CHAPTER 8: COMPENSATION AND BENEFITS

Course Name: HUMAN RESOURCE MANAGEMENT

Course Code: DIB 2253, DHR 1323

DIPLOMA IN BUSINESS (DIB)

DIPLOMA IN HUMAN RESOURCE MANAGEMENT (DHRM)

Lecturer: MISS NITA YUSNEE MOHAMAD IDRIS

 WHAT IS COMPENSATION PACKAGE?
* Compensation packages are total reward systems that contain non-monetary, direct
and indirect elements.
* Non-monetary compensation is any benefit an employee receives from an employer
or job that does not involve tangible value - job security, flexible hours, and
opportunity for growth, praise and recognition, task enjoyment, and friendships.
* Direct compensation is an employee’s base wage which can be an annual salary or
hourly wage plus any performance-based pay an employee receives such as profit-
sharing bonuses.
* Indirect compensation is far more varied which includes everything from legally
required public protection programs such as Social Security to health insurance,
retirement programs, paid leave, child care, etc.

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 WHAT IS COMPENSATION?
* Compensation is the employer's feedback for an employee's work - the monetary
value given to employees in return of their services.
* Employee compensation refers to all forms of pay going to employees and arising
from their employment.
* The phrase 'all forms of pay' does not include non-financial benefits but all the
direct and indirect financial compensations.
* It is an integral part of HRM which helps in motivating employees and improving
organizational effectiveness.
* Compensation includes payments such as bonuses, profit sharing, overtime pay,
recognition rewards and sales commission.

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 Direct Compensation
Base pay Cash wage paid to the employee.
Incentive pay A bonus paid when specified performance objectives are met.
Incentives may inspire employees to achieve higher performance
levels and motivate them to accomplish farm goals.
Stock options A right to buy a piece of the business which may be given to an
employee to reward excellent service. An employee who owns a
share of the business is more likely to go the extra mile for the firm.
Bonuses A gift given occasionally to reward exceptional performance or for
special occasions. Bonuses can show that an employer appreciates
his employees; they ensure that good performance is rewarded.

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 Indirect Compensation
Flexible working schedules Elder care
Retirement programs Moving expenses
Insurance (health, dental, eye) Subsidized housing
Paid leave (sick, holiday, personal days) Subsidized utilities
Tickets to events (ball games, concerts) Magazine subscription
Boots and clothing Laundry service
Wellness programs Use of farm trucks or machinery
Farm produce, foods, meals Cellular phones, pagers
Child care Use of farm pastures and gardens

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 OBJECTIVES OF COMPENSATION POLICY

* Allure suitable staff

* Keep qualified personnel
* Develop reward structures that are equitable with logical and fair pay
relationships between differently valued jobs
* Manage pay structures to mirror inflationary effects
* Appraise performance, duty, and loyalty, and provide for progression
* Abide with legal requirements
* Maintain compensation levels and differentials under review and control salary or
wage costs

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 COMPONENTS OF EMPLOYEE COMPENSATION
1. Guaranteed Pay
* Fixed monetary (cash) reward paid by an employer to an employee - basic
element of the guaranteed pay - base salary, paid based on an hourly, daily,
weekly, bi-weekly or a monthly rate.
* Individual skills and the level of experience of employees give rise
to differentiation in income-levels within the job-based pay structure.

2. Variable Pay
* Non-fixed monetary reward paid by an employer to an employee that is contingent
on discretion, employee performance, or results achieved.
* The most common forms of variable pay are bonuses and incentives (sales
commission), overtime pay, etc.
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* Variable pay is employee compensation that changes as compared
to salary which is paid in equal proportions throughout the year.
* It is used to recognize and reward employee contribution toward company
productivity, profitability, team work, safety, quality, or some other metric
deemed important.
* The employee who is awarded variable compensation has gone above and
beyond his job description to contribute to organization success.
* Variable pay is awarded in a variety of formats including profit sharing, bonuses,
holiday bonus, deferred compensation, cash, and goods and services such as a
company-paid trip, etc.

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3. Benefits
* Benefits are programs an employer uses to supplement employees’
compensation such as paid time off, medical insurance, company car, etc. It is
designed to address a specific need and is not in the form of cash.

4. Equity-Based Compensation
* It is an employer compensation plan that uses the employer's shares as employee
compensation. The common form is stock options.
* An employee stock option (ESO) is a stock option granted to specified employees
of a company - carry the right but not the obligation to buy a certain amount of
shares in the company at a predetermined price.

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* An option is created specifies that the owner of the option may 'exercise' the
'right' to purchase a company's stock at a certain price ('grant' price) by a
certain (expiration) date in the future.
* The price of the option ('grant' price) is set to the market price of the stock at the
time the option was sold.
* The objectives of equity-based compensation plans are retention, attraction of
new hires and aligning employees' and shareholders' interests.
* Equity-based compensation is a program an employer uses to provide actual or
perceived ownership in the company which ties an employee's compensation to
the long-term success of the company.

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5. Competence-Based Pay (or knowledge-based pay)
* You pay the employee for the skills and knowledge he is capable of using rather
than for the responsibilities or title of the job currently held.
* For example, an employee in a class I job who could (but may not have to at the
moment) do class II work gets paid as a class II worker, not a class I.
* Competencies are demonstrable personal characteristics such as knowledge,
skills, and personal behaviors such as leadership.
* Why pay employees based on the skill levels they achieve, rather than based on the
jobs they're assigned to? With more companies organizing around teams, you want
to encourage employees to get and to use the skills required to rotate among jobs.

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 EMPLOYEE BENEFITS

* Employee benefits are non-financial form of compensation offered in addition to

cash salary to enrich workers’ lives.
* Workers receive benefits regardless of their performances.
* Employee benefits as a whole have no direct affect on employee performance -
inadequate benefits do contribute to low satisfaction level and increase
absenteeism and turnover in employees.
* The most common benefits are medical, disability, and life insurance; health
insurance; retirement benefits; paid time off; sick leave; paid vacation; pensions;
relocation expenses; housing; profit sharing; child care benefits; tuition
reimbursement; etc.

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 TYPES OF EMPLOYEE BENEFITS
1. Medical Insurance
* Medical insurance covers the costs of physician and surgeon fees, hospital rooms,
and prescription drugs. Dental and optical care might be offered as part of an
overall benefits package. Coverage can include employee's family (dependents).
Employers usually pay all or part of the premium for employee medical insurance.

2. Life Insurance
* Benefits are paid all at once to the beneficiaries of the policy - usually a spouse or
children. You can get life insurance through an employer if they sponsor a group
plan. Company-sponsored life insurance plans are standard for almost all full-time
workers in medium and large firms across the country.

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3. Disability Benefits
* Your short-term and long-term disability plans offer you and your family an
important source of financial protection.
* The plans will provide you with a continuing source of income, even if a serious
illness or injury keeps you from working.
* You are considered disabled during the first 24 months of your long-term disability
(LTD) leave if the insurer determines that you are incapable of performing the
essential duties of your own occupation.
* You must continue to be treated by a physician during this 24-month period.
* After receiving LTD benefits for 24 months, you are considered disabled if the
insurer determines you are incapable of performing any occupation for which you
are reasonably suited (or could become suited) by education, training or experience.

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4. Retirement benefits
* Retirement benefits are funds set aside to provide people with an income or
pension when they end their careers.
* Retirement plans have two categories:
(a) defined benefit plans (pension plans)
the benefit amount is predetermined based on salary and the years of
service; the employer bears the risk of the investment

(b) defined contribution plans (401k plan)

employer or employee contributions are specified but the benefit amount is
untied to investment returns which are not guaranteed.

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5. Paid Time Off
* Paid time off is earned by employees while they work.
* The three types of paid time off are holidays, sick leave, and vacation leave.
* It is a policy in some employee handbooks that provides a bank of hours in which
the employer pools sick days, vacations days, and personal days that allows
employees to use as the need or desire arises.
* The company determines the amount of paid time off that will be allotted to
employees while keeping in mind the payoff in recruiting and retaining employees.
* Paid time off hours cover everything from planned vacations to sick days and are
becoming more prevalent in the field of HRM. Upon employment, the company
determines how many paid time off hours will be allotted per year.

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6. Fringe Benefits
* Fringe benefits are a variety of non-cash payments are used to attract and
retain talented employees.
* They may include tuition assistance, flexible medical or child-care spending
accounts (pre-tax accounts to pay qualified expenses), other child-care
benefits, and non-production bonuses (bonuses not tied to performance).
* Tuition reimbursement can be an especially important benefit if you plan to take
classes in your personal time.
* This can be a great way to advance in your career. Most firms offering tuition
assistance require that courses are related to job duties.

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 MALAYSIA PAYROLL
* The norm of pay frequency in Malaysia is monthly paid. There is no statutory minimum
wages.

Mandatory Benefits Optional Benefits

Annual leave Long service payment
Gazette Public Holidays Housing allowances
Maternity Leave Car allowances
Medical Leave Medical insurance
Termination & Layoff Benefits Bonus
Commission
Retirement benefits

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 FACTORS AFFECTING INDIVIDUAL DIFFERENCES IN WAGES
* Worker’s capacity and age
* Educational qualifications
* Worker experience
* Hazards involved in work
* Promotion possibilities
* The prevailing wage in the community
* Stability of employment
* Demand for the product; and
* Profits or surplus earned by the organization

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 MANDATORY CONTRIBUTIONS AND DEDUCTIONS
Employees Provident Fund (EPF)
* It is compulsory for the employer and employees to contribute toward EPF and that
such contributions are payable to the employees in full on reaching the age of 55
years.
* Effective from 2008, the employer is liable to contribute to EPF for employees who
have attained the age of 55 years and above at revised rate.
* The EPF is a social security institution formed according to the Laws of Malaysia,
Employees Provident Fund Act 1991 (Act 452) which provides retirement benefits for
members through management of their savings in an efficient and reliable manner.
* The EPF members consist of private and non-pensionable public sector employees.

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* The amount calculated based on the monthly wages of an employee.
* Current contribution rate is in accordance with wage/salary received.
* For employees who receive wages/salary of RM5,000 and below, the portion of
employee’s contribution is 11% of their monthly salary, while the employer
contributes 13%.
* For employees who receive wages/salary exceeding RM5,000 the employee’s
contribution of 11% remains while the employer’s contribution is 12%.
* The EPF ensures that your savings are secure and receive reasonable dividends. In
fact, it guarantees a minimum of 2.5% dividend annually.
* To ensure dividend payments, the EPF invests your contribution in approved
financial instruments for optimum returns.

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* Dividends are paid annually into your account.
* The dividend rate declared by the EPF is subject to the returns from investments
made in the approved instruments.
* Annual Dividends are calculated based on the opening balance of your savings as
at 1 January of each year.
* Monthly Dividends credited into your account are based on the monthly
contributions received.
* All remuneration in money due to an employee under his contract of service or
apprenticeship whether it was agreed to be paid monthly, weekly, daily or
otherwise.

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 Payments liable for EPF contribution Payments not liable for EPF contribution

 Salary  Service charges

 Payment for unutilized annual or medical  Overtime payment
leave  Gratuity
 Bonus  Retirement benefits
 Allowance  Retrenchment, temporary and layoff
 Commission termination benefits
 Incentive  Any travelling allowance or the value of
 Arrears of wages any travelling concession
 Wages for maternity leave  Payment in lieu of notice of termination of
 Wages for study leave employment
 Wages for half day leave  Director's fee
 Other payments under services contract or
otherwise

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Employees’ Social Security Scheme (SOCSO)
* SOCSO is a social security scheme for employees. Employees are protected against
industrial accident including accident occurred while working, occupational
diseases, invalidity or death due to any cause.

Employer and Employee Eligibility

1) Employer responsibility
* Principal and immediate employers who employ one or more employees are
responsible to register and pay the contributions to SOCSO.
* The principal employers are also accountable to ensure the registration and
payment of contributions for all employees employed by the immediate
employer. Failure to do so, and in the absence of the immediate employer,
principal employers will be deemed liable under the Act.
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2) Employee
* A person that takes employment under an employer under contract of a
service or apprenticeship contract is defined as an employee under the Act.
* SOCSO coverage and protection is only limited to Malaysian citizens and
permanent residents.
* All employees are eligible to register regardless of employment status either
temporary, part-time, probation including those employees who are not
confirmed in their employment.

Employees who are eligible for coverage and protection under the Act are:
a) Monthly wages of RM3,00 or less
* Employee who receives a monthly wages of RM3,000 or less is eligible
under the Act and required to register and contribute.
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b) Monthly wages exceeding RM3,000 with option notice
* Employee receiving a monthly wages of more than RM3,000 and is not
eligible under the Act, however he can still be covered upon mutual
agreement between employer and the employee by submitting a notice
in the specified form, together with Form 2.

c) Once-in-always-in principles
* Pursuant with the ‘Once-In-Always-In’ principle, employees who have
already contributed and whose monthly wages exceed RM3,000
thereafter, are required to continue contributing.

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Employee who are Not Eligible Under the Act
 Earning more than RM3,000 per month
 Spouse of a Principal or Immediate employer
 Any person whose employment is of casual nature and who is employed

otherwise than for the purposes of the employer's industry

 Employees who are employed for household related services in a private

residence or individual capacity, and not commercially or business based

 A tributer - a person who is permitted to win minerals or produce of any kind
from or on the land of another and who, in consideration of such permission,
gives a proportion of the minerals or produce so won to that other person or
pays to him the value of such proportions

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 Any member of Malaysian Armed Forces

 Any Police Officer

 A person who has been detained in any prison, Henry Gurney School,

approved school, detention camp, mental hospital, or leper settlement

 In so far, as this Act relating to Invalidity Pension are concerned:
 an employee who has attained the age of 60 and in respect of whom no

contribution were payable before he attained the age of 55 years; or

 an employee who has attained the age of 60 years; or

 a certified invalid who is in receipt of Invalidity Pension

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* Employers shall submit the claim form and other relevant documents to
SOCSO within 48 hours upon notification of the accident that have occurred to
an employee.

Benefits under the scheme:

 Medical Benefit  Constant-attendance Allowance

 Temporary Disablement Benefit  Return To Work Program
 Permanent Disablement Benefit  Dependants' Benefit
 Facilities for Physical and Vocational  Funeral Benefit
Rehabilitation  Education Benefit

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 UNDERSTANDING THE CONCEPT OF PENSION

* Pension means money paid under given conditions to a person following

retirement or to surviving dependants.
* The Pensions Act 1980 is the governing act for pensions benefits in Malaysia -
provide for the administration of pensions, gratuities and other benefits for
officers in the public service and their dependants.
* Pension does not include any cash award granted in lieu of accumulated vacation
leave to an officer whose salary is not paid out of the Federal Consolidated Fund.
* An officer refers to an officer of the public service or an employee of any
statutory or local authority who prior to retirement or death, was service in
Malaysia or in any of the territories which presently constitute Malaysia.

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Objectives of Pension Scheme:
* To acknowledge and appreciate the excellent service, with loyalty, dedication,
and honesty rendered to the government by a personnel
* As a bondage for personnel to retain their service with the government
* To provide the life subsistence for the dependants of personnel who have
passed on during the term of service with the government or after their
retirement
* To develop a form of compensation scheme for personnel who are required to
retire or passed away due to an injury or contracted a disease because of
exposed to harm in the course of carrying out his duties

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* In Malaysia, officers on full-time employment in the public service under
given condition are entitled to pension benefits.
* Public service refers to:
 the Judicial and Legal Service
 the General Public Service of the Federal Government
 the Police Force
 the Railway Service
 the Education Service
 the Joint Public Services common to the Federal Government and of
one or more of the states
 the Public service of each state
 the Parliamentary service
 such other service as the Yang di-Pertuan Agong may determine to be
public service for the purposes of the Pensions Act 1980

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 TYPES OF PENSION
1) Compulsory Pension (Section 10)
* The minimum retirement age for most workers are set at age 60 under the
Minimum Retirement Age Act 2012 but some companies, in practice, most
employers set it at age 55 for their employees.

2) Compulsory Retirement at the Instance of the Government (Section 11)

* If the government requires a pensionable officer/personnel agrees, the following
pension may take place if the government requires that a pensionable officer be
appointed to another post under a different appointing authority and is agreeable
by that officer, he may be pensioned on the ground of national interest.

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 * In the interest of the public service or statutory bodies or local authorities – the
government may require that a pensionable officer with low performance or
declining over a certain period or has persistent health problems but not to the
level of being Medical Boarded, if he agrees, may be pensioned.

3) Optional Retirement (Section 12)

* Pensionable personnel upon attaining 40 years of age may apply for optional
retirement. The period of reckonable service not less than 10 years is required
to enable pension benefits be paid to the personnel.
* Payment for service gratuity is made on the date of retirement while pension
would be paid when attaining the eligible age as stipulated in the Pension Laws.

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4) Retirement Due to Privatization of a Government Agency (Section 10(5)(b), 12 and
12A/13)
* Upon the government’s approval, pensionable personnel may be retired when
a public agency or part of it is privatized. The retirement is on voluntary basis
made via an option offered that is, either:
* retirement due to abolition of the office held under Paragraph 10(5)(b) Act
227/230 if offer into employment of the privatized entity is refused; or
* optional retirement – Sec. 12 Act 227/239 as stipulated in Paragraph 15 and
agrees to work with the company; or
* retired after appointment to work for company under – Sec. 12A Act 227 or
Sec. 13 Act 239 if less than 45 years for women and 50 years for men
effective from date of privatization and accept to work with the company.

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 REFERENCES

• Gary Dessler (2017). Human Resource Management, 15th Edition. Pearson.

• Maimunah Aminuddin (2014). Human Resource Management: Principles and Practices, 3rd
Edition. Oxford Fajar.
• https://mohamed-sabry.com/blog/basic-factors-in-determining-pay-rates/
• https://www.tutorialspoint.com/human_resource_management/human_resource_managemen
t_compensation.htm
• https://image.slidesharecdn.com/currenttrendsincompensation-130417095241-
phpapp01/95/current-trends-in-compensation-4-638.jpg?cb=1366192411
• http://szhang7.github.io/human%20resource%20management/2013/04/19/11-establishing-
strategic-pay-plans/
• http://www.zeepedia.com/read.php?compensation_system_pay_job_pricing_compensation_a
n_overview_compensation_surveys_human_resource_management&b=33&c=28
• http://www.yourarticlelibrary.com/organization/7-factors-for-determining-wage-and-salary-
structure-of-workers/24737
• http://images.humanresourcesonline.net.s3.amazonaws.com/wp-
content/uploads/2015/12/Aditi-Dec-2015-graduates-expectations-jobstreet-1-
e1449540718854.jpg
• https://www.aafp.org/fpm/2000/0200/p30.html

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