1

UNIT Suggested time allotment: 1 hour

1 COMPENSATION ADMINISTRATION

TARGET GOALS:
o Critique the history of compensation. (AN)
o Present a discussion based on the mini case. (AN)

DESIRED VALUES: Loyalty, Motivation, Satisfaction and Trust

LESSON 1.1. History of Compensation

I. LEARNING OUTCOMES

 Discuss the history of compensation. (U)

 Identify Edward N. Hay’s works. (R)
 Define guide charts. (R)
 Analyze the different improvements of compensation in the 90’s and 20’s
centuries. (An)

II. INPUT

History of Compensation

Rudimentary pay management has existed for as long as there have been
employers and employees. Owners of typically small, preindustrial businesses
commonly weighed their ability to pay against employee responsibilities and
contributions in order to determine compensation. The rapid development of
corporations, multiplication of administrative hierarchies, and specialization of jobs in
the 20th century removed owners from the day-to-day evaluation of jobs. Unionization
brought a measure of standardization to wage labor, but neither the private sector nor
the federal government began to study systematic job evaluation until after World War
1.
The federal government spearheaded the development of formal compensation
administration with the passage of the Federal Classification Act of 1923, which ranked
government jobs and set salary levels accordingly.
Rock and Berger (2009), authors of The Compensation Handbook, credited
human resource professional Edward N. Hay with providing a foundation for 20th
century compensation management. Hay began his work in the late 1930s, when his
employer, a bank, asked him to create a system of pay without ethnic, racial, or gender
biases. He embarked on the assignment by analyzing jobs their duties, responsibilities,
skills, education levels and composing descriptions based on his findings. Hay operated
on the theory that something that can be measured has value while something that
can't be measured has none. Accordingly, this pioneer devised guide charts that
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systematically evaluated and ranked jobs according to several variables: know-how,

accountability, working conditions, physical effort, and problem solving. The guide
charts that bore his name would become the world's single most widely used job
evaluation technique.
By 1943, when Hay founded his trendsetting consulting practice, organizations
throughout the United States (including the federal government) had acknowledged the
need for a consistent salary-administration system that would facilitate job evaluation,
ranking, and pricing.
During the period between the world wars, the American Management
Association began to compile descriptions of non-union (especially clerical and blue-
collar) jobs. Beginning in the mid-1930s, the federal government's Employment Service
enlisted its field offices throughout the country to describe and codify jobs. The first
edition of the resulting Dictionary of Occupational Titles (DOT), published in 1939,
contained about 17,500 summary definitions presented alphabetically by title. Blocks
of jobs were assigned five- or six-digit codes that classified them in one of 550
occupational groups and indicated whether the positions were skilled, semiskilled, or
unskilled. This erratically published compendium became the "bible" of the emerging
compensation profession. It provided a foundation for systematic pay plans by
promoting internal classifications of jobs and later, external comparisons of jobs across
industries.
Mobilization of the domestic economy for World War II significantly advanced
the compensation discipline, both directly and indirectly. The war's technological
advances helped add 3,500 new occupations in the plastics, paper and pulp, and radio
manufacturing industries to the economy, and to the second edition of the Dictionary of
Occupational Titles.
The war era also saw the imposition of governmental wage and price controls
and guidelines. During the freeze, only companies with rational job evaluation plans
could justify upward pay and benefit adjustments. This requirement helped coerce
some recalcitrant corporations into formulating systematic pay plans. Since the controls
on wages were more stringent than those on benefits, labor unions lobbied for
increased benefits and employers gladly capitulated. At the time, generous packages
of benefits were non-taxable and cost-effective for employers.
Now-common benefits such as pension plans, supplementary un-employment,
extended vacations, and guaranteed wages were added to the roster of statutory
benefits that had included Social Security (federal), workers compensation, and
unemployment compensation. Over the years, aggressive unions negotiated an
astonishing array of benefits, the administration of which fell to compensation
managers.
Most companies limited their pay analysis efforts internally until after the war.
During the 1950s, Hay and other human resource professionals joined the federal
government in broader examinations of compensation. The introduction
of computers quickly and continuously simplified and advanced the data collection,
quantification, and storage processes. The resulting databases have enabled survey
 3

analysts to thoroughly study relationships within and among corporations, industries,

and geographic regions.
Sunshine laws ratified in the 1970s combined with equal pay for equal work
initiatives began to usher in a new era for the compensation profession, as employees
demanded explanations of the rationale behind job assignments, remuneration, and
opportunities, as well as employers' overall capacity to pay. Over the course of the
decade, pay administration evolved into a thoroughly scientific and bureaucratic
method, with its own technologies and rationalization methods.
The profession grew so systematized, in fact, that its precepts were considered
nearly as inviolate as natural law until the early 1990s. At that time, corporate
downsizing, international competition, and new management schemes compelled
compensation managers to be more adaptive to the changing needs of employers and
employees. These shifts went to the heart of wage and salary administration: job
descriptions. As companies asked their employees to use their competencies and skills
to contribute to results in several ways, rather than just one easily described way, the
compensation administrator's tasks of job description and comparison have grown
more difficult and variable. One observer of these changes has characterized
compensation managers in this environment as engineers who apply established
techniques as situational warranted. The basics of the discipline still apply, but they are
adapted to each corporate culture in this new generation.

PRACTICE EXERCISE:

1. Who is Edward Hay?

2. What are the contributions of Edward Hay in our economy?

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Suggested time allotment: 1 hour

LESSON 1.2. Theories related to compensation

I. LEARNING OUTCOMES

 Discuss theories related to compensation. (U)

 Differentiate wage fund theory from Bargaining Theory of wages. (U)

II. INPUT

Theories related to Compensation

Wage determination, apart from the statutory aspect, is influenced by different

theories (Jain, 2014). These theories are:

I. Traditional Theory of Wage Determination

This theory assumes the market forces demand and supply determines
the wages. Computer programmers are in short supply, so they are able to
demand higher salaries.

II. Theory of Negotiated Wages

Unionized employee can negotiate salaries. This is done by collective

bargaining process normally in any organization; unions periodically submit their
memorandum to the management, asking for wage raises to keep pace with
market standards and organizational profitability. Then wages are negotiating in
a collective bargaining meeting attended by the unions and management
nominees

III. Subsistence Theory

David Ricardo (1772-1832) advocated the Subsistence Theory. It was

Thomas R. Malthus’s theory of population that provided the raw material for the
first economic wage theory. Population, according to the theory, is limited by the
means of subsistence: it increases geometrically whereas the means of
subsistence increases arithmetically.

IV. Wage Fund Theory

The short-term version of classical wage theory was the wages-fund

theory. As described by John Stuart Mill, this theory explained the short-term
variations in the general wage level in terms of the number of available workers
and the size of the wages fund. The wages fund was thought to come from
resources accumulated by employers from previous years and allocated by them
to buy labor currently. Employers were thought to have a fixed stock of
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“circulating capital” for the payment of wages. Dividing the labor force (assumed
to be the population) into the wages fund determined the wage.

V. Surplus Value Theory

The surplus value theory of wages owes its development to Karl Marx
(1818-1883). According to this theory, labor was an article of commerce, which
could be purchased on the payment of the ‘subsistence price’. The price of any
product was determined by labor and the time needed for producing it. The
laborer was not paid in proportion to the time spend on work, but was paid much
less, and the surplus was utilized for paying other expenses.

VI. Residual Claimant Theory

The Residual Claimant Theory advocated by Francis Walker (1840-

1897), assumes that there are four factors of production/business activity-land,
labor, capital, and entrepreneurship. Wages represent the amount of value
created in the production, which remain after payment has been made for all
these factors of production. In other words, labor is the residual claimant.

VII. Marginal Productivity Theory

This theory assumes that wages are based upon an entrepreneur’s

estimate of the value that will probably be produced by the last or marginal
worker. In other words, it assumes that wages depend upon the demand for and
supply of labor. Consequently, worker is paid what they are economically worth.

VIII. Bargaining Theory of wages

The bargaining theory of wages assumes that wages are determined by

interaction of management and labor in a collective bargaining process.
Although this theory does not provide adequate analysis of source of wages in
the long-run, it forms an effective basis for determining wages in the short-run.

Read more about the topic at https://www.jstor.org/stable/2328185.

Practice Exercise: (To be discussed during online class)

In a sentence, give your own summary of each of the theories of compensation.

I. Traditional Theory of Wage Determination

_________________________________________________________________
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II. Theory of Negotiated Wages

_________________________________________________________________

III. Subsistence Theory

_______________________________________________________________

IV. Wage Fund Theory

_______________________________________________________________

V. Surplus Value Theory

_______________________________________________________________

VI. Residual Claimant Theory

_______________________________________________________________

VII. Marginal Productivity Theory

_______________________________________________________________

VIII. Bargaining Theory of wages

_______________________________________________________________
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Suggested time allotment: 2 hours

LESSON 1.3. Compensation Administration

I. LEARNING OUTCOMES

 Define Compensation Administration. (R)

 Pinpoint the importance of compensation. (U)
 Apply the basic concept of compensation administration. (AP)
 Analyze the difference between financial and non-financial compensations. (AN)

II. INPUT

Definition

The term compensation represents the exchange between employees and

organization, both gives something in return for something else. In the past, the
compensation issues were often confidential and govern by individual employer’s
preferences and choices. However, in today’s competitive world the compensation
policies are more transparent and the employees take their own choices based on the
compensation package. Thus, balancing the cost of compensation and retaining the
employees have become the most important priority for the organization
(Bhattacharyya 2009).

Compensation includes direct forms such as base, merit, and incentive pay and
indirect forms such as vacation pay, deferred payment, and health insurance.
Compensation does not refer, however, to other kinds of employee rewards such as
recognition ceremonies and achievement parties. Compensation can be considered as
the bucket of financial rewards- salaries, commission, wages, bonuses, insurance and
other sorts of circumlocutory monetary benefits provided to employees (Caruth &
Handlogten 2001).

Compensation administration is a segment of management or human resource

management focusing on planning, organizing, and controlling the direct and indirect
payments employees receive for the work they perform. The ultimate objectives of
compensation administration are: efficient maintenance of a productive workforce,
equitable pay, and compliance with federal, state, and local regulations based on what
companies can afford.
Objectives of Compensation

Bhattacharay (2009) had provided the following objectives of compensation or

wages as given below:
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Equity

The first category is equity which may take several forms. It includes income
distribution through narrowing of inequalities, increasing the income of lowest paid
employees, protecting real wages (purchasing power), and the concept of equal pay
for work of equal values. Compensation management strives for internal and external
equity. Internal equity requires pay related to the worth of similar job so that similar job
gets similar pay. External equity means paying worker what other firms in the labor
market pay comparable workers. Compensation differentials, based on differences in
skills or contribution, are all to the concept of equity.

Efficiency

The objective of efficiency are reflected in attempts to link a part of wages to

productivity or profit, group or individual performance, acquisition and application of
skills, and so on. Arrangement to achieve efficiency may also be seen as being
equitable (if they fairly reward performance) or inequitable (if the reward is viewed as
unfair).

Macro-economic Satiability

It can be achieved through high employments level and low inflation. For
instance, an inordinately high minimum wages would have an adverse impact on levels
employment, tough at what level these consequences would occur is a matter of
debate. Although compensation policies influence macro-economic stability and
contribute to the balanced and sustainable economic development.

Efficient Allocation of Labor

The efficiency allocation of labor in the labor market implies that employees will
move to wherever they receive a net gain. Such movement may be form one
geographical location to another or form one job to another (within or outside an
enterprise). The provision or availability of financial incentive causes such movement.

Motivating the Employees

Employees may have talent but they will not be motivated to use their talent
unless they know that they will be rewarded duly for their contribution towards
organizational objectives or be punished for not contributing as per the demands of the
job.

Acquired Qualified Employees

Compensation needs to be high enough to attract applicants. Pay levels must

respond to supply and demand of workers in the labor market since employers compete
for workers.
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Retain Current Employees

Employees may quit when compensation levels are not competitive resulting in
higher turnover. Therefore, one of the important objective of Compensation
Management is retaining the human capital or talent of the organization.

Reward Desired Behavior

Pay should reinforce desired behavior and act as incentive for those behaviors
to occur in future.

Control Cost

A rational compensation system helps the organization obtain and retain workers
at reasonable cost.

Comply with Legal Regulations

A sound wage and salary system considers the legal challenges imposed by the
government and ensures the employers compliance.

Facilitate Understanding

The Human Resource specialists, operating managers and employees should

easily understand the compensation management.

Further Administrative Efficiency

Wages and salary programs should be designed to be managed efficiently,
making optimal use of HRIS

Example: Human Resource Information System

Why compensation is important?

Total compensation serves the following major purposes:

1. It attracts potential job applicants.

In conjunction with the organization's recruitment and selection efforts,
the total compensation program can help assure that pay is sufficient to attract
the right people at the right time for the right job.

2. It retains good employees.

Unless the total compensation program is perceived as internally
equitable and externally competitive, good employees [e.g. those that the
organization wants to retain are likely to leave.
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3. It motivates employees.
Many employers seek to be productive and have a motivated work force.
Total compensation can help achieve this goal by tying rewards to performance
that is, by having an element of productivity incentive.

4. It administers pay within the law.

Organizations must be aware of the legal regulations relevant to total
compensation and avoid violating them in their pay programs.

5. It attains HR and strategic business plans.

An organization may want to create a rewarding and supportive climate,
or it may want to be an attractive place to work so that it can attract the best
applicants. Total compensation can assist these plans and also further other
organizational objectives such as rapid growth, survival, continuous
improvement, or innovation.

6. It gains a competitive edge.

Total compensation can be a significant cost of doing business.
Depending on the industry, labor costs range from 10 to 80 percent of total costs.
To gain a competitive advantage, an organization may choose to relocate to
areas where labor is cheaper or more interested in performance-based pay.

The basic concept of compensation administration

Employees perform tasks for employers and so companies pay employees
wages for the jobs they do.
Consequently, compensation is an exchange or a transaction, from employers
and employees benefit, where both parties receive something for giving something.
Compensation, however, involves much more than this simple transaction. From the
employer's perspective, compensation is an issue of both affordability and employee
motivation. Companies must consider what they can reasonably afford to pay their
employees and the ramifications of their decisions.
In addition, some employers and managers believe pay can influence employee
work ethic and behavior and hence link compensation to performance. Moreover,
social, economic, legal, and political forces also exert influence on compensation
management, making it a complicated yet important part of managing a business.
Principles of compensation

1. To be legal
It must get approval from the government or top management in the
organization.

2. To be adequate
Compensation must be sufficient so that needs of the employees are fulfilled
substantially.
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3. To be motivational
Compensation must increase the level of motivation and job satisfaction of the
employees.

4. To be equitable
Compensation policy should be declared in such a way so that no discrimination
can be observed.

5. To provide security
Employees must have guarantee of getting wages or compensation regularly.

6. To be cost benefit effective

The organization must make a balance between cost for giving compensation
and benefits to be accrued from the employees.

Components of Compensation

A typical compensation of an employee comprises the following components.

1. Financial Compensation
2. Non-Financial Compensation

1. Financial Compensation
It refers to financial benefits offered and provided to employees in return of the
service to the organization.

a. Basic Wages/Salaries

Basic wages/salaries refer to the cash component of the wage

structure based on which other elements of compensation may be
structured.
It is normally a fixed amount which is subject to changes based on annual
increments or subject to periodical pay hikes.

b. Dearness Allowance

The payment of dearness allowance facilities employees and

workers to face the price increase or inflation of prices of goods and
services consumed by him. The onslaught of price increase has a major
bearing on the living conditions of the labor.

c. Incentives

These are paid in addition to wages and salaries and are also
called payments by result.
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d. Bonus

The bonus can be paid in different ways.

It can be fixed percentage on the basic wage paid annually or in
proportion to the profitability.

e. Commissions

Commission to managers and employees may be based on the

sales revenue or profits of the company. It is always a fixed percentage
on the target achieved. For taxation purposes, commission is again a
taxable component of compensation.

2. Non- financial compensation

These benefits give psychological satisfaction to employees even when

financial benefits are not available. Such benefits are:

a. Recognition of merit through certificate etc.

b. Offering challenging job responsibilities
c. Promoting growth prospects
d. Comfortable working conditions
e. Competent supervision
f. Job sharing and flexi-time

Practice Exercise:

Instruction: Based on the reading above, write at least 1 example of each component
that you think it is the best thing we can give to our employees to encourage and
motivate them in doing their job? Give a brief explanation.

Ex. In Financial compensation- Bonus, it helps and encourage employees because they
can have received incentives if they can reach the quota therefore they will work hard
and become motivated enough to work.

1.
____________________________________________________________________
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____________________________________________________________________
____________________________________________________________________
____________________________________________________________________
____________________________________________________________________
____________________________________________________________________
____________________________________________________________________
____________________________________________________________________
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____________________________________________________________________
____________________________________________________________________
____________________________________________________________________
____________________________________________________________________
__________________________________________________________________.

2.__________________________________________________________________
____________________________________________________________________
____________________________________________________________________
____________________________________________________________________
____________________________________________________________________
____________________________________________________________________
____________________________________________________________________
____________________________________________________________________
____________________________________________________________________
____________________________________________________________________
____________________________________________________________________
____________________________________________________________________
__.
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Suggested time allotment: 1 hour

LESSON 1.4. Compensation programs

I. LEARNING OUTCOMES

 Pinpoint the basic component of compensation programs. (U)

 State the factors that can shape a company's pay structure in the new era. (AP)

II. INPUT

Basic component of compensation programs

A pay program may include the following four components:

a. base pay
b. wage and salary add-ons
c. incentive payments
d. benefits and services

a. Base pay refers to the cash that an employer pays for the work performed. This
base pay can be further delineated as either a wage or a salary.

b. Wages are hourly rates of pay regulated by the Fair Labor Standards Act of 1938.
This federal legislation formed the foundation of minimum wage, overtime pay, child
labor, gender equality, and record keeping requirements. Employees who are subject
to the Fair Labor Standards Act are known in compensation management parlance as
"nonexempt."

Salaries are usually paid to managers and professionals, are annual or monthly
calculations of pay that usually have less relation to hours worked. Most (but not all)
salaried workers are "exempt" from the Fair Labor Standards Act of 1938.

Wage and salary add-ons include cost-of-living adjustments (or COLAs),

overtime, holiday and other premium wages, travel and apparel expenses, and a host
of related forms of premiums and reimbursements.

Wage and salary add-ons are used to compensate employees for work above
and beyond their normal work schedules or to reimburse them for expenses related to
their jobs. COLAs are usually across-the-board contractual increases tied to an
economic indicator, such as the consumer price index, that reports an increase in the
cost of living.

c. Incentive payments refer to funds employees receive for meeting performance or

output goals as well as to seniority and merit pay. Companies provide these forms of
compensation to influence employee behavior, improve productivity, and reward
employees for their years of service or their strong job performance
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d. Benefits and services include paid time off, health insurance, deferred income such
as pension and profit sharing programs, company cars, fitness club memberships, child
care services, and tuition reimbursement. Social Security, workers' compensation, and
unemployment compensation are three legally required benefits. Since its initial
passage in 1935, the Social Security Act has been amended and expanded to protect
workers and their families from losses due to retirement, disability, and/or death.
Employers, employees, and the self-employed make contributions to the Social
Security fund over the course of their careers.

Benefits may also come in the form of protection programs, such as life and
health insurance and pensions and retirement plans. Group life insurance is one of the
most widely offered benefits because of its cost-effectiveness. Most employers
shoulder the premiums for employees (and sometimes retirees), but end coverage at
employee termination.

Pension and retirement plans include defined-benefit plans and defined-

contribution plans. As many as 80 percent of pension plan participants are the
beneficiaries of defined-benefit plans. In such a program, the employer promises a fixed
pension level, either in terms of a dollar amount or a percentage of earnings scaled to
seniority.

Read more about the topic at https://www.referenceforbusiness.com/Clo-Con/

Compensation-Administration.html#ixzz761Vn1UuC

Six primary but interrelated factors can shape a company's pay structure:

Social Customs
Beginning in the thirteenth century, employees began demanding a "just" wage.
This idea evolved into the current notion of a federally mandated minimum wage.
Hence, economic forces do not determine wages alone.

Economic Conditions
Demand for labor influences employee wages. Employers pay wages based on
the relative contributions employees make to production goals. In addition, supply and
demand for knowledge and skills helps determine wages.

Company Factors
Pay structures depend on the kind of technology a company has and on whether
a company uses pay as an incentive to motivate employees to improve job performance
and to accept more responsibilities.

Job Requirements
Some jobs may require greater skills, knowledge, or experience than others and
hence fetch a higher pay rate.
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Employee Knowledge and Skills

Likewise, employees bring different levels of skills and knowledge to companies
and hence they are qualified to work at different levels of a company hierarchy and
receive different rates of pay as a result.

Employee Acceptance
Employees expect fair pay rates and determine if they receive fair wages by
comparing their wages with their coworkers' and supervisors' rates of pay. If employees
consider their pay rates unfair, they may seek employment elsewhere, put forth little
effort in their jobs, or file lawsuits.

Read more about the topic at https://www.referenceforbusiness.com/Clo-Con/

Compensation-Administration.html#ixzz761Vn1UuC

Practice Exercise: (To be presented during online class)

Instruction: In a sentence, give your own summary of each given words:

1. Wage vs. salary

2. Wage and salary

3. Benefits and services

4. Company factors
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ASSESSMENT # 1
COMPENSATION ADMINISTRATION

Name:___________________________ Program/Year:____________________
Subject: HRM5 Student’s Contact Number:__________
Name of the Instructor: Mrs. Kriska Bea May U. Serentas

Instruction:
Answer the following questions. Use a separate sheet of paper for your
answer. Submit it through silid, messenger or in the school’s dropbox.

I. Essay
In your own words, summarize the history of compensation.
Based on your summary, Evaluate/rate 1-10 the improvement of
compensation by century and expound your answer.

II. Mini Case

In 2005, Starbucks was rated as 11th overall on the 2005 Fortune’s “Best
Places to Work” list and was number two among large companies on the
same list. Retailing analysts believe that Starbucks’ competitive advantages
are based on the firm’s superior training programs, employee stock option
programs, and health and benefits packages (even for part-time employees),
as well as the superiority of its coffee blends. Starbucks’ executives also
proclaim that its employees or “partners” have had a major impact on the
positive in-store experience provided to customers.
Questions:
o Aside from the above mentioned advantages, what else can you suggest other
programs in order for the employees to be more motivated to work? Enumerate
and justify.
o If you were the owner, what can you add for the benefits of the company to become
more competitive? Explain your answer.
 18

UNIT Suggested time allotment: 3 hours

2
TOTAL COMPENSATION

TARGET GOALS FOR THE UNIT

o Summarize the important role played by the different rewards in the company’s
operation. (E)
o Compare and contrast Extrinsic Rewards from intrinsic rewards and Financial from
non-financial rewards in total compensation which is used by the business
industries. (An)
o Apply different types of rewards on a certain organization. (Ap)

VALUES DESIRED: Commitment, Loyalty and Faithfulness

LESSON 2.1. Total Compensation and Types of Compensation

I. LEARNING OUTCOMES

 Define Total Compensation. (R)

 Distinguish the different types of rewards. (AN)
 Identify the different components of Total Compensation. (R)
 Discuss the importance of total compensation. (U)
 Differentiate salary from total compensation. (U)

II. INPUT

Total Compensation involves the assessment of employee contributions in

order to distribute fairly and equitable both direct and indirect organizational rewards in
exchange for these contributions. As Figure 1.1 shows, total compensation is
distinguished between monetary and nonmonetary rewards. Monetary rewards may be
further categorized as direct or indirect compensation. Direct compensation includes
an employee's base salary and performance-based pay. Indirect
compensation consists of several benefits, accruing from various public and private
protection programs, health care benefits, paid leave, and lifecycle benefits.

Nonmonetary rewards can be very important to employees. Indeed, in Total

Quality Management environments task rewards such as greater autonomy and
responsibility, empowerment, praise and recognition for achievements are actually
considered to be more powerful than traditional, monetary rewards. Thus, many quality
organizations are indeed moving toward nonmonetary rewards which support
greater flexibility, team working, a customer and quality focus and improvement.
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Fig. 1.1 "Components of Total Compensation"

Note: For further understanding of this figure, the continuation of this topic Total
Compensation will be on the next lesson 2.2.

What is total compensation?

Total compensation is the collective compensation you provide to your

employees in return for their services. It includes the employee's base salary (how
much you pay the employee as either the hourly rate or their annual salary), the total
dollar amount of the fringe benefits you offer (health insurance, paid time off, retirement
plan, profit sharing, gym membership, etc.), bonuses and/or commissions.

Employers can show employees (or potential employees) the total value of the
compensation and benefits they receive by supplying them with a total compensation
document.

What are the differences between salary and total compensation?

Salary is the fixed sum employees are paid each pay period.
 20

Total compensation encompasses the base salary the employee receives plus other
monetized benefits, such as paid time off and health insurance. In other words, salary
is one element of an employee's total compensation.

One reason why a company may review one's total compensation, as opposed
to salary alone, is that any useful budget needs to reflect the cumulative costs of each
employee.

Why is total compensation important?

Total compensation, and having an effective compensation management

program, is important to winning and retaining talent within your industry. Employees
are looking for, and expect to find, compensation packages that are comprehensive
and meaningful to them.

If company doesn't offer a good benefits package, candidates may spurn your
job offer for one from a company that is extending the benefits they want. And for your
existing employees, they may leave for another job offering better benefits than what
you offer.

Total compensation helps employers attract top talent and grasp the full related
costs of each full-time employee.
Total compensation is an incredibly effective tool to utilize when attracting top
talent and when informing team members about the value they receive in the form of
benefits from your company. Understanding what total compensation is and how it
works is essential to winning and retaining top talent. Additionally, it helps companies
more completely assess the total cost of a hire so they can budget accordingly.

Practice Exercise:
Instruction:
Complete the matrix with an appropriate information.

Questions

Why is total compensation important?

As an HR, how useful total compensation

to our employees?
 21

How can we say that salary id different

from total compensation?

How can we say that total compensation

can motivate our employees?

Is it helpful to lessen turnover rate if we

have total compensation? Elaborate your
answer
 22

Suggested time allotment: 1 hour

LESSON 2.2. Rewards management

I. LEARNING OUTCOMES

 Define Rewards management. (R)

 Apply philosophy of rewards management in this new generation. (AP)
 Discuss the benefits. (U)

II. INPUT

Reward management

It is concerned with the strategies, policies and processes required to ensure

that the value of people and the contribution they make to achieve organizational,
departmental and team goals is recognized and rewarded. (Armstrong, 2010).

Reward management is concerned with the formulation and implementation of

strategies and policies in order to reward people fairly, equitably and consistently in
accordance with their value to the organization. It deals with the development of reward
strategies and the design, implementation and maintenance of reward systems reward
processes, practices and procedures which aim to meet the needs of both the
organization and its stakeholders. Reward can be regarded as the fundamental
expression of the employment relationship.

The philosophy of reward management

Reward management is based on a well-articulated philosophy – a set of beliefs

and guiding principles that are consistent with the values of the organization and help
to enact them. These include beliefs in the need to achieve fairness, equity, consistency
and transparency in operating the reward system. The philosophy recognizes that if
HRM is about investing in human capital from which a reasonable return is required,
then it is proper to reward people differentially according to their contribution.

Example: the return on investment

The philosophy of reward management recognizes that it must be strategic in

the sense that it addresses longer-term issues relating to how people should be valued
for what they do and what they achieve. Reward strategies and the processes that are
required to implement them have to flow from the business strategy.
The philosophy will be affected by the business and HR strategies of the
organization, the signifi cance attached to reward matters by top management and the
internal and external environment of the organization. The external environment
includes the levels of pay in the labour
market (market rates) and it is helpful to be aware of the economic theories that
explain how
 23

these levels are determined as summarized in Table 3.1.

Table 3.1 Theories explaining pay levels

Reward management adopts a total reward approach which emphasizes the

importance of considering all aspects of reward as a coherent whole which is integrated
with other HR initiatives designed to achieve the motivation, commitment, engagement
and development of employees. This requires the integration of reward strategies with
other human resource management (HRM) strategies, especially those concerning
human resource development. Reward management is an integral part of an HRM
approach to managing people (Continuation of the topic will be discuss at Unit 3).
 24

Fig. 1.2 Types of Rewards

Extrinsic rewards
 These are direct/indirect financial and non-financial rewards that are external to
the job and come from outside source mainly management.
 It is related with job context.
 It focuses on optimum use of human resource, maximize productivity and
achieve predetermined objectives.

Examples are:
Pay, Fringe benefits, Job security, Good working environment, supportive
supervision, status, promotion, recognition and praise
Intrinsic rewards
 These are the personal satisfactions of employees derived directly from their
jobs.
 It is related with job content.
 It focuses on job satisfaction high level of motivation of employees.

Examples are:

Achievement, involvement, independency, participation, self-responsibility,

facing challenges, self-development and work itself.

Financial rewards
 These are monetary rewards in order to enhance employee’s financial well-
being.
 They are tangible and fulfill financial need of employees.

Examples are:

Pay, allowances fringe benefits, bonus, profit sharing, piece rate system,
retirement benefits, prizes and awards
 25

Non-financial rewards
 These are non-monetary incentive created to add attraction to life on the job.
 They are intangible and fulfil psychological need of employees.

Examples are:

Achievements, recognition, appreciation, respect, praise, affiliation,

independency and participation.

Aims of reward management

Ghoshal and Bartlett (1995) said that the overall aim of reward management
should be to ‘add value to people’. It is not just about attaching value to them.

the aims are the following:

 support the achievement of business goals through high performance;
 develop and support the organization’s culture;
 define what is important in terms of behaviors and outcomes;
 reward people according to the value they create;
 reward people according to what the organization values;
 align reward practices with employee needs;
 help to attract and retain the high-quality people the organization needs;
 win the engagement of people.

The benefits of a reward management approach are:

• Greater impact – the combined effect of the different types of rewards will make a
deeper and longer-lasting impact on the motivation and commitment of people.

• Enhancing the employment relationship – the employment relationship created by

a total rewards approach makes the maximum use of relational as well as transactional
rewards and will therefore appeal more to individuals.

• Flexibility to meet individual needs –Relational rewards may bind individuals more
strongly to the organization because they can answer those special individual needs.

• Talent management – relational rewards help to deliver a positive psychological

contract and this can serve as a differentiator in the recruitment market which is much
more difficult to replicate than individual pay practices. The organization can become
an employer of choice and a great place to work thus attracting and retaining the
talented people it needs.

Learn more about the topic at

https://nscpolteksby.ac.id/ebook/files/Ebook/Business%20Administration/ARM
STRONGS%20HANDBOOK%20OF%20HUMAN%20RESOURCE%20MANA
GEMENT%20PRACTