Compensation Function of HRM

Compensation can be defined, considering following

two basic aspects:

• Absolute Pay.
• Relative Pay.

It is used to determine the relevant worth of job

 Purpose of Compensation

1. Services against the work done.

2. Services against no work done.

3. To acknowledge the abilities and skills of the person.

4. To acknowledge the worth of the individual.

5. For better retention of the employees.

 Theoretical Aspects to Achieve Basic Pay

Equity Theory:

The proportionate worth of the individual leads to create equity apart from claiming equality.
 Theoretical Aspects to Achieve Basic Pay

Equity Theory:

The proportionate worth of the individual leads to create equity apart from claiming equality.
 Theoretical Aspects to Achieve Basic Pay

Expectancy Theory:

Effort Performance Reward Valence

Valence: The desired recognition expected from the employer by the employee.

Valence and effort are directly related.

Theoretical Aspects to Achieve Basic Pay
 Strategic and Tactical Issues in Compensation
1. Recognition of job worth of the employee across the company.

2. Recognition of individual performance in teamwork.

3. Recognition of the employee’s performance as per the promotion they

deserve.

4. Recognition of job worth through appropriate job evaluation.

 Job Evaluation
This process is considered to allocate the worth of the job by making comparison

Methods of Job Evaluation (Absolute Pay):

Non Analytical Methods

1. Inter and Intra Occupational Method

Jobs can be compared across the different occupations in an organization.
Steps:
a. Note down all the jobs in an occupation.
b. Give the ranks to each job in an occupation.
c. Compensation will be decided as per the rank of the job.
d. The similar jobs, having same job description, of different occupations can be given
same rank/compensation/scale.
 Job Evaluation

2. Classification Method

Jobs are classified on the basis of grades. The more responsible and
complex the job is the higher grade it gets. Compensation is set according
to the grades. Higher grade will have higher pay.

Analytical Methods

3. Factor Comparison Method

Weightage is given to the factors that comprise the jobs in an organization.

The more the factors are there in a job description, the higher the
weightage of the job will be and the higher will be its compensation.
Job Evaluation
 Job Evaluation

5. Market Pricing Method

a. Survey – Pay range is collected through survey.

b. External Market – Survey is conducted in external market.

Same salary to jobs are given as those are given in market by the competitors.

There are several disadvantages in respect of this method, considering the

equity and expectancy theory. The culture across organizations are also
different, therefore, such method is adopted as per context
 Relative Pay
 Bonuses
 Profits.
 Incentives/Credits.

Benefits – Authority and power that comes with the job irrespective of the
basic pay.
Perks – Allowances, Insurances, Medical, Contributory Fund, Gratuity Fund
and OPD etc.

Benefits directly compete with absolute pay whereas perks are additive
advantages aligned with the basic pay.

Decision of which relative pays are to be given depends on the comparison

with the competitors and the situational demands of the jobs.