Reward compensation system

The term compensation is used to indicate the employee’s gross earnings in

the form of financial rewards and benefits. Compensation can also be
defined as follows: …

A system of rewards that can motivate the employees to perform.

Compensation System:

Compensation is a tool used by management for safeguarding the existence

of the company. Compensation can be of two types – Direct and Indirect.

Direct Compensation:

1. Basic pay, dearness allowance, cash allowance

2. Incentive pay, bonus, commission, profit sharing, stock option

Indirect Compensation:

1. Legal requirement
a. Provident fund
b. Gravidity
c. Pension
d. Insurance
e. Medical leave
f. Accident benefits
g. Maturity leave
2. Optional sick leave
3. Casual leave
4. Travelling allowance
5. Telephone bill
6. Canteen allowance
7. Club membership

The main characteristics of the compensation are as follows:

1. A hierarchy of pay levels

2. A hierarchy of jobs
3. A set of jobs
4. A set of rules and procedures
 5. Qualities required for movement from one level to other

An organization’s compensation system usually consists of three separate

components. Each element of the compensation package has a link with an
individual need hierarchy. All allowances are linked to basic pay.

In order to motivate the employees when they achieve objectives, rewards

and incentives are incorporated along with basic pay. To retain the
employees and to get long-term commitments, stock option plan, annual
increments and promotion are provided.

Function/role of compensation

A compensation and benefits manager is responsible for identifying,

developing & implementing the employee compensation policies of an entity.
He oversees the salary and compensation policies and ensures that they are
attractive to retain the existing faculty & to draw the attention fresh talents.

The role of compensations and benefits manager in an organisation can be

identified on the basis of the task performed by him.

The following are some of the task that they lay before a compensation and
benefits manager.

1. Identify & put into service and attractive pay package which is capable
of retaining the existing talent with the entity. The compensation policy
must be capable of drawing the attention of potential employees towards
entity.
2. Analysis the compensation policies and salary packages provides by the
competitors and those in the market to guarantee that the compensation
and benefits package offered is equivalent to those in the market.
3. Compensation plays a very important role in attracting the best talent in
the organization, as well as, retaining them for a long time.
4. It helps in creating a solid human resource base in the organization
which enhances the productivity, efficiency and overall quality in the
organization.
5. A sound human resource infrastructure with employees possessing
proper set of skills for right job, is critical to the success of any
organization and
6. In order to avoid high attrition levels, compensation plays a key role in
retaining the top talent in the organization.
7. To maintain high standards of productivity and service, the organization
must motivate employees.
8. A suitable compensation, incentives and rewards program is the key
motivator in any organization today.

Significance/importance of compensation

Compensation often includes an employee’s base salary and additional

benefits, such as health insurance, retirement plans and performance
bonuses. The compensation packages a business offers to employees
affects the company’s recruitment rate, retention rate and employees
affects the company’s recruitment rate, retention rate and employee
satisfaction.

The fair compensation system will help in the following:

 An ideal compensation system will have positive impact on the efficiency

and results production by employees. It will encourage the employees to
perform better and achieve the standards fixed.
 It will enhance the process of job evaluation. It will also help in setting up
an ideal job evaluation and the set standards would be more realistic and
achievable.
 Such a system should be well defined and uniform. It will be apply to all
the levels of the organization as a general system.
 The system should be simple and flexible so that every employee would
be able to compute his own compensation receivable.
 It should be easy to implement, should not result in exploitation of
workers.
 It will raise the morale, efficiency and cooperation among the workers. It,
being just and fair would provide satisfaction to the workers.
 Such system should also solve disputes between the employee union and
management.
 The system should follow the management principle of equal pay.
 It should motivate and encouragement those who perform better and
should provide opportunities for those who wish to excel.
 Sound Compensation/Reward System brings peace in the relationship of
employer and employees.
 It aim at creation a healthy competition among them and encourages
employees to work hard and efficiently.
 The system provides growth and advancement opportunities to the
deserving employees.
 The perfect compensation system provides platform for happy and
satisfied workforce. This minimizes the labour turnover.

Job evaluation

A job evaluation is a systematic way of determining the value/worth of a job

in relation to other jobs in an organization. It tries to make a systematic
comparison between jobs to assess their relative worth for the purpose of
establishing relation pay structure.

Concept of job evaluation:

In simple words, job evaluation is the rating of jobs in an organization. This

is the process of establishing the value or worth of jobs in a job hierarchy. It
attempts to compare the relative intrinsic value or worth of jobs in a within
an organization. Thus, job evaluation is a comparative process.

Below are given some important definitions of job evaluation:

According to the International Labour Office (ILO) “Job evaluation is an

attempt to determine and compare the demands which the normal
performance of a particular jobs makes on normal workers, without taking
into account the individual abilities or performance of the workers
concerned.”

The British Institute of Management defines job evaluation as “the process

of analysis and assessment of jobs to ascertain reliably their negative worth
using the assessment as the basis for a balanced wage structure.” In the
words of Kimball and Kimball “job evaluation is an effort to determine the
relative value of every job in a plant to determine what the fair basic wage
for such a job should be.
Methods of Job Evaluation

The essence of compensation administration is job evaluation and the

establishment of the pay structure. By job evaluation we mean using the
information in job analysis to systematically determine the value of each job
in relation to all jobs within the organization.

