the method, exact calculation of the figures and
selection of values that fulfil the measurement requirements and evaluations
that depict data accurately.
(d) Identify the Highest and Lowest Salary Payment Rates for Each Salary
Grade and Each Job Position Designed
This is to ensure the rate differential between the maximum salary and
minimum salary received by the employees indicates a logical and obvious
difference. An obvious difference will simplify annual increase calculations
for each salary grade designed.
(e) Determine the Lowest to the Highest Salary Payment Increment Rates
This means organisations need to decide on the salary increment rate
annually for each salary grade. For example, the beginning salary for the
position of an administrative clerk is RM700 and the end or maximum salary
will be RM2,000. If the duration of service is 20 years, the total increment
will be about RM1,300 for the whole duration.
Thus, there is an average annual salary increase of RM65. The administrative

clerk would need to work for 20 years to achieve the maximum salary of
RM2,000.

In deciding this increment rate, organisations have to look at the clear

differences in the salary payment rates for the purpose of making it easier
for a job holder to perceive a difference in the responsibilities carried out.
Figure 6.5 shows that low annual increase in salary rates which are unjust
will give rise to employee dissatisfaction.
Figure 6.5: Dissatisfaction caused by a low salary increment rate
(f) Design Salary Structures in Organisation

When designing salary structures, we have to make known the number
of salary increases it takes to reach the maximum rate and width, which is
the period it takes to reach the maximum level. Based on the example in (e),
the stipulated period is 20 years before the maximum salary rate of
RM2,000 is reached.
Besides that, the height of the salary structure which has been designed has
to be explained, that is, the difference between the maximum salary and
minimum salary and if the structure takes into account the skill levels,
knowledge and experience of an individual. This is to ensure the form of
salary introduced is fair and acceptable to all, especially to the employeesÊ
union.

Test your understanding through the following exercises.
SELF-CHECK 6.1
Imagine that you are working as an engineer. Identify the minimum

and maximum values in the salary range for your job. Compute the
difference between your maximum salary and minimum salary and
explain the annual increase received. Do you feel the increment rate
is reasonable?
EXERCISE 6.1
1. Discuss an organisationÊs compensation management process

briefly.
2. Explain how an organisation designs its salary structure.
6.3 TYPES OF SALARY PAYMENT

Before an organisation determines the type of salary payment that will be used,
it has to identify the reasons why certain salary payment practices are widely
used. This is important in order to standardise the salary payment with the
organisationÊs objectives and aims. The implementation of types of salary
payment also helps an organisation to identify and mould the behaviour and
aims of employees in the organisation.
An organisation can use multiple approaches to salary payment practices that

will help the organisation to achieve its aim. For instance, if the organisationÊs
objective is to develop highly skilled employees, then it will be more
appropriate for the organisation to use payment practices based on skills.

Next, we will identify four salary payment practices that can be adopted by
organisations. They are:
(a) Skill-based salary payment;
(b) Knowledge-based salary payment;
(c) Competency-based salary payment; and
(d) Seniority-based salary payment.
SELF-CHECK 6.2
When individuals get their first job, is their salary decided based on
their academic qualifications or experience (or inexperience)? When
they get their second job, what determines their salary? Is it academic
qualifications or experience? Besides academic qualifications and
experience, what are other factors that determine a personÊs salary?
Give your opinion.
6.3.1 Skill-based Salary Payment

Organisations that give importance to employeesÊ skills will try to design a
salary structure that is capable of attracting skilled employees to join the
organisation as well as satisfying and retaining existing skilled employees.
Skill-based salary payment is the approach used to identify types and levels of
skills that the employees possess. Normally, the higher the skills possessed
by employees, the higher their salary.
If an organisation wishes to use this method, it has to clearly and accurately

identify types of skills that are needed by each position and also the skill levels
that employees have to possess if they desire to be paid a particular salary rate.
Differences in the types of skills needed have to be stated accurately and clearly
especially in the job description and specification. For example, the skill type
and level for the position of a general administrative clerk differ from that for
a senior administrative clerk, so the different requirements will have to be clearly
described.

If an employee possesses high skill levels and fulfils all the criteria decided by
the organisation, he is eligible to be considered for a higher salary grade.
If the skill level of another employee who is doing the same work is lower, he will
be placed in a lower salary grade although both employees perform the same job.
Figure 6.6 explains why differences exist in salary grades although the job position
is the same.
Figure 6.6: Salary grades according to skills level
Organisations which use this approach are generally involved in businesses that
require high levels of skills to gain a competitive edge.
This method enables organisations to assess an individualÊs skill level to find

out if the skills possessed are appropriate for the responsibilities attached to the
job. If the skills are insufficient, the organisations will normally try to send the
employees for training programmes which centre on the skills required.

6.3.2 Knowledge-based Salary Payment

Organisations that give importance to an employeeÊs knowledge level can choose
this approach to pay their employeesÊ salary.
To retain expert employees in certain fields of knowledge, an organisation will

generally use this approach to pay their salary. The higher an employeeÊs
knowledge level, the higher the salary offered to him. For example, a lecturer
who possesses a doctorate is paid more than another who has a masterÊs degree.
This approach is also generally used to evaluate an individualÊs involvement

in a work group that utilises the membersÊ knowledge. The difference in their
salary payment is based on the knowledge level required for the task or job offered.
Figure 6.7 shows how a difference in salary grades leads to misunderstanding

between colleagues.
Figure 6.7: Salary grades according to academic qualifications

Thus, if this approach is chosen by the organisation, it has to have a set of clear
guidelines that can differentiate between knowledge levels as well as identify
different levels of knowledge possessed by its employees. In other words, the
knowledge level of employees is a determining factor of the salary payment rate
they will receive.
SELF-CHECK 6.3
Knowledge is subjective and cannot be measured. How does the human

resource department use knowledge to determine an employeeÊs salary?
6.3.3 Competency-based Salary Payment

This approach gives importance to competencies possessed by employees.
An assumption used most of the time is that the more competent an employee
is in carrying out his job, the higher the salary he will receive. Organisations
have to design competency sets which can be evaluated and achieved by their
employees.
For example, for technical employees who assemble car engines, the faster and
the more competent they are in assembling the car engines, the higher their
salary rate will be. This is because the organisation is able to increase output
with the competencies possessed by the employees. Competency-based salary
payment takes into account the competency level, knowledge and skills of
employees in carrying out their duties.
Figure 6.8 shows the characteristics of competency-based salary payment.

Figure 6.8: Characteristics of competency-based salary payment
Let us look further at the characteristics mentioned in Figure 6.8.
(a) Knowledge competency is evaluated through three levels: education,

experience and the skills possessed by an employee in completing a task.
(b) Problem-solving competency consists of three components: interpreting

problems faced, analysing problems faced with working situations and
communication competency between colleagues in looking for a solution to
problems faced.

(c) Decision-making competency looks at the ability of employees to solve a

problem and compare the quality of the solution with the time taken to
come up with it. Decision-making competency includes interpersonal
competency, resource management competency in solving problems and the
organisationÊs asset allocation competency.
An example of a job best suited to use this approach is that of company

manager. This is because a company manager will be evaluated based on the
way he runs the company. A high competency level means higher profits
for the company and the reverse is also true. The manager will have to
combine the elements of knowledge competency, problem-solving
competency and decision-making competency to ensure the company is
able to continue operations and obtain profits from those operations.
ACTIVITY 6.2
In your opinion, what is meant by work-related problem-solving

competency? Why is it perceived as important in an organisation?
6.3.4 Seniority-based Salary Payment

What does seniority mean?
Seniority means an employeeÊs duration of service in the same organisation.
The purpose of the salary payment method based on seniority is to show

appreciation for employees who have served for a long duration in an
organisation. Indirectly, it also recognises employeesÊ loyalty to the organisation.
Figure 6.9 illustrates a senior employeeÊs hopes of obtaining a salary based on

seniority.

Figure 6.9: Employees expect a salary based on their seniority
This method assumes that employees are equally qualified, thus long-serving
employees will receive a higher salary rate.
This will help organisations to identify and differentiate between new employees
and senior ones, especially from the aspect of their level of understanding
concerning the organisation. This is important because employees who have
been with the company for a longer period can generally understand the
organisationÊs operations better and they are capable of improving their work
quality in line with the organisationÊs goal.
For example, compare a new administrative clerk and an administrative clerk

who has been at the same job for the past five years. Of course, the senior
administrative clerk will be more knowledgeable about the ins and outs of the
job compared to the new clerk who is still learning the ropes in the organisation.

ACTIVITY 6.3
Is it appropriate to implement a salary payment method based on

seniority? If it is to show appreciation for a long-time employeeÊs
contributions, is it appropriate if a long-serving employee receives a
higher salary than a new employee who has higher academic
qualifications? Give your opinion.
Test your understanding of salary structure design through the following exercise.
EXERCISE 6.2
Arrange the steps in a compensation management process in the correct

sequence.
Compensation Management Item Sequence
Design job description and job specification
Determine salary grade
Determine salary scale
Analyse performance evaluation
Compare organisationÊs compensation rate to the

market rate
Determine and explain organisational hierarchy

structure
Payment to individuals

1. The following statements are true regarding an organisationÊs

salary structure design process, EXCEPT:
A. The organisation has to decide whether it needs more than one

salary structure for each category of job.
B. Data from market surveys is useful for measuring and
valuing an organisationÊs salary structure.
C. Market survey output has to be referred to first when deciding
on the method for determining and drawing random salary
plots.
D. The lowest and highest salary grades for every job in an
organisation have to be decided to differentiate between the
skills, knowledge and abilities of individuals.
2. The following are true of salary payment types, EXCEPT:
A. A salary payment based on skills is adopted for the purpose

of keeping highly skilled employees in the organisation.
B. A salary payment based on knowledge is necessary when an
organisation gives importance to employeesÊ knowledge of
its operations.
C. A salary payment based on competency has to combine an
employeeÊs competency level, knowledge and skill.
D. None of the three salary payment types can value an
employeeÊs salary eligibility accurately.

3. Pick the most accurate statement regarding salary structure design

in organisations.
A. Organisations have the right to fully decide on the salary

payment type for their employees except when there is
interference from trade unions.
B. Competency in salary payment means competency in solving
problems related to job or work, competency in generating
knowledge regarding job and competency in making decisions.
C. Information accuracy in job description and job specification
is necessary to explain eligibility levels, experience and a
personÊs skills when determining salary.
D. Salary grade has to symbolise a positionÊs importance.
Essay Question
Explain briefly salary payment programmes based on skills and

competency.
6.4 OTHER SALARY PAYMENT PROGRAMMES

Do you know that besides the salary payment programmes which have been
discussed earlier, organisations can also design a salary payment programme
that is suited to their situation? Other examples of salary payment programmes
are:
(a) Salary payment programme based on merit system;
(b) Salary payment programme based on unit of output; and
(c) Bonuses and awards.

6.4.1 Salary Payment Programme Based on Merit

System
The merit payment programme is an incentive compensation system which is
given to employees who show very high or excellent job performance levels.
Any increase in salary is given based on a subjective evaluation of the employeeÊs
performance.
Generally, salary increase is based on the merit increment grid which has been
decided upon. The motivation expectancy theory forms the foundation of the
merit system.
The motivation expectancy theory is based on the assumption that human

behaviour is a result of conscious choices among alternatives and favourable
behaviour will produce the desired results.
Based on this theory, there are three conditions which can motivate human
behaviour, and these are as follows:
(a) An employee has to believe that if he puts in the effort required, he will
succeed in getting the desired results;
(b) An employee has to see the existence of a positive relationship between

good job performance and rewards that will be received; and
(c) An employee has to appreciate rewards that are given out. It means that
rewards that are offered can motivate him to reach better performance levels.
This concept attempts to explain that if organisations are able to relate positively
to performance levels and work output, employees will soon realise this
relationship as an opportunity for them to increase their performance levels.
A good merit system has to have the following criteria:
(a) Salary ladder matrix is created for each job or for the same group of jobs;
(b) An individualÊs progress up the salary ladder depends on his performance

evaluation;

(c) The quality of performance is interpreted through performance evaluation

systems, whereby an employeeÊs behaviour will be monitored and his
contribution to the organisation is evaluated; and
(d) The salary increase system is the awarding of pay increment or bonus or
a combination of both either to an individual or a team.
An example of a payment system based on merit is a 10 per cent rise in basic

salary for employees who have performed exceedingly well.
6.4.2 Salary Payment Programme Based on Unit of

Output
This programme gives importance to the output produced by an employee.
This means each employee will be assigned a total output that has to be produced
in a given time frame. If employees are able to exceed targets that have been
determined, they will be eligible to receive higher salary payments.
If this payment programme is chosen by employers, three components have to be

done first. These are as follows:
(a) Determine the time needed by an employee to produce one unit of output:
This means time is a measure of employee productivity, which is how
much time is taken to produce one unit of output.
For example, if 30 minutes is needed to produce one unit of output,

employees need to complete the output within 30 minutes or less for every
unit of output produced.
Assume that an employee has to produce 80 units of output within a week.

If he is able to produce up to 100 units a week, he will be paid more.
(b) Determine what has to be considered for a performance level to be accepted

in a standard period: This means for every employee, the goal and initial
target have been determined and they are related to the organisationÊs
goal and targets. The organisation, teams and individuals will try to do
their best and form a common understanding and manage achievements
based on one framework that has been agreed upon by all parties.

(c) Develop the acceptance of salary levels for employees who can work within
the given period: For example, according to the Employment Act 1955,
a person is required to work for 40 hours a week and this is the
standard period that has been decided to measure the time taken to produce
the output and it will be used to calculate the employeeÊs salary.
6.4.3 Bonuses and Awards

Organisations have their own way of appreciating their employees and designing
rewards that are capable of increasing employee motivation directly. There are
various methods to achieve that purpose. For example, bonuses and awards are
given to individuals who show excellent work performance.
Figure 6.10 takes a look at five forms of bonuses and awards that can be given
by organisations to their employees.
Figure 6.10: Five forms of bonuses and awards
(a) Attendance Bonus
According to Steers and Rhodes (1978), an employeeÊs attendance

depends on two things ă the employeeÊs motivation to be present at
the workplace and the ability and capability to go to work.

Motivation or encouragement to attend work depends on the effectiveness

of the employeeÊs responsibilities towards the work situation and work
pressure. The motivation expectancy theory also proves that low attendance
level can be overcome by giving rewards towards excellent attendance
at the workplace. For example, Malaysian electronics factory Carsem
Semiconductors Sdn Bhd gives an attendance bonus amounting to as
much as RM75 to employees who record perfect attendance.
(b) Government Incentive Award

Recognition is given to civil servants who display quality or work output
exceeding the normal responsibility for their position. For example, the
Government constantly hopes that civil servants will put in more effort
to raise the standard and quality of civil service. Some of the efforts
made by the Government towards this end include giving out service
excellence awards like General Circular No. 2 year 1983 (Surat Pekeliling Am
Bilangan 2 tahun 1983).
(c) Special Achievement Award

The special achievement award is given to individuals in recognition of
their efforts towards excellence in their careers. The awards are given based
on their individual quality, work quality and achievement as a whole in
the organisation. The award will keep the individual employeeÊs career
development in line with the organisationÊs development.
(d) Patent Award

The patent award is given to appreciate the maturity of an employee. It is for
the purpose of encouraging employees to explore the depth of their
intellectual capability related to their work. This award is also given to
employees who are capable of creating new ideas that are applicable to
their work situations.
(e) Long Service Award

The long service award is bestowed in acknowledgment and appreciation
of employeesÊ loyalty towards the company. For example, after spending
15 years with a company, employees will be given the long service award by
the organisation.
Organisations can create their own awards and bonuses based on their
needs. What is important is the purpose of the award and that the bonus
is interpreted positively by the employees.
Lastly, test your understanding of salary payment programmes through

the following exercise.

EXERCISE 6.3
Briefly explain the following salary payment programmes:
(a) Payment based on merit;
(b) Payment based on output unit; and
(c) Payment based on attendance.
 The seven steps of an organisationÊs compensation management process are:
 Organisational structure and hierarchy;
 Job description and job specification;
 Salary scale;
 Market rate;
 Salary grade;
 Performance evaluation; and
 Individual payment.
 There are six steps to follow in carrying out a salary structure design:
 Determine a salary policy line or a salary trend line;
 Decide whether or not more than one salary structure is needed;
 Interpret data obtained from market surveys;
 Identify the highest and lowest salary payment rates for each salary grade
and for each job position designed;
 Determine the lowest to the highest salary payment increment rates; and
 Design salary structures in organisations.

 The four types of salary payment are:
 Skill-based salary payment;
 Knowledge-based salary payment;
 Competency-based salary payment; and
 Seniority-based salary payment.
 Other salary payment programmes that can be considered are:
 Salary payment programme based on merit system;
 Salary payment programme based on unit of output; and
 Bonuses and awards.
Competency-based salary Seniority

Line-of-sight method Skill-based salary
Salary structure Two-point method

Topic  Short-term
and
7 Long-term
Incentives
LEARNING OUTCOMES
1. Explain the meaning and factors in designing an incentive payment
programme;
2. Differentiate between three types of short-term incentives offered
by organisations;
3. Discuss the advantages and disadvantages of a profit-sharing plan;
and
4. Design long-term incentive programmes for employees.
 INTRODUCTION
It cannot be denied that incentive programmes are a form of rewards, playing
a crucial role in boosting productivity and efforts. The incentive programme
provides an income that is paid in addition to the basic salary.
The easiest incentive programme to be implemented is one that involves every

employee in an organisation (Henderson, 2005). According to Martocchio (2001),
research has shown that more than half (58%) of all professional employees
and almost every executive (94%) is eligible to receive the incentive compensation
award. An increasing number of organisations are becoming aware of the
importance of providing incentive payment programmes to all categories of
their employees, who include production, technical and service employees.
TOPIC 7 SHORT-TERM AND LONG-TERM INCENTIVES  165
7.1 DEFINITION OF INCENTIVE PAYMENT

Martocchio (2001) stated that:
„Compensation, besides basic salary or wages, changes according to an

employeeÊs achievement based on certain standards that have been decided
such as formulas, individual or group aims, or the organisationÊs gains‰.
Most organisations implement incentive payment programmes to control salary

payment cost or to motivate employee productivity. Organisations can control
cost by substituting annual merit payment, increment based on seniority or fixed
salary payment with an incentive plan. Increment in salary payment is only
awarded when the organisation enjoys an increase in productivity, profits or
other business success. If developed well, an incentive programme based on
performance will allow employers to control their own compensation cost.
A good and effective incentive payment system is based on three assumptions:
(a) Individual employee and work groups differ in the form of their contribution
to the organisation. The organisation not only looks at what they have
done but also evaluates how well the employees have performed their tasks.
(b) The organisationÊs overall performance depends on a wide range of

individual and group performance.
(c) To attract, motivate and maintain high-performance employees and to be

fair to all employees, an organisation has to reward all employees based
on their relative performance.
Some organisations use incentive payment programmes to replace all or

part of the basic salary payment to control the salary payment expenses
and to interrelate payment with work performance. Organisations can
also use the incentive payment programme to distinguish difficulty levels
for multiple job ranks.

166  TOPIC 7 SHORT-TERM AND LONG-TERM INCENTIVES
SELF-CHECK 7.1
We often hear the term „incentive‰, especially during job performance

evaluations. Most of us perceive incentives as rewards for satisfactory
performance. What do you understand by „incentive‰?
7.2 INCENTIVE PAYMENT PROGRAMME

DESIGN
We will now discuss the design of an incentive payment programme. Human
resource professionals and managers have to take the following five factors
into consideration when designing an incentive programme:
(a) Whether the plan is to be based on individual or group performance;
(b) Risk level that will be faced or accepted by employees in the overall
compensation package;
(c) Whether incentive payment should replace or complement the traditional

salary payment;
(d) Performance criteria has to be taken into account and has to be evaluated;
and
(e) Time frame to accomplish the aims or goals ă long-term, short term or a
combination of both.
The incentive payment programme can be short or long term. Generally,

a short-term incentive programme is often used for lower-level employees. For
example, a production workerÊs output performance is evaluated based on a
period that can be as short as an hour.
A long-term incentive payment programme is more for professionals and

executive-level employees. For example, incentives are given to an engineer
who innovates a product as the process of innovation requires a long time frame.

7.3 SHORT-TERM INCENTIVE PROGRAMMES

The short-term incentive programme is based on short-term achievements,
generally over a time frame of five years or less. It can exist in multiple forms
and the incentive amount can be paid on a weekly, monthly, quarterly or
yearly basis.
Short-term incentives can be in the form of premiums and difference in payment

to employees who work in exceptional situations or under exceptional conditions.
Thus, incentive payment is generally made as:
(a) Payment for units that are produced;
(b) Bonus for innovation and individual creativity;
(c) Bonus or award for the achievement of multiple results that are desired
and required e.g. full attendance; and
(d) Payment for the achievement of specific organisational goals e.g. unusually
high profits and cost reduction.
Before any short-term incentives are given to employees, employees have to be

observed and evaluated from four perspectives:
(a) As an individual who contributes;
(b) As members in groups;
(c) As members in work units; and
(d) As members in organisations.
The incentive payment programme can be classified into three main categories:
(a) Individual incentive plan;
(b) Group incentive plan; and
(c) Organisation incentive plan.

Table 7.1 shows the performance measures which are used for the individual,
group and organisation incentive plans.
Table 7.1: Performance Measures for Individual, Group and Organisation Incentive Plan
Individual Incentive Plan
 Work Output Quantity

 Work Output Quality
 Monthly Sales
 Work Safety Records
 Work Attendance
Group Incentive Plan
 Customer Satisfaction
 Labour Cost Savings (Basic Salary, Overtime Payment, Interest)
 Materials Cost Savings
 Reduction in Accidents
 Services Cost Savings (Usage)
Organisational Incentive Plan
 OrganisationÊs Profits
 Cost Reductions
 Market Shares
 Profits from Sales
Source: Martocchio (2005)
ACTIVITY 7.1
What are the types of short-term incentive payment programmes that

are practised in Malaysia and how are these incentives determined?
Compare your answer with your friends and note any additional
information which you can obtain from the comparison.

7.3.1 Individual Incentive Plans

An individual incentive plan gives rewards to employees who work individually
and display excellent performance. This plan is most appropriate in the
following three situations:
(a) Employees have control over:
(i) Number of units produced;

(ii) Sales amount; and
(iii) Reduction of error rates.
(b) Employees have sufficient work output control and at the same time, are able
to control their own performance level.
(c) Employees do not practise unhealthy competition that can lead to

low-quality performance at work.
There are four types of individual incentive plans as shown in Figure 7.1.
Figure 7.1: Four types of individual incentive plans

Now, let us study these four types of individual incentive plans:
(a) Piecework Plan

Generally, there are two types of work plans based on piecework and they
are:
(i) Work Plan According to Working Hours

A work incentive plan based on working hours is often used in the
manufacturing industry like the textile and apparel sector. Employees
are rewarded based on the amount of time spent to produce a standard
output which has been decided in hours. Time spent on the task
determines the value of the output. This plan takes into account
the standard output objective and the movement rate of the operations.
Employees are also guaranteed that they will enjoy the hourly payment
rate whether or not they reach the standard output.
(ii) Work Plan According to Output Units

This plan is developed based on individual performance standards
which cover two important elements:
 Objective Standards
Objective standards generally look into the output units achieved
by employees. For example, an employee is required to produce
one unit of product in less than 15 minutes.
 Subjective Criteria
Subjective criteria refer to the overall work quality based on a
supervisorÊs interpretation and evaluation. For example, a
supervisor evaluates the performance of a customer service
representative and finds that sales performance is better when
the customer service representative emphasises the benefits of a
product and product warranty and vice- versa.

ACTIVITY 7.1
Source: http://www.callcentercomics.com/Call-Center-Comic-22.JPG
Do this activity in your tutorial class and/or in the myINSPIRE forum.

Divide your class into small groups. Later, read and understand the
scenario illustrated. Following that, discuss the main issue and
suggest solutions to overcome it. Finally, compare your answers with
other groups and come to a consensus.
(b) Management Incentive Plan

A management incentive plan awards bonuses to managers when they
achieve or exceed objectives set based on sales, profits, output or other
measurements for divisions, departments or their work units.
For example, the management incentive plan rewards managers when

the value of the organisationÊs shares goes up, or when there is a
reduction in operating cost without affecting output quality and quantity.
One well-known management incentive plan is the management by
objectives (MBO) plan.
MBO is a process whereby a manager and his subordinates agree upon

a set of objectives and jointly come up with a plan for achieving them.
The objectives must be specific, realistic, achievable and time based.

(c) Behaviour Stimulation Plan

Through behaviour stimulation plans, employees receive payments for
achievements based on behaviour or specific behaviour like full attendance
or good safety records.
For example, organisations award financial bonuses to employees who

have full attendance records for a specific time frame.
(d) Reference Plan

Employees receive financial bonuses for referring and bringing in new
employees or recruiting successful job applicants.
For example, an employee recommends an applicant for a job in the

organisation. The person referred is successfully recruited by the
organisation. The bonus award will be given to the employee only when
the new employee has served for a predetermined time frame or exceeds
the predetermined time frame of at least 30 days.
Now, we will discuss the advantages of the individual incentive payment

plan (see Table 7.2).
Table 7.2: Advantages of the Individual Incentive Payment Plan
Characteristics Explanation
Encourage Relationship Employees will try to excel when they anticipate

or Connection between obtaining bonuses that are equivalent to their work
Payment and performance.
Performance
Encourage Fair Employees who perform better will receive higher

Compensation rewards. The fair payment enables the organisation
Distribution in to retain high-performing employees. The higher
Organisations payment given to high-performing employees
signals that the organisation evaluates positive work
performance well.
Compatibility between Employees socialise themselves, and at the same

individualistic and time, they want to be recognised for their individual
collectivistic cultures contributions.

Although this programme proves that it is effective in certain situations, it has a

few limitations. There are three main disadvantages in the individual incentive
payment plans and these are:
(a) This Plan has the Potential to be Inflexible

The supervisor determines the employeeÊs performance level and the
employee who is under the incentive plan depends wholly on the supervisor
to determine his work objective.
If the production or performance standard that has been decided upon is

easily achieved by the high-performing employees, then such employees
who are capable of surpassing the set standard will not do so because
they will receive no additional payment. This, in turn, will discourage the
employees from improving their work performance.
(b) This Plan Causes Measurement Problems When Management Carries Out
Improvements on Work Processes and Instruments
When new work processes or new instruments are introduced in
organisations, employees will generally take time to accept and learn
them. This can pose difficulties to organisations in determining fair
incentive awards among employees because it can lead to the refusal of
employees in accepting the new method.
(c) This Plan Can Encourage Unwanted Workplace Behaviour When it Rewards
Employees based on One Dimension Only
Even if a job has multiple dimensions such as output quantity, quality or
customer satisfaction, employees may focus on only one dimension, which
is, the dimension which has the power to influence the overall work
performance. For example, employees may focus only on output which is
the measure for the incentive plan and disregard the other dimensions,
such as quality.
Test your understanding of what you have learned thus far by answering the
questions in the following exercise.

EXERCISE 7.1
1. Discuss three assumptions which have to be considered in

developing a good and effective incentive payment plan.
2. Explain five factors that have to be considered by human resource

professionals and managers in developing an effective incentive
payment plan.
3. Explain two types of work plans based on piecework.
7.3.2 Group Incentive Plan

Group incentive plan rewards performance collectively. A group incentive
programme is effective when all the group members play a part in achieving
the set objectives although individual contributions may not be the same.
Generally, a well-designed group incentive plan is able to strengthen work groups,

encourage loyalty towards the organisation and increase productivity.
There are two types of group incentive plans. These are:
(a) Small group or work team incentive plan; and
(b) Profit-sharing plan.
Let us study these two types of group incentive plan:
(a) Small Group or Work Team Incentive Plan

The small group or work team incentive plan is similar to the individual
incentive plan with an exception, which is, that every group member receives
a financial reward when the groupÊs objective or aim is achieved.
There are many types of group incentive programmes. Organisations

generally define these programmes according to the performance criteria set.
Groups or teams may receive incentive payments based on multiple criteria
including customer satisfaction, safety records, quality standards and
production records.

Under the small group incentive plan, human resource experts allocate
incentive rewards through the following three methods:
(i) Equal incentive payment to all group members;

(ii) Different incentive payment to group members based on their
contributions to the teamÊs performance; and
(iii) Different payments decided by a ratio of basic salary payment for
each individual as compared to the groupÊs total basic salary payment.
(b) Profit-sharing Plan

The profit-sharing plan gives employees a share in the profits of the
organisation.
This plan was developed to enable employees to enjoy financial benefits

from improvement in productivity as a result of the employee suggestion
system at the workplace. The employee suggestion system has many
benefits, including increased customer satisfaction, better safety, improved
quality and cost savings. The plan illustrates the managementÊs philosophy
that emphasises employee involvement in groups.
Most profit-sharing plans have three main components, which are explained
in Table 7.3.
Table 7.3: Profit-sharing Plan
Component Explanation
Leadership Refer to a cooperative situation in the organisation which

Philosophy encourages a high level of trust, open communication and
employee involvement in groups.
Involvement This system encourages ideas from employees. A monetary

System amount may be awarded for innovative suggestions submitted
by employees. This system also takes into account the
involvement and practices of creative employees, such as
problem-solving work groups. This system has many benefits,
including cost savings, improved quality, decreased waste
and better safety.
Bonus Organisations award profit-sharing bonuses when actual

productivity exceeds the productivity target level. Generally,
the profit-sharing bonus is based on a formula which measures
productivity, where an employee perceives it as fair and the
employer believes it will improve the organisationÊs
performance. Generally, this bonus is given as monthly
payment to employees.

The following are the steps for a profit-sharing plan:
(a) Create a Successful Situation

A programme can succeed when the top management gives full support.
(b) Determine the Purpose of the Group Incentive Programme

The main purpose of the group incentive is to reduce cost and increase
employee morale and productivity.
(c) Develop Appropriate Performance Measures

Performance measures shape behaviour towards the achievement of the
organisationÊs strategic objectives.
(d) Determine How Payment to Employees will be Done

Payment of incentives to employees can be done annually, semi-annually
or according to a certain schedule based on the desired employee behaviour
by the organisation.
(e) Develop Qualification Rules

Organisations have to determine the following matters:
(i) Employee eligibility for the incentive;
(ii) A payment distribution method for employees who quit during the
payment time frame; and
(iii) A method to manage and distribute any funds in deferred accounts.
(f) Determine Sources to Fund Payments

Organisations must determine whether the payment should come from cost
savings, increased profits, increased sales or other sources based on
increased production.
(g) Discuss Special Issues

Any outstanding issues have to be settled immediately to ensure they do not
affect the programme.
(h) Programme Implementation

Organisations have to inform their employees when the incentive
programmes will be implemented.

Figure 7.2 shows four categories of performance measures which can be adopted
by an organisation. It can be focused on customers, finance, capability and
internal processes.
Figure 7.2: Four categories of performance measurement

The following is further explanation regarding the components:
(a) Measurement Focused on Customers

This component is divided into two sub-categories:
(i) The first component refers to the employeesÊ performance in carrying

out product or service delivery, for example, whether they follow
the predetermined time cycle and also the way in which employees
handle and carry out the introduction of new products in the market.
(ii) The second component refers to customer satisfaction. This can be seen
through loyalty of existing customers and solid penetration of the
product market dominated by competitors.
This performance measurement encourages employees to continuously

work hard and improve their existing performance.
(b) Measurement Focused on Finance

This category refers to the first component which includes:
(i) Profit growth;
(ii) Increase in units sold;
(iii) Source pay-offs;
(iv) Profit margin; and
(v) Increase in economic value.
The second component gives returns to the shareholders including returns

on capital investment, returns on sales or profits of an organisation and
anticipated profits.
Employees will be paid according to their achievement in work output, with

reference to the financial performance of the organisation.

(c) Measurement Focused on Capability

This category refers to two main components, which is the capability of
human resources and the capability of other assets. Let us look at Table 8.4
to understand these better.
Table 7.4: Measurement Focused on Capability
Component Characteristics
Human  Employee satisfaction

Resource
Capability  Low employment termination rate
 Overall cost spent on recruitment
 Expansion rate of the development plan
 Stimulation index and staff or number of employees ratio

mix
Capabilities  Design rules and original copyright

of Other
Assets  Efficient distribution system and technological capabilities
 Incentive payment can be given to employees who display

excellent capabilities and work performance
(d) Measurement Focused on Internal Processes

This refers to the usage of resources and also effective changes. Resources
include budget plans which refer to:
(i) Actual expenditure;
(ii) Cost allocation ratio;
(iii) Reproduction or work repeated;
(iv) Zero error rate or accuracy rate in carrying out a process; and
(v) High safety rate.
Effective changes cover programme implementation according to plan,

effective work groups and also quality or service index. Incentive payment
focused on internal processes can be given to employees to enable them to
see how well they have been doing their jobs.

The group incentive plan has two main advantages:
(i) It is easier for organisations to develop performance measures for

group incentive plans than for individual incentive plans.
(ii) Large group harmony exists. Generally, a group which is united will
work more effectively to achieve the objective set compared to group
members who individually focus on specific tasks assigned to them.
Working cooperatively is the best way for members in groups to
maximise the incentive award.
We have discussed the advantages of the group incentive plan. The next
discussion will be focused on the main disadvantages of the group incentive
plan.
One of the main disadvantages of this plan is the high turnover rate of
employees. This is due to the free rider effect caused by the planÊs
implementation. Some employees may make smaller contributions towards
achieving the organisationÊs goal because they have lower capabilities or
skills or less experience compared to the other employees. Yet, they get to
enjoy the same benefits. These people are referred to as free riders.
Basically, the free rider effect can cause a feeling of unfairness among
those employees who have contributed the most in achieving the
organisationÊs goals.
The high performers may also be uncomfortable with the fact that the
performance of the less productive members influences the compensation
level. If the dissatisfaction persists, these employees may leave the
organisation or worse still, join its competitors.
ACTIVITY 7.2
Most of us have worked in groups or received incentives based on

a groupÊs achievements. How do you overcome the free rider effect
which influences your groupÊs performance?

7.3.3 Organisational Incentive Plan

Generally, an organisation incentive plan rewards employees only when the
organisation meets or exceeds the minimum performance standards. In recent
times, most organisations use organisation incentive plans to motivate employees
so that they work more diligently to increase profits or the value of the
organisation.
There are two main types of organisational incentive plans. These are
profit-sharing plan and employee share option plan.
Let us examine these plans:
(a) Profit-sharing Plan

Through the profit-sharing plan, employees obtain financial rewards when
the organisationÊs profit objectives have been met. This plan pays a portion
of the organisationÊs profits to employees. This payment is separate from the
basic salary, living cost adjustments or rise in fixed merit payments.
There are two types of profit-sharing plans implemented by organisations

today:
(i) Current Profit-sharing

It awards cash payments to employees as a portion of the core
compensation which is normally received on a quarterly or annual
basis.
(ii) Deferred Profit-sharing

It gives cash payments in the form of employee trust funds or accounts.
The trust fund is created for the employees as a source of retirement
income.
(b) Employee Share Option Plan

Rights are awarded to employees to purchase the organisationÊs shares.
The employees do not own the shares until they exercise their rights to
the share option.

Figure 7.3 illustrates the advantages and disadvantages of the profit-sharing plan.
Figure 7.3: Advantage and disadvantages of the profit-sharing plan

Let us now study the advantages of the profit-sharing plan in detail:
(a) Benefits for Employees

The profit-sharing plan enables employees to share the organisationÊs profits.
Thus, employees will put in more effort to be more productive and
increase the organisationÊs profits further. Increase in employee productivity
will cause increase in profits, which in turn, will enable the organisation
to carry out the incentive plan.
(b) Benefits for Organisation

Organisations use this profit-sharing plan to obtain greater financial
flexibility. The characteristics of this plan enable organisations to use their
limited cash savings, if needed, for activities like research and development.
Although this plan gives advantages to organisations and employees, it is

not without its disadvantages. There are two major disadvantages:
(i) Direct Effect on Employees

The profit-sharing plan may weaken the employeesÊ economic
guarantee especially if the profit sharing represents a large portion of
the employeesÊ direct compensation. An organisationÊs profits
generally differ from year to year and it will be the same for the
employeesÊ income.
Thus, employees will find it hard to predict their future income and
this will affect their savings and their buying behaviour. This may
cause the employees to leave the organisation and it will be even worse
when a high- performing employee leaves to join competitors.
(ii) Effect on Organisation

This plan may fail to motivate employees because they are unable to
see a direct relationship between their effort and the organisationÊs
profits. This will ultimately affect the organisationÊs productivity.
Before we move the discussion to long-term incentives, test your understanding

of what has been covered by answering the following exercise.

EXERCISE 7.2
True (T) or False (F) Statements
1. A short-term incentive payment can be based on individual or

group performance. _______________
2. Incentive payment is preferred by employers because it is not

taxable. _______________
3. Incentives given by organisations are rewards that stimulate

employeesÊ performance. _______________
4. Incentive packages like profit sharing and share option plans

are aimed at encouraging employees to familiarise themselves
with the organisationÊs goals or aims and values. _______________
5. An incentive plan based on groups focuses on wage incentives

to motivate high standards of employee performance.
_______________
6. One disadvantage of the incentive plan based on individual

performance is the high level of distrust between the management
and the employees. _______________
7.4 LONG-TERM INCENTIVES

What are long-term incentives? When an employee tries to predict what may
happen in the future, he will start to think about life after retirement.
The questions often brought up by employees are listed in Figure 7.4.

Figure 7.4: Questions posed by employees
When an employee passes the age of 40 and has contributed 10 to 15 years of

service to an organisation, it is usually difficult for him to look for another
job elsewhere. It cannot be denied that job guarantee and future income are critical
factors at this stage in the employeeÊs life.
Thus, there are organisations that provide retirement plans, life insurance plans
and medical benefits for their employees. There are also employers who provide
long-term compensation that takes care of the employeesÊ financial welfare.
7.5 EMPLOYEE SOCIAL CLASS

Organisations generally will consider the lifestyle patterns and social class of
their employees when developing long-term incentive payment programmes.
Most organisations and societies are influenced by strategic thinking and
long-term objectives. However, if we look at the social classes in our society, it is
apparent that certain organisations sometimes forget or neglect to take into
account the benefits that have to be given to employees of certain social classes
in order to improve their lifestyle.
Most employees who belong in the middle class are too dependent on their jobs
for their livelihood.
This may cause the employees to urge their employers to think about providing
long-term benefits that will make a positive impact on the employeesÊ economic
life. Seven social classes of employees are shown in Figure 7.5.

Figure 7.5: Seven social classes of employees
7.6 TAX LEGISLATION

Loyalty towards organisations, good work behaviour and attitude, having pride
in work output and giving importance to productivity are matters that are often
given high evaluation marks by most organisations, resulting consequently in
attractive compensation being offered to employees who exhibit the mentioned
traits.
However, although such is often the case, there is a factor that is very critical in
influencing compensation in high-technology industries and that is the national
tax legislation. Organisations are always looking for ways and means to increase
employeesÊ take-home income and at the same time, reduce the employerÊs
tax obligations. One of the ways is the implementation of progressive income
tax programmes.

The major part of this type of income tax programme affects individual income
tax payments in the following ways:
(a) Deduction from the gross income is made to determine gross income
adjustments and taxable income;
(b) Income tax rates and tax schedules that are assessed to determine tax to be
paid; and
(c) Credit or deduction from tax is calculated to determine actual tax.
Thus, compensation experts have to combine their knowledge regarding taxation

legislation, agency rules and court orders with accounting, insurance and
compensation practices to come up with the appropriate plan. This will help
organisations to increase the employeeÊs income, both in the short and long terms.
Deferred income programmes have long been provided for top management,
but lower-level employees have minimal opportunities to join any wealth-building
programmes besides the conventional retirement programmes.
In the next subtopic, we will discuss the designing of effective long-term incentive
programmes.
7.7 DESIGNING LONG-TERM INCENTIVE

PROGRAMMES
In this subtopic, we will discuss the designing of long-term incentive payment
programmes. When an organisation plans to design a long-term incentive
payment programme, it will need input of ideas from its employees. The plan
will integrate the needs of both the employees and organisation for long-term
growth and economic survival.
Chingos et al (2004) prepared a three-piece model for developing long-term

incentive programmes. In the three-piece model, there are three stages in
designing and developing a long-term incentive plan. These are:
(a) Designing the foundation;
(b) Building the super structure; and
(c) Attaching the internal structure.

This model focuses on deferred compensation known as the deferred payment

for services whereby employees receive compensation after providing services
for a determined period. Chingos et al (2004) identified three types of deferred
plans:
(a) Qualified deferment;

(b) Capital accumulation; and
(c) Additional retirement income arrangement and other deferred income.
Generally, most compensation experts do not consider the deferred arrangement

an incentive plan. Henderson (2005) disagrees with that opinion, but he recognises
that organisations have to carry out communication activities to inform employees
about the value of deferred long-term compensation programmes and how
they could be an economic guarantee for employees and the development
of the organisation.
7.8 LONG-TERM INCENTIVE PROGRAMMES

What is the purpose of these programmes?
Long-term incentive programmes are developed by employers for their

employees to help in providing a more comfortable lifestyle upon their
retirement.
7.8.1 Qualified Deferred Compensation Arrangement

Most employees assume that a good life awaits them upon retirement. This is
because they will not have to wake up early to go to work or carry out tasks
that no longer challenge or interest them. However, this good life can only be
achieved through smart retirement planning.
Now, let us look at the retirement schemes that are available in Malaysia.
Generally, the retirement schemes in Malaysia can be grouped into two types:
(a) Pension Scheme

The Government pays a total sum of money to eligible pensioners every
month. Government servants who have served for a pre-determined period
will be eligible to receive a pension of half their last drawn basic salary before
retirement.

There are five issues that have to be considered in developing pension plans
as summarised in Figure 7.6.
Figure 7.6: Five pension issues
Let us study these issues further in the following sections.
(i) Retirement Age

Generally, the retirement age is 60 for Malaysian public sector
employees. However, employees may opt to retire early when they
have reached the age of 40 years or more at the time they are applying
for retirement.
(ii) Benefits Size

Inflation in the 1970s and early 1980s resulted in cost of living
adjustments for the pension plan. Many methods can be used in
determining the retirement income.
(iii) Discrimination in the PlanÊs Design

Organisations often give special benefits to a certain group of
employees, especially those in high-level positions. There is also
gender discrimination, evident from the fact that women employees
often receive a far smaller pension than their male counterparts.
(iv) Early Retirement

Retirement before the age of 60 years is known as early retirement.
There are two main reasons why early retirement takes place:
 To open more opportunities for younger employees; and
 To reduce an excessive workforce.

(v) Vesting Needs

Vesting is the period before employees are entitled to employersÊ
contribution to their accrued benefits, usually a fixed period of
employment, generally five years.
For example, if an employee ends his service after five years, he has
the right towards this fund that is contributed by the employer on
behalf of the employees. However, an employee who ends his
service before the stipulated five years will not have any right
towards the fund because his eligibility has been terminated or
cancelled with his resignation.
(b) Employees Provident Fund

The Employees Provident Fund (EPF) is a scheme set up by the
Government to provide retirement benefits to private sector employees
and non-pensionable public service employees.
The Employees Provident Fund Act 1991 makes it compulsory for employees
and their employers to contribute monthly to this savings scheme. Thus,
EPF was formed and was given the responsibility of collecting, managing
and investing the money on behalf of the employees. Partial withdrawal
of the savings can be made by the employees when they reach 50 and
complete withdrawal when they are exactly 55 years old.
7.8.2 Thrift Plan

This plan is known as the contribution plan, which is a savings plan or thrift
plan. For many years, most organisations have designed and developed thrift
plans that encourage employees to save a certain amount of their income to be
enjoyed during retirement. Organisations implement programmes in which they
undertake to match their employeesÊ contributions. Most programmes determine
a limit to how much can be saved under this plan.
Under this savings plan, employees contribute a certain percentage of the

yearly compensation that they are eligible for on a „voluntary after tax‰ basis.
The interest earned on this type of savings is not taxable. However, each
contribution by the employees or employers cannot exceed 25% of the base salary.
Before we end this topic, test your understanding of what has been discussed
through the following exercise.

EXERCISE 7.3
TRUE (T) or FALSE (F) Statements
1. It is compulsory for employers and employees to contribute to

the Employees Provident Fund under the Employees Provident
Fund Act 1991. _______________
2. The main reason an employee defers income is to save for the

future. _______________
3. According to Chingos et al. (2004), one of the long-term incentive

plans is the profit-sharing plan. _______________
4. The central government sponsors the pension plan.

_______________
5. The pension plan offered to employees will have an impact on

the current job guarantee. _______________
6. Retirement plans can be both short-term and long-term incentive

plans. _______________
Essay Questions
1. Discuss the effects of tax legislation on organisations and the

employeeÊs income.
2. Explain the three stages in designing and developing long-term

incentive plans according to Chingos et al. (2004).
3. Briefly explain three situations that are most appropriate for the
implementation of individual incentive payment plans.
4. List five issues that have to be considered in all pension plans.

 Incentive payment is a programme to control salary payment cost or

motivate employee productivity.
 Five factors have to be considered in designing an incentive programme:
 Whether the plan is to be based on individual or group performance;
 Risk level that will be faced or accepted by employees in the overall

compensation package;
 Whether incentive payment should replace or complement traditional

salary payment;
 Criteria whereby performance has to be considered and evaluated; and
 Time frame to accomplish the aims or goals (long-term, short-term or a

combination of both).
 There are three types of short-term incentives ă individual incentive plan,

group incentive plan and organisational incentive plan.
 The advantages and disadvantages of a profit-sharing plan can be viewed

from the employeesÊ and organisationÊs perspectives.
 Long-term incentive programmes are developed by employers to help

provide a more comfortable lifestyle for their employees upon their retirement.
The three-piece model for developing long-term incentive programmes
has three steps ă design the foundation, build the super structure and
attach the internal structure.
Deferred profit-sharing plan Profit-sharing plan

Incentive payment Short-term incentives
Long-term incentives Work incentive plan based on
working hours

Topic  Employee
Benefits and
8 Services
LEARNING OUTCOMES
1. Discuss the meaning and categories of employee benefits and
services;
2. Discuss three main components of employee services; and
3. Design a flexible benefits plan.
 INTRODUCTION
Today, employee benefits are one of the major components in employee
compensation. Some examples of benefits that are often offered to employees
are housing and car loans with low interest rates, panel clinic facilities and
scholarships for employeesÊ children.
Many questions have emerged in the attempt to design a good benefits

package for employees. How does an employer choose benefits that are best
suited for its employees and at the same time, enable the organisation to achieve
its aims and abide by existing rules and regulations? Is the organisationÊs
benefits package capable of attracting, motivating and retaining employees?

194  TOPIC 8 EMPLOYEE BENEFITS AND SERVICES
8.1 DEFINITION OF EMPLOYEE BENEFITS AND

SERVICES
Now, let us have a look at the definition of employee benefits and services.
Employee benefits can be defined as a programme that provides alternative

payment forms that include payment for non-working hours (holidays, jury
duties, annual leave and others), services (counselling services, financial
planning, cafeteria and others) and coverage or protection (medical coverage,
life insurance, retirement and others).
(Milkovich & Newman, 2004)
Benefits contribute to employeesÊ welfare by fulfilling certain needs and

demands for facilities and improving their job satisfaction.
Employee benefits cover two important aspects:
(a) Protection in medical cases and accidents; and
(b) Future or deferred income for retirement, end of career etc.
In the context of compensation management, besides paying fair and just

salaries to employees for their contributions, organisations also feel it is their
responsibility to look after their employeesÊ welfare and that of their families.
Although benefits that are offered do not relate directly to the products and
services of the organisation, most employers feel that employees will improve
their productivity through the benefits offered. A good benefits programme
will also help an organisation to attract new employees and retain existing ones.
8.2 EMPLOYEE BENEFITS

Today, it is a trend for employers to provide a benefits package as a portion of
direct payment. The employers should inform their employees about the total
economic value of the benefits package.
The role of the benefits programme in achieving the compensation goals is to

influence employee behaviour in organisations.

TOPIC 8 EMPLOYEE BENEFITS AND SERVICES  195
8.2.1 Employee Benefits Classification

Employee benefits are classified into seven main groups as explained in
Figure 8.1.
Figure 8.1: Employee benefits classification groups
Let us look at each of the groups in detail:
(a) Continuous Income for the Invalid or Disabled

Disabilities can occur often, temporarily, all the time or partially. Continuous
payment for employees who are disabled (because of accidents or health
problems) will help them to pay their living expenses and medical costs.
(b) Continuous Income for Loss of Employment

Continuous income for loss of employment is designed to help sacked or
retrenched employees during their unemployment period.
(c) Deferred Income

Deferred income gives an opportunity for employees to retire with peace
of mind, knowing that their economic well-being is guaranteed. Through
this benefit, employees will receive a lump sum payment upon their
retirement.

(d) Insurance Coverage for Husband or Wife and Family

Most employees want to ensure that the welfare of their family members is
taken care of in the event of their deaths. One of the benefit components
offered is life insurance which provides a sum of payment to an employeeÊs
beneficiary upon the employeeÊs death.
(e) Medical and Accident Coverage

Medical and accident coverage is provided by organisations to ease the
financial and emotional burden of employees and their families.
(f) Assets and Liability Coverage

Assets and liability coverage provides protection for employeesÊ personal
assets and liabilities.
(g) Services and Special Group Benefits (Privileges)

Services and special group benefits are often known as privileges.
An example is the payment of medical expenses from major illnesses by
the organisation. These benefits are generally limited to the senior
management of the organisation.
SELF-CHECK 8.1
Civil servants and private sector staff are given various benefits like
housing loans, car loans, annual leave and maternity leave. What are
the objectives of these benefits and why do employers use them to
attract new employees?
8.3 EMPLOYEE SERVICES

Thus far, we have discussed the benefits and services offered by employers to
improve their employeesÊ standard of living. Through the allocation of these
benefits and services, employers often receive tax benefits in the form of
deductions on their tax return because in most cases, the products or services
are not considered earned income.
Figure 8.2 shows the three main components of employee services.

Figure 8.2: Three main components of employee services
Let us look at the components in detail:
(a) Payment for Non-working Hours

For the past 35 years, efforts to reduce working hours and the total time
spent at the workplace have been focused on providing more paid leave
and paid vacations for employees. The paid leave often given by employers
is shown in Figure 8.3.
Figure 8.3: Payment for non-working hours
If we refer to the Employment Act 1955 and the Malaysian Labour Law,
there are certain sections that have to be adhered to when implementing
the employee benefits programme. The important sections pertaining to
public holidays, annual leave and medical leave are summarised in Table 8.1.

Table 8.1: Employment Act 1955: Sections Related to Leave
Section Explanation
Section 60D (1) Every employee is entitled to at least 10 days of leave in

any calendar year.
Section 60D (1) If a public holiday falls on a rest day, the next working day
will be a paid holiday to replace it.
Section 60D (1A) Any other day or days may be substituted for one or more of
the six gazetted public holidays which are announced before
the start of each calendar year.
Section 60D (1B) Employees are eligible to take another day as paid leave
in substitute for a public holiday.
Section 60D (2) If an employee is absent without reason on the working day
before or after a public holiday, that person is not entitled to
any holiday pay for the holiday or consecutive holidays.
Section 60E (1) An employee is eligible for annual leave as shown in

Table 8.2.
Let us refer to Table 8.2 to find out the number of days of paid annual leave
that employees are eligible for according to the determined time frame.
Table 8.2: Annual Leave
Total Years Worked Eligible Annual Leave

Under the Same Employer (Total Days)
One year or more but less than two years 8
Two years or more but less than five years 12
Five years or more 16
Table 8.3 further discusses employee leave.

Table 8.3: Employment Act 1955: Sections Related to Employee Leave
Section Explanation
Section 60E (1) If an employee quits within a year, he is eligible for annual
leave equivalent to the number of months he worked in
that year.
Section 60E (2) On the employerÊs request and with written permission
from the employee, the total or a part of the annual leave that
is not taken can be replaced with payment in lieu.
Section 60E (1B) A female employee will receive additional annual leave if
during the annual leave, she takes maternity leave.
Section 60E (1B) An employee will receive additional leave if during the
annual leave, he is on sick leave.
Section 60E (2) Employers can only approve annual leave for employees
after the end of every 12 months of continuous service.
Section 60E (2A) An employee can use the remainder of his annual leave for
the whole or part of the notice period that is needed for his
resignation.
Section 60F (1) An employee is eligible for sick leave only under certain
(1A) & (2) circumstances (refer to Section 60F [1] [1A] and [2] in the
Employment Act 1955).
Section 60F (1) The total number of paid sick leave days that an employee is
(aa) & (bb) eligible for in a calendar year is provided in Table 9.4. If an
employee is warded, the total number of paid sick leave
can be extended to 60 days in a calendar year.
Section 60F (3) Daily rated employees have to be paid ordinary rate of pay
for every day of the sick leave. However, employees on a
monthly rate of pay will receive their monthly wage without
any deduction for the leave taken. An amendment in 1998
(refer to the Employment Act 1955) restricts salary payment
to the basic salary rate only for the purpose of determining
the normal rate when an employee is on medical leave
(Employees on daily wages are paid according to output
rate only).

EmployeesÊ leave entitlement is summarised in Table 8.4.
Table 8.4: Sick Leave
Total Number of Eligible

Service Duration
Sick Leave in a Calendar Year
Less than two years 14 days
Two years but less than five years 18 days
Five years and more 22 days
Based on this section, the calculation for all payment rates for sick leave is:
Payment rates for sick leave = Total number of days  Normal payment
rate
(b) Absence from Work without Payment

Although disabled employees are not paid a salary when they do not work,
they are protected by the disability benefits programme and are eligible for
medical coverage.
(c) Income Balancing Payment and Paying Back Expenses

Generally, most components of this compensation including the ones just
mentioned are a reaction to change in economic situations and tax demands.
Components which are often contributed by the employer are explained
in Table 8.5.

Table 8.5: Employer Contribution Components
Employer Contribution Components
 Charity contributions
 Counselling
 Preparation of taxes
 Education subsidy
 Child adoption
 Child care
 Senior citizen care
 Food services subsidy
 Health and physical awareness programme
 Transportation to and from work
 Travelling expenses
 Uniform allowances
 Relocation expenses
 Housing
 Emergency expenses
The Employment Act 1955 and Malaysian Labour Law contain many procedures
that can be used as guidelines and source of reference for employers and
employees on the benefits and services offered by an employer. However,
these procedures are amended from time to time. Therefore, employers and
employees are advised to contact the Labour Department to keep abreast of the
changes.
When an organisation spends a certain amount of money on any of these

programmes, tax exemptions will be given as the organisation has contributed
to employee welfare.

ACTIVITY 8.1
Benefits and services programmes provided by the employer are very

competitive these days. Based on our discussion, why do employers
spend a considerable amount of money on such programmes?
Share your answer in the myINSPIRE forum.
Test your comprehension of what has been discussed through this exercise.
EXERCISE 8.1
1. Explain the meaning of benefits and employee services in the

context of compensation management.
2. List the various media that can be used in the interest

communication programme.
8.4 FLEXIBLE BENEFITS OR COMPENSATION

PLAN
A flexible benefits plan allows an employee to choose benefits and services up to
a set limit. Before allowing an employee to make his choices, the employer
must identify beforehand alternative benefits and services. Then, he must
determine the cost of each benefit and service to assess whether the cost falls
within the set limit of the package to be offered to the employee.
The number of organisations that offer flexible benefits continues to increase

every year. Generally, the flexible benefits or compensation plan achieves
three important goals. These goals are the cornerstones of a successful programme.
Figure 8.4 describes the goals.

Figure 8.4: Three goals of a compensation plan
ACTIVITY 8.2
When you join an organisation, will you discuss with the human
resource department the benefits or compensation plan that you think
you deserve to receive? Or will you just accept the benefits or
compensation plan that is created for you by the human resource
department?
8.4.1 Appreciation of Benefits by the Employee

An organisation and its managers spend a lot of time and money on improving
the benefits programme. However, they often do not devote as much time to
communication activities to inform employees about their efforts and the benefits
of the programme.
One thing an employer can do to help employees to understand better and

appreciate the organisationÊs efforts and benefits programme is to develop an
employee suggestion system that solicits employeesÊ opinions on how to get
work done and what they desire in terms of compensation for their contributions.
Only by getting the employees involved will they realise and acknowledge
all considerations that are taken by their employer to improve their quality of life.

8.4.2 Hopes and Priorities of Employees

Due to the increased interest of employers in identifying the benefits and
services required by their employees, more research needs to be carried out to
appraise attitude, hopes and employee priorities.
Based on the findings of the research conducted, when it comes to benefits and
services, employees are more interested in the things described in Figure 8.5.
Figure 8.5: EmployeesÊ hopes
A better method to determine the intended employee interest is by implementing

priorities research. In the following subtopic, we will discuss the development
of a flexible benefits plan. Before that, let us do the following activity.
ACTIVITY 8.3
Based on your understanding of what we have just covered, compare

between the importance of employers preparing various benefits
and services for their employees and the importance of employees
making educated choices about benefits and services.

8.4.3 Development of a Flexible Benefits Plan

In-depth consideration, planning and discussion must be held before a flexible
benefits plan can be implemented. Hence, there are three groups of people who
must be involved in the development of a flexible benefits plan as described in
Table 8.6.
Table 8.6: Three Types of People Involved in the Development of a Flexible Benefits Plan
People Function
Senior Managers This group develops, shapes and finalises the flexible benefits
plan policy.
Compensation This group provides guidance in the development of the plan

Experts and Human and helps to draft and shape the plan that will help to achieve
Resource Officers organisational objectives and satisfy employeesÊ needs.
Employees This group plays a very important role in developing the

flexible benefits plan. Employees are responsible for giving
initial input on what should be in the benefits plan and for
making choices about benefits and services provided by the
employer.
8.4.4 Issues in the Development of a Flexible Benefits

Plan
The senior executive is responsible for ensuring the overall value of benefits
and for approving the percentage allocated to selectable and non-selectable
choices. He also needs to decide on the number of choice components and the
monetary value where an employee might have to make a choice.
The questions that frequently have to be addressed in a flexible benefits plan

are as follows:
(a) Does the plan recognise changes in the level of current salary in yearly
benefits?
(b) Does the plan recognise changes in the marital status or number of family
members of the employees?
(c) Does the plan recognise changes in benefits cost and premiums?
(d) When are the employees allowed to make changes to these benefits?

Test your understanding of this subtopic by doing the following exercise.
EXERCISE 8.2
True (T) or False (F) Statements
1. Research has shown that employees are highly aware of and can
evaluate accurately the benefits provided by their employers.
_______________
2. Employers need to realise that the reduced satisfaction with

benefits provided is a result of long-term changes in the workplace.
_______________
3. Research has shown that the priority employees attach to benefits

is influenced by age, salary level and marital status.
_______________
4. Employers normally want one benefits package that fulfils all

requirements of the law. _______________
5. Employee benefits are cost effective because there are a lot of

benefits based on groups that can be achieved at low rates
compared to benefits given to individual employees.
_______________
Essay Questions
1. Discuss the three objectives of an effective communication

programme.
2. Explain three important factors that have to be considered by an

organisation in drafting a benefits or compensation plan.
3. State four important objectives of the flexible benefits or

compensation plan that would serve as a framework for the
development of a successful programme.

 According to Milkovich and Newman (2004), employee benefits can be

defined as a programme that offers alternative payment forms that include
payment for non-working hours (holidays, jury duties, annual leave and
others), services (counselling services, financial planning, cafeteria and others)
and coverage or protection (medical coverage, life insurance, retirement and
others).
 Employers offer these seven categories of benefits to employees:
 Continuous income for the invalid or disabled;
 Continuous income for loss of employment;
 Deferred income;
 Insurance coverage for husband or wife and family
 Medical and accident coverage;
 Assets and liability coverage; and
 Services and special group benefits (privileges).
 The three main components of employee services are:
 Non-working hour payment;
 Absence from work without payment; and
 Income balancing payment and paying back expenses.
 A flexible benefits plan allows an employee to choose benefits and services

up to a set limit. In order to design a flexible benefits plan, the employer
must identify beforehand alternative benefits and services. Then, the employer
must determine the cost of each benefit and service to assess whether the
cost falls within the set limit of the package to be offered to the employee.

Employee benefits and services Non-working hour payment

Flexible benefits plan

MODULE FEEDBACK
MAKLUM BALAS MODUL
If you have any comment or feedback, you are welcome to:
1. E-mail your comment or feedback to modulefeedback@oum.edu.my
OR
2. Fill in the Print Module online evaluation form available on myINSPIRE.
Thank you.
Centre for Instructional Design and Technology

(Pusat Reka Bentuk Pengajaran dan Teknologi )
Tel No.: 03-78012140
Fax No.: 03-78875911 / 03-78875966


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BBCM4103

Copyright © Open University Malaysia (OUM)

Copyright © Open University Malaysia (OUM)

Developed by Centre for Instructional Design and Technology, OUM.

Copyright © Open University Malaysia (OUM)

Topic 1 Introduction to Compensation Systems 1

Topic 2 Compensation Legislation 37

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2.5 Importance of Law in Determining Salary and 59

Topic 3 Job Analysis 66

Topic 4 Job Evaluation 98

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Topic 5 Salary Market Survey 116

Topic 6 Salary Structure Design 138

Topic 7 Short-term and Long-term Incentives 164

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Topic 8 Employee Benefits and Services 193

Copyright © Open University Malaysia (OUM)

Copyright © Open University Malaysia (OUM)

COURSE GUIDE DESCRIPTION

As an open and distance learner, you should be acquainted with learning

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Table 1: Estimation of Time Accumulation of Study Hours

Briefly go through the course content and participate in initial discussion 3

COURSE LEARNING OUTCOMES

1. Describe the importance of compensation management;

2. Point out the roles and functions of compensation in an organisation;

3. Plan a competitive and effective compensation structure; and

4. Combine various methods and techniques in administering compensation

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Topic 1 introduces the perspective of compensation administration and the

Topic 2 introduces the legislationÊs role in managing compensation. Among

Topic 7 explains short-term and long-term incentives as well as types of plans

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TEXT ARRANGEMENT GUIDE

Self-Check: This component of the module is inserted at strategic locations

Activity: Similar to Self-Check, the Activity component is also placed at various

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Caruth, D. L., & Handlogten, G. D. (2001). Managing compensation (and

Henderson, R. I. (2000). Compensation management (8th ed.). Upper Saddle River,

Henderson, R. I. (2005). Compensation management in a knowledge-based world

Martocchio, J. J. (2005). Strategic compensation: A human resource management

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Milkovich, G. T., & Newman, J. M. (2005). Compensation (8th ed.). Singapore:

Rosenbloom, J. S. (2005). The handbook of employee benefits: Design, funding

TAN SRI DR ABDULLAH SANUSI (TSDAS)

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Therefore, every employer must develop an employee compensation programme

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1.1 DEFINITION OF COMPENSATION

Compensation refers to all types of monetary returns, tangible benefits

In theory, compensation encompasses three elements as illustrated in Figure 1.1.

Figure 1.1: Three elements of compensation

Now, let us look at each element in detail:

(a) Motivation Element

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(b) Communication Element

(c) Strategy Element

We often hear or read about compensation offered to employees who

1.2 TYPES OF COMPENSATION

Figure 1.2: Three types of compensation

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These three types of compensation are discussed further as follows: