Cavite State University

Graduate School and Open Learning College

Compensation Administration 2nd Semester SY 2022-2023

 Compensation
◼ Probably the most salient single element in conditions of
employment.
◼ Always brought about issues in negotiations between employers and
workers.
◼ If industrial peace and harmony are to be achieved, the many
considerations regarding compensation schemes have to be
examined.
◼ A compensation policy and structure that is satisfactory to both
management and workers is very advantageous.
◼ The fewer the complaints and grievances are over compensation, the
healthier the industrial relations and the more favorable the climate
for sustained productivity improvement.
 Compensation is regarded as the single most
important cost in most firms. Manpower costs are as
high as 60% of total cost in certain types of
manufacturing environment and even higher in some
service organizations. This means that the effectiveness
with which compensation is allocated can make a
significant difference in gaining or losing a competitive
edge.

How much is paid and who gets paid

what are crucial strategic issues for the
company.
WHAT IS COMPENSATION?
Employee compensation refers to all forms of pay
or rewards going to employees and arising from
their employment.
It has two main components:
1. financial (a) direct payments (in the form of wages,
salaries, incentives)
(b) indirect payments (in the form of benefits
supplied by the employers)
2. non-financial which includes recognition programs,
rewarding jobs and flexible work hours to accommodate
personal needs.
Compensation constitutes a quantitative measure of
employees’ relative worth. It has a direct bearing on their
standard of living, status and recognition that they may be
able to achieve both on and off the job.
 Compensation
◼ is the function of Human Resource Management
that deals with every type of reward that
individuals receive in return for performing
organizational tasks.
◼ includes all forms of pay or rewards received by
the employees for the performance of their jobs.
◼ is a reward for his services and contribution to
the business.
◼ To employees, compensation is important
❖ for their purchasing power.
❖ the amount of money an employee earns serves as an indicator
of his power and prestige
❖ and is tied to his feeling of self worth.
❖ has a direct bearing on their standard of living, status and
recognition that they may be able to achieve both on
and off the job.
In other words, compensation affects an employee
❖ economically
❖ sociologically
❖ psychologically

Because of this, mishandling the compensation allocation process

would likely have a strong negative impact on employees and on
the firm’s performance. How much is paid and who gets paid are
crucial strategic issues for the company.
◼ Compensation should facilitate the effective
utilization and management of an organization’s
human resources, while also contributing to the
overall objectives of the organization. The
organization should develop an HR program to
manage compensation.

◼ The program should establish its intended

objectives and policies for determining
compensation payments, the systems and the
methods by which the payments will be
disbursed.
WHAT IS
TOTAL COMPENSATION?
❖ It is the package of quantifiable rewards an employee
receives for his labor.
❖ It is the activity by which organizations evaluate the
contributions of employees in order to distribute fairly
direct and indirect monetary and non-monetary reward
within the organization’s ability to pay and legal
regulations.
❖ Its components are:
❖ Base wage or salary,
❖ Incentives
❖ Benefits
 COMPONENTS OF TOTAL
COMPENSATION

1. Base pay – the fixed pay an employee

receives on a regular basis either in the
form of a salary (monthly) or a wage (daily
or hourly);

2. Incentive pay – programs designed to

reward employees for good performance
which comes in many forms like bonus,
profit sharing, differential piece rate etc.
3. Benefits – sometimes called indirect
compensation which encompasses a wide
variety of programs such as health, insurance,
clothing allowance, vacation etc.
Perquisites or perks are benefits of special
category available to employees with special
status in the organization, usually upper level
managers.
examples:
company car, a special parking place on company
grounds and company–paid country club membership
fee.
 IMPORTANCE OF TOTAL
COMPENSATION

1. To attract potential job applicants

2. To retain good employees
3. To motivate employees
4. To administer pay within legal regulations
5. To facilitate organizational strategic objectives
 THEORIES OF WAGES
◼ SUBSISTENCE THEORY was inspired by
Thomas Robert Malthus. He held that the
production of food at any given time cannot keep
pace with the potential rate of increase of human
population. Thus, the size of population will just
equal the number which is able to subsist.
◼ It states that wages tend to keep to a level that
will provide the workers only with bare
subsistence. If wages for a time rise above this
level, it inevitably leads, it is said, to an increase
in the population, and increased competition
among workers for employment, causing wages
to fall again. If wages fall below subsistence
level, fewer children are born and malnutrition
raises the death-rate, so that competition for
employment is reduced and wages tend to rise.
◼ The fundamental premise: labor is a commodity
whose price is controlled by the same market
conditions as other commodities. The price of labor is
determined by the mechanical forces of supply and
demand, like the price of commodity its value is
ultimately based on its cost of production. Wages
cannot fall below subsistence level otherwise the
supply of labor will suffer a drastic reduction that will
cause competitive bidding among employers and this
will raise wages. A raise in wages affects the growth
of population that will cause an excess in the supply
of workers.
◼ WAGES FUND THEORY

◼ is based on John Stuart Mill idea that the

working capital of a nation provides a fund
from which wages can be paid. Thus, the
amount of wages cannot rise above the
amount of the fund.
◼ Wage Fund Theory

◼ At the time when the wage fund theory was developed

it was thought that a fund of capital had to be
accumulated in advance before wages could be paid.
Thus the size of the fund limited the total amount
available for payment of wages.
◼ Though the theory did not specifically say so, it
appeared to imply that if one group of workers obtained
a rise in wages it could be only at the expense of other
workers, whose share of fund was thereby reduced. The
theory ignored the fact that total output could increase
and the wage-earners might also be able to benefit at
the expense of capital.
◼ Marginal Productivity Theory

◼ was introduced by Johann Heinrich Von

Thunen in 1826. It represents an attempt to
explain not only the general level of wages
but also the entire wage structure of a
highly competitive economy in terms of the
interaction between the market forces of
supply and demand.
◼ Marginal Productivity Theory:

◼ According to this theory, the higher the wage, the

smaller the amount of labor the entrepreneur will
employ. Additional labor will be employed till the last
addition to the total value of the product is only just
covered by the wages paid to the marginal or the last
worker taken on, without leaving any profit. Apparently,
an employer cannot afford to pay more than the wealth
produced by the laborer.
◼ As the number of laborers increases, the productivity of
each successive worker goes on decreasing. Ultimately a
stage is reached where the productivity of the last or the
marginal laborer is just equal to the wages paid to him.
◼ His contribution to production is known as Marginal
Productivity. He is just on the margin of being employed or
dismissed. It may be said that the maximum limit beyond
which rates of wages cannot be paid to a laborer, is
determined by its marginal productivity to the employer.
◼ Bargaining Theory of Wages

◼ An American economist contend” that labor is a

commodity whose price is wage. As such like the
prices of other commodities, the price of labor is
determined by a bargaining process between
buyers and sellers”.
◼ The sellers of labor are the workers who set a lower
limit on the value of their services conditioned by the
utility of the reward.
◼ The buyers of labor are the employers who set an
upper limit estimate of the value of the workers’
services based on the amount and “discounted”
value of the output which they expect to obtain from
the labor in question.
◼ Earlier theories of wages have been rendered invalid or
at least inadequate, as a result of collective bargaining by
trade unions. Collective bargaining provides an example of
what is sometimes called bi-lateral monopoly, the trade
union being the monopolist supplier and the employer’s
association, the monopolist buyer of a particular kind of
labor. Level of wages in an industry depends on the
bargaining strength of the trade union concerned.

◼
◼ The power of a trade union depends on the size of its
membership, the size of its fighting fund and the extent
of the dislocation to the national economy it can cause
by a strike. In times of full employment, the union will be
in a strong position, in a depression they will be weaker.
◼ Wage Theory of St. Thomas Aquinas

◼ St Thomas doctrine of “Just Wage” is based

on his concept of JUSTUM PRETIUM (Just
Price). Just wage permit the recipient
worker to live in a manner in keeping with
his position in society.
◼ EQUITY THEORY

◼ Equity is the balance between the inputs an

individual brings to a job and the outcomes
he or she receives from it.
◼ Employee inputs include experience,
education, special skills, effort and time
worked.
◼ Outcomes include pay, benefits,
achievement, recognition and any other
rewards.
◼ EQUITY THEORY … cont’n.

◼ Equity theory suggests that individuals

determine whether they are being fairly treated
by comparing their own input/outcome ratio to
that of someone else. This other person may
be in the same job or in other jobs, within or
outside the company. A sense of inequity
arises when the comparison process uncovers
an imbalance between inputs and outcomes of
the employee compared with others.
 Elements of Equity

1. Internal equity refers to the relationship among

jobs within a single organization. It exists when
the pay differentials between different jobs within
the organization are perceived as fair—neither
too large nor too small. This is established
through job evaluation.
 Cont’n.

2. External equity refers to comparisons of

similar jobs in different organizations. The
decision to examine pay relative to this is called
pay-level decision. The objective of the pay-level
decision is to keep the organization competitive in
the labor market. The major tool used in this
decision is the pay survey.
 Cont’n.

3. Individual equity refers to comparisons

among individuals in the same job with the same
organization.
➢ The decision involving pay relative to employees
working on the same job within the organization is
called individual pay determination.
➢ The two approaches used to determine how
workers are placed and process through the pay
ranges are seniority and merit. A newer method
bases increments on the number of skills mastered
(skill-based pay).
FACTORS INFLUENCING
COMPENSATION/WAGE MIX
Internal Factors:
❑ Compensation policy of organization
❑ Worth of job
❑ Employee’s relative worth
❑ Employer’s ability to pay
❑ Nature and size of business
❑ Kinds and levels of required skill
❑ Performance rating
FACTORS INFLUENCING
COMPENSATION /WAGE MIX
(cont’n.)

External Factors
❑ Conditions of the labor market
❑ Average wage rates
❑ Cost of living
❑ Collective Bargaining
❑ Legal requirements
CAUSES OF WAGE INEQUITIES
❑ Pressure of aggressive employee or supervisor
❑ Favoritism among supervisors
❑ Seniority
❑ Feeling of being important
❑ Union pressure
❑ Faulty classification of jobs
❑ Absence of job evaluation
❑ Compensation plan not kept up-to-date
 COMPENSATION DESIGN

◼ A process for establishing equity between

what workers contribute to the organization
and what they receive for their efforts.

◼ It determines the value of the job and/or

specific, properly executed accomplishments
toward the achievement of the organization
desired outcomes. The value of the job and/or
the accomplishment is used to establish the
nature and amount of compensation.
◼ COMPENSATION POLICY
is a company policy that stipulates how well
the company will pay its employees relative to
the market. Formulating such policy is a crucial
step in the design of a pay system. When
setting pay policy, the strategic plan of the
company must be considered.
Common Goals of Compensation
Policies
1. To remain competitive in the labor market
2. To reward employee’s past performance
3. To maintain salary equity among employees
4. To motivate employee’s future performance
5. To maintain the budget
6. To attract new employees
7. To reduce unnecessary turnover
 COMPENSATION POLICIES
To achieve compensation goals, the following
policies must be established to guide management
in decision makings:

1. The rate of pay within the organization whether it is

to be above, below, or at the prevailing community
rate;

2. The ability of the pay program to gain employee

acceptance while motivating employees to perform
to the best of their abilities;
3. The pay level at which employees may be recruited and
the pay differential between new and more senior
employees;

4. The intervals at which pay raises are to be granted and

the extent to which merit and/or seniority will influence
the raises;

5. The pay levels needed to facilitate the achievement of a

sound financial position in relation to the products or
services offered.
 STRATEGIC OBJECTIVE OF A
COMPENSATION PROGRAM

◼ Legal - consistent with labor code and local laws

◼ Adequate - large enough to attract qualified

employees to join the organization and stay

◼ Motivating - provide sufficient incentives to

motivate employees to perform efficiently
 Cont’n.

◼ Equitable - internally and externally equitable

◼ Provide security - make income secure, predictable and

insulated from changes in employment, profitability,
individual performance and personal health

◼ Cost-benefit effective - administer the compensation

efficiently and have the financial resources of the
organization support it on a continuing basis in the long
run
 CRITERIA FOR DEVELOPING
COMPENSATION PLAN
1. Internal vs. External Equity - Will the compensation
plan be perceived as fair within the company, or
will it be perceived as fair relative to what other
employers are paying for the same type of labor?

2. Fixed vs. Variable Pay - Will compensation be

paid mainly on fixed basis – through base salaries
or will it fluctuate depending on such depending on
such pre-established criteria as performance and
company profits?
 Cont’n.
3. Performance vs. membership - Will compensation
emphasize performance and tie pay to individual
or group contributions, or will emphasize
membership in the organization - logging in a
prescribed number of hours each week and
progressing up the organizational ladder?

4. Job vs. Individual Pay - Will compensation be

based on how the company values a particular
job’ or will it be based on how much skill and
knowledge an employee brings to that job?
 Cont’n.
5. Elitism vs. Egalitarianism - Will the compensation plan
place most employees under the same compensation
system (egalitarianism) or will it establish different
plans by organizational level and/or employee group
(elitism)?
6. Below Market vs. Above Market - Will employees be
compensated at below-market levels, at market levels
or at above market levels?
7. Monetary vs. Non-Monetary Rewards - Will the
compensation plan emphasize motivating employees
through monetary rewards like pay and stock options,
or will it stress non-monetary rewards such as more
interesting work, challenging assignments, public
recognition and job security?
 Cont’n.
8. Open vs. Secret Pay - Will employees have access
to information about other worker’s compensation
levels and how compensation decisions are made
(open pay) or will this knowledge be withheld from
employees (secret pay)?

9. Centralization vs. Decentralization of Pay

Decisions - Will the compensation decisions be
made in a tightly controlled central location, or will
they be delegated to managers of the firm’s unit?
Remember: THE IRON LAW OF
COMPENSATION

You GET what you GIVE.

You GET what you PAY FOR.
Therefore, if you want REAL
performance…
GIVE REAL PAY FOR REAL
PERFORMANCE
 PRIMARY DESIGN CRITERIA
FOR COMPENSATION
PROGRAMS
1. Must be internally equitable – (i.e. they must pay
people in proportion to the relative value of their
job)

2. Externally competitive – (i.e. they must pay people

in proportion to the market price for their job)

3. Personally motivating to employees

4. Ease of administration for staff

 DESIGNING AN EFFECTIVE
COMPENSATION PROGRAM
1. Recognize that monetary rewards change employee
behavior.
2. Stick to the basic. Pay people at a reasonable market
level for base salary based on survey data.
3. Use variable pay everywhere.
4. Keep the performance measures as simple as
possible and limit their numbers preferable to 2 or 3.
5. Communicate the details of your program, the
rationale of the measures that is how they fit into the
organization’s study.
EXTERNAL ENVIRONMENTAL
FORCES THAT DIRECTLY
SHAPE COMPENSATION
DESIGN DECISIONS

1. Labor Market Conditions

2. Legal Considerations

3. Labor Unions
FACTORS INFLUENCING
COMPENSATION
DIFFERENCES

1. Organization differences

2. Work difference

3. Employee differences

4. Market differences
FACTORS INFLUENCING / CAUSING
COMPENSATION DIFFERENCES
❑ ORGANIZATION DIFFERENCES –
Organization determines compensation rates based on
its philosophy. (Highest payer or just above the
median) Company’s ability to pay based on its
profitability.

❑ WORK DIFFERENCES –
Using job analysis and job evaluation, internal value of
jobs are systematically measured. Jobs are objectively
rated and classified according to their value to the
company.
FACTORS INFLUENCING / CAUSING
COMPENSATION DIFFERENCES
(cont’n.)

❑ EMPLOYEE DIFFERENCES –
Longer tenure or length of service and individual work
performance and skills of workers are given
consideration in pay determination.

❑ MARKET DIFFERENCES –
Low profit margin generated by the market and
demand-supply situation in the labor market influences
pay.
 Compensation differences may create
demoralization among employees if the reasons
behind these differences are not thoroughly and
satisfactorily explained and if they refuse these
reasons. The way a company handles these is likely
to have a direct impact on its ability to attract, retain
and motivate its employees.
 BASIC PAY SYSTEMS

1. Time-based (or hourly and measured day work) -

Compensate employees for the time the employee
has worked during a pay period.
2. Output-based (incentive) - Compensate
employees according to the amount of output they
produce during a pay period, thereby tying pay directly
to performance.
COMPARISON OF TIMED-BASED
AND OUTPUT-BASED
PAY SYSTEMS
Time-based ---
Advantages to Management
1. Stable labor costs

2. Easy to administer

3. Simple to compute pay

4. Stable output
 COMPARISON … cont’n.
Time-based ---
Disadvantages to Management
1. No incentive for workers to increase output
2. Workers receive the same pay regardless of
output
Advantages to Worker
1. Stable pay
2. Less pressure to produce under output
system
Disadvantage to Worker
1. Extra efforts are not rewarded
 COMPARISON … cont’n.
Output-based ---
Advantages to Management
1. Lower cost per unit
2. Greater output
Disadvantages to Management
1. Wage computation more difficult
2. Need to measure output
3. Quality may suffer
4. Difficult to incorporate wage increases
5. Increased problems with scheduling
 COMPARISON … cont’n.

Output-based ---
Advantages to Worker
1. Pay related to efforts
2. Opportunity to earn more
Disadvantages to Worker
1. Pay fluctuates
2. Worker may be penalized because of
factors beyond their control
 Three types of pay system
A. Skill-based Pay System
• employees with higher skill levels receive higher pay
than those with lower skill levels.
• also called the competency-based pay
B. Job-based Pay System
• compensation is linked to the specific tasks that an
employee performs
C. Performance-based Pay System
• compensation is based on the level of
accomplishment of the employee.
WHY PAY FOR PERFORMANCE
IS AN ABSOLUTE NECESSITY
❑ People will behave as they are being rewarded

❑ Pay people for performance and people will perform

❑ Pay people for promises and efforts and people will

continue promising and making efforts which do not
necessarily lead to performance.

❑ Pay people only for time and they will become time-
servers
 BASIC DETERMINANTS OF PAY
1. Relationship between Jobs and Wage rates.
These involves three considerations:
a) Qualifications required for the job.
b) Worker supply and demand.
c) Duties and responsibilities of the job.
2. Recognition of Individual Differences
3. Level of pay in the Community
4. Company’s Ability to Pay
5. Type of Industry
6. Cost of Living
 Cont’n.
7. Minimum Wage Fixing The following are
considered:
a) Demand for living wages
b) Wage adjustment vis-a vis the consumer price index
c) Cost of living and changes or increases therein
d) Needs of workers and families
e) Need to induce industries to invest in the
countryside
f) Improvements in standards of living
g) Prevailing wage levels
h) Fair return of the capital invested and capacity to
pay employees
i) Effects on employment generation and family
income
j) Equitable distribution of income and wealth along
the imperatives of economic and social development
 Cont’n.

8. Labor Costs

9. Collective Bargaining
2
 Job Evaluation (JE)

A systematic and orderly process of

determining the worth of a job in relation to
other jobs in the company.
 4 Basic Principles in Job
Evaluation
◼ Equal pay for equal work/worth
◼ Differences in payment must be based on differences in
work
◼ The pay must be related to the existing pay in the
community or in the industry
◼ The employee is concerned with the general wage level
and the relative position of his pay
 What Job Evaluation Is Not
◼ It is a measure of job value and not of individual performance
◼ It is not a one-time event, it is a continuing process.
◼ It is a collaborative and participative activity and not an
individual undertaking
◼ It is not a reactive or bureaucratic function of management but a
proactive action, a responsive action to some employee
concerned
◼ It is simple to understand and administer and not complex.
◼ Communicated not secretive
 Purposes of Job Evaluation
◼ To determine the relative worth of job in organization
◼ To establish a correct pay differential for each job
◼ To correct existing pay inequities and prevent future inequities
◼ To determine the correct pay rate for each job
◼ Other uses are in areas of training and development,
performance planning, job design, organizational design,
management succession and employee selection
 JE is a Tool
◼ To manage employee expectation
◼ To respond to business needs and enhance administrative
efficiencies
◼ To serve as venue of communication
◼ To enhance relation with the union
 Scope of JE
◼ Contained only within the company and cannot be used as
standard for the whole industry

◼ Within the company, it can only be contained within the

same range of jobs only
Approaches to Job Evaluation
◼ Do it yourself
◼ Joint undertaking utilizing company personnel and
consultant
◼ Full dependence on company consultant
◼ Outsource
 Basic Steps in Job Evaluation
◼ Job Analysis
◼ Job Rating
◼ Job Classification
◼ Job Pricing

JA + JR = JC JP
 Job Analysis
◼ A process of obtaining job-related information to
establish a basis for an accurate description and to
determine the specifications and requirements of a
specific job
◼ It is merely a reportorial job
 Benefits of Job Analysis
◼ Clarifies duties, responsibilities and relationship
◼ It is an input in determining staffing levels
◼ It is an input to job simplification
◼ It provides information for recruitment, performance appraisal
and training
◼ Used as guide for transfer and promotion
◼ Helps in counselling employees and handling grievances
◼ Helps determine working conditions that are hazardous,
unpleasant and unhealthy
 JA Procedure

◼ Job data gathering

◼ Job data analysis
◼ Job description write-up
 Job Data to Gather
◼ What the employee does
◼ Percentage of time spent/devoted to each duty
◼ How the duties are performed
◼ Knowledge and skills required for effective performance
◼ Working conditions
◼ Job relationships
◼ Supervision required
◼ No. of person on each job
◼ Why the job duties are performed
 Sources of Job Data
◼ Job holder
◼ Other employees including supervisors who know the job
◼ Independent observers who watch employees perform
their jobs
How to Secure the Data

◼ Questionnaire
◼ Interview
◼ Observation
◼ Any combination of the above
 Questionnaire Method
◼ Advantages
◼ Cheaper and quicker to administer
◼ Can be completed off the job
◼ Allows survey of large numbers of job incumbents
◼ Each survey data can be quantified and processed by a computer
◼ Very effective if used in combination with other methods
◼ Disadvantages
◼ Time consuming and expensive to develop
◼ Rapport is sacrificed between respondent and job analyst
◼ Impersonal approach may have adverse effects on respondent’s
cooperation and motivation
 Interview Method
◼ Advantages
◼ Can get more complete and more accurate information about the job
◼ Worker may provide analyst with information that may not be available
from other sources
◼ Can clarify issues on the spot
◼ Disadvantages
◼ Worker may become suspicious of interview and motives
◼ If analyst asks ambiguous question, there might be distortion of
information
◼ Should not be used as a sole method of job analysis
 Observation Method
◼ Advantages
◼ Desirable when manual operations are prominent in importance and
when the work cycle is short
◼ Working conditions and hazards are better described when viewed
personally
◼ Disadvantages
◼ Workers may behave differently when they know that they are being
observed
◼ If work in question is primarily mental in nature
◼ Critical yet rare job requirements may not be observed
 Job Description
◼ A written statement or report which outlines the essential
features of a job, particularly the duties, responsibilities and
conditions attendant to the job.
◼ It tells what is done on the job, how it is done, why is it done,
the skills involved and the tools and equipment used in doing
it.
◼ It provides guidelines that can be followed by the employees
for better performance by clearly defining the employer’s
expectations of the employee in a particular job.
 Parts of Job Description
◼ Heading
◼ Job title, job code number, location of job, reporting
relationship, date written, name or initials of job analyst
(optional)
◼ Job summary
◼ Job duties
◼ Personal requirements or specification
3
 Who is responsible for job
evaluation?
◼ The Job Evaluation Committee is responsible
for rating and classifying all jobs covered by
the Job Evaluation Program.
◼ The committee's basic function is to review,
rate and classify all jobs covered by the JE
program.
◼ In rating the jobs, the committee uses a rating
plan (Job Evaluation Methods).
 JOB EVALUATION METHODS
1. Non - Quantitative Methods
a. Ranking Method
b. Position Classification or Grade Description
Method
2. Quantitative Methods
a. Point System
b. Factor Comparison Method
c. Hay Method
 1. RANKING METHOD
◼ is the process of evaluating a job by
comparing it with others to determine
whether it is higher, lower or of the same
rank. It is based on an overall judgment of the
skills, efforts, responsibility and working
conditions relative to the job.
 RANKING METHOD
◼ Advantages
◼ Simplicity
◼ Time Element
◼ Accuracy and Facility for Adjustment in Rank
◼ Disadvantages
◼ Can be used only by people who have a pretty good
knowledge of the jobs to be evaluated
◼ Simply indicates whether one job is higher or lower than
another, but how much higher or lower is not determined.
◼ Not suited to large organizations where there are many
jobs to evaluate
 2. Position Classification or Grade
Descriptive Method
◼ is a process of grouping jobs by comparing
each job against a rating scale comprising
several job grades to ascertain the grade to
which each appropriately belongs.
◼ Jobs are compared to a pre-determined
standard.
 Position Classification or Grade
Descriptive Method
This method requires the preparation of these
guides in classifying the jobs.
◼ A well prepared job description and job
specification which shows the duties,
responsibilities, and working conditions relative
to each job.
◼ A rating scale made up of several classes or
grades in ascending steps, from the least valued
jobs and a description for each grade is given.
◼ Management usually understands well what jobs
are of greater value than others.
 Position Classification or Grade
Descriptive Method
Advantages
◼ Because of its simplicity, the grade classification
structure can easily be explained to the
employees so that there is a greater possibility
for their acceptance of the classification of the
jobs.
◼ It is easy to use and it takes a little time to rate
jobs because the rater is not confronted with
numerous and complex factors, sub - factors,
degrees and rating scales.
 Position Classification or Grade
Descriptive Method
Disadvantages
◼ Great care must be exercised in writing job description
of the various grades, especially in the use of phrases
or words that may cause either broad interpretation to
include too many jobs or narrow Interpretations that
may exclude jobs that should properly belong to the
grade.
◼ Because the method does not provide for the
numerical weighting of each factor comprising the job,
disagreements may exist as to the assignment of a
particular job to a particular grade.
 Position Classification or Grade
Descriptive Method
Disadvantages
◼ Since there are no objective records to support the
assignment of jobs to grades, the job classification
may be subject to disagreements between
management and the union, unless job rates are
fairly standard in the industry or community.
◼ The higher the job level, the more difficult it
becomes to classify it under the Grade Description
Method.
 3. The Point System
◼ The point system or point rating method evaluates
the job by appraising it separately against each of
the factors or characteristics, such as skill, effort,
responsibility, and working conditions, and adding
up the corresponding point values to arrive at a
single point score for each job.
◼ This method uses a series of rating scales, one for
each of the major factors with their subdivisions
which have been chosen as important in terms of the
position.
 The Point System
◼ The job is considered by its elements or
factors.
◼ Each factor is then evaluated against a
prepared point rating scale.
◼ The point system of evaluating jobs is
fundamentally analytical since it requires that
each job be judged against different elements
or factors.
 Factors in the Point System
1. SKILL which is further subdivided into:
◼ Schooling
◼ Experience
◼ Manual Dexterity
◼ Supervision Received
◼ Complexity of Duties
2. RESPONSIBILITY which may also be further subdivided into:
◼ Accuracy
◼ Company Funds and Materials
◼ Contact with Others
◼ Confidential Data
◼ Supervision Given to others
 Factors in the Point System
3. EFFORT
◼ Mental
◼ Physical

4. WORKING CONDITIONS or factors affecting

the performance of the job
 The Point System
Advantages
◼ Uses graphic and descriptive types of rating scales
which most practitioners find reliable and valid.
◼ Errors in judgment in determining job values are
reduced to a minimum
◼ It's difficult to "doctor". Intentional bias is easy to
detect and is, therefore, less apt to occur.
Disadvantages
◼ It is difficult to construct.
◼ It is difficult to explain.
◼ Evaluation of jobs is time consuming.
 Why the point system enjoys wide
acceptance
◼ It requires closer analysis and a more
thorough judgment.
◼ It offers greater assurance of consistency in
the rating of jobs in various departments in
the firm.
◼ Judgment arrived at in the rating process are
based on statements which become a
permanent part of the record.
4. The Factor Comparison Method
◼ This method requires that each job be
compared and ranked with the other jobs
under each separate factor.
◼ The evaluation is done on a factor-by-factor
basis, five factors usually used in comparing
jobs are skill requirement, mental
requirement, physical effort, working
conditions and responsibility.
 The Factor Comparison Method
◼ The factors are subdivided into degrees.
◼ On the basis of these factors, several "key
jobs" are selected.
◼ A key job is one generally accepted by
employees and managers as being a standard
type of job, correctly priced, and
representative of major factors in most jobs in
the organization.
 The Factor Comparison Method
◼ The ranking of jobs is established by analyzing
the description and specification of each job and
then comparing the factors present in the job
against the factors in the key job, one factor at a
time, and then arranging the jobs from the
highest to the lowest or the other way around as
the evaluators may choose.
◼ The evaluation is done by the pooling of a group
of trained persons who composed the rating
committee.
 5. The Hay Method
◼ This method is a type of factor-comparison method
developed by Hay and Associates using three factors which
are know-how, problem solving and accountability.
◼ This method requires that the organization develop its own
key jobs called benchmark, selected from among positions
within the company.
◼ The factors and the quantitative weights are established by
the organization.
◼ The method works similar to a point system where the
evaluator makes specific comparative identification of the
weights assigned for each factor so that it tells which job is
worth more and how much more.
◼ The factor values are then converted to monetary wages.
◼ The JE method provides a disciplined framework, which
if applied rigorously, enables objective judgements to be
made by evaluators. Hay method is a modified factor
comparison method of JE which meets equal pay law in
principle. It is based on credible, simple and coherent
models of the characteristics of different levels of work.
 The Hay Method
Stages of the Hay Method
1. Benchmark Selection

2. Position Analysis

3. Position Evaluation

4. Compensation Survey

5. Development of Policies and Procedures

 The Hay Method
Disadvantages
◼ It is difficult and complex
◼ It is time consuming to establish and develop

◼ It is not easy to explain to employees

◼ It is heavily dependent on outside consultant

 Establishing Job Ratings and Job
Classification
◼ To establish job ratings, the Job Evaluation group
familiarizes itself with each job description and rates the
different job characteristics in terms of the different
factors included in the job rating plan.
◼ In rating, the group members take care that ratings are
established as objectively as possible. This is done by
concentrating on the job duties and the
skills/qualifications required rather than on the person
currently assigned to the job. The job's point rating is the
sum total of the ratings for each of the factors.
◼ To classify a job, the Job Evaluation Group compares the
job's point rating with the point rating range defined for
each job class in the job classification table.
 Procedure followed in job rating and
job classification
1. Analyze the job description in order to determine the
nature and extent of duties and responsibilities
involved.
2. Evaluate the job characteristics against defined limits of
each factor to establish the relative degree of difficulty
of the job elements. Use the appropriate Job Rating
Sheet. Indicate the supporting explanation of each
rating made.
3. Where the rating of a job seems to fall between two
degrees, select the actual point rating by comparing the
specific job characteristics in benchmark jobs which
have been previously evaluated on the same degree.
 Procedure followed in job rating and
job classification
1. Add the resulting ratings for all factors to
arrive at the total point value of the job.
2. Classify the jobs by matching the total points
garnered by the job to the corresponding job
grade as shown in the Job Classification Table
◼ Compare the newly-rated job with other jobs
in the same job grade to check any
consistencies before finally assigning the job
to the appropriate job grade and pay class.
Check against mathematical errors and/or
errors in judgment during the rating process.
 Role of Key Players in JEP
A. Steering Committee (SC)
◼ decision-making body
◼ deliberates and approves matters related to
corporate policies and practices (e.g. compensation-
related policies); elevates matters to the Board for
approval of the Board of Directors
◼ reviews and approves recommendations of the JEG
like plan design, new job grades/job classification
◼ monitors progress of the project and approves
guidelines of the job evaluation.
 Role of Key Players in JEP
B. Job Evaluation Committee (JEC)
◼ reviews outputs and deliverables of the Technical
Staff job classification
◼ plan design including job factors and rating instruments
◼ job classification

◼ recommends to SC on the plan design and the

classification system
 Role of Key Players in JEP
C. Technical Staff (TC)
◼ consist of key functional representatives from
various functional areas
◼ provides inputs to the design of the JE Plan

◼ studies and evaluates jobs based on JDs and other

inputs
◼ recommends to the JEG on the plan design, job
ratings and the classification system
 Role of Key Players in JEP
D. Supervisors and Managers
◼ reviews and evaluate inputs of employees
E. Employees
◼ provide information on individual jobs