In a short, job evaluation seeks to rank all the jobs in the organization and
place them in a hierarchy that will reflect the relative worth of each. There
are four general job evaluation methods.

a. Ranking method:
Raters examine the description of each job being evaluated and arrange
the jobs in order according to their value to the company. This method
requires a committee typically composed of both management and
employee representative to arrange job in a simple rank order from
highest to lowest.
No attempts are made to break down the jobs by specific weighted
criteria. The committee members merely compare two jobs and judge
which one is more important, or more difficult to perform. Then they
compare the other job with the first two, and so on until all the jobs have
been evaluated and ranked.
The most obvious limitation to the ranking method is its sheer inability
to be managed when there are a large number of jobs. Other drawbacks
to be considered are the subjectivity of the method-there are no definite
or consistent standards by which to justify the rankings and the fact
that because jobs are only ranked in terms of order, we have no
knowledge of the distance between the ranks.
b. Classification method:
A job evaluation method by which a number of classes or grades are
defined to describe a group of jobs is known as Classification method.
The classifications are created by identifying some common denominator
skills, knowledge, responsibilities-with the desired goal being the
criterion of a number of distinct classes or grades of jobs.
Once the classifications are established, they are ranked in an overall
order of importance according to the criteria chosen, and each job is
placed in its appropriate classification. This later action is generally done
 by comparing each position’s job description against the classification
description and benchmarked jobs.
The classification method shares most of the disadvantages of the
ranking approach, plus the difficulty of writing classification
descriptions, judging which jobs go where, and dealing with jobs that
appear to fail into more than one classification.
c. Factor comparison method:
Raters need not keep the entire job in mind as they evaluate; instead,
they make decisions on separate aspects, or factors, of the job factors:
1. Mental Requirements,
2. Skills,
3. Physical requirements,
4. Responsibilities, and
5. Working Conditions.

The committee first rank each of the selected benchmark jobs on the
relative degree of difficulty for each of the five factors. Then, committee
of the committee allocates the total pay rates for each jobs to each factor
based on the importance of the respective factor to the job. A job
comparison scale, reflecting rankings and money allocations, is
developed next.

d. Point method:
Raters assign numerical values to specific job components, and the sum
of these values, provides a quantitative assessment of a job’s relative
worth. The point method requires selection of job factors according the
group of the specific group of jobs being evaluated. After determining the
group of jobs to be studied, analysts conduct job analysis and write job
descriptions.
Next the analysts select and define the factors to be used in measuring
job value and which become the standards used for the evaluation of
jobs, education, experience, job knowledge, mental effort, physical effort,
responsibility, and working conditions are examples of factors typically
used.
Process of the job evaluation

A job evaluation is a systematic way of determining the value/worth o

comparison between jobs to assess their relative worth for the purpose of
establishing a rational pay structure.

Job evaluation is the systematic process for assessing the relative worth of
jobs within an organization. A comprehensive analysis of each position’s
tasks, responsibilities, knowledge, and skills requirements is used to assess
the value to the employer of the job’s content and provide an internal
ranking of the jobs.

Process of Job Evaluation

Gaining Acceptance

Creating Job Evaluation Committee

Finding and Jobs to be Evaluated

Selecting the Method of Evaluation

Analysing and Preparing Job Description

Classifying Jobs

Installing the Programme

Reviewing Periodically

Inputs to job evaluation

 Remind employees that while you have kept records about their performance throughout the year,
you may have missed some important events along the way.  A self-assessment provides an
opportunity for the employee to highlight their accomplishments over the past year.
Ask for specific examples including a list of accomplishments, process improvements they
recommended and/or implemented, letters or emails of commendation they received that have not
been forwarded to you, training completed that you may have not recorded, and anything else that
they feel is important to share that will give you a complete look at their performance.
DO NOT ask the employee to fill out the evaluation form on his or her own and submit it to you.  
This approach leads to the employee feeling as if the evaluation duties are being delegated. 
Employees want your opinion, however you convey it.  Those supervisors who ask their
employees to complete their own evaluations and who do not add significantly to the content of the
employee’s evaluation are seen as lazy, as cowards, or as both.

Wage differentials
Wage differential is a term used in labour economics to analyze the relation between
the wage rate and the unpleasantness, risk, or other undesirable attributes of a
particular job. A compensating differential, which is also called a compensating wage
differential or an equalizing difference, is defined as the additional amount of income
that a given worker must be offered in order to motivate them to accept a given
undesirable job, relative to other jobs that worker could perform. One can also speak of
the compensating differential for an especially desirable job, or one that provides special
benefits, but in this case the differential would be negative: that is, a given worker would
be willing to accept a lower wage for an especially desirable job, relative to other jobs.
The idea of compensating differentials has been used to analyze issues such as the risk
of future unemployment, the risk of injury, the risk of unsafe intercourse, the monetary
value workers place on their own lives, and in explaining geographical wage differentials.
TYPES  OF WAGE DIFFERENTIALS

1) (A) Occupational differentials

    (B) Inter-Occupational differentials               
2)   Inter-firm differentials;
3)   Inter-area or regional differentials;
4)   Inter-industry differentials;
5)   Differentials based on gender.

Significance/importance of wage differentials

Wage differentials have a great economic and social significance, for they are directly related to the
allocation of the economic resources of a country, including manpower, growth of the national income, and
the pace of economic development. Social welfare activity depends, in a large measure, on such wage
differentials as will:

•       Cause labour to be allocated among different occupations, industries and geographical areas in the
economy in such a manner as to maximize the national product;
•       Enable full employment of the resources of the economy to be attainted; and
•       Facilitate the most desirable rate of economic progress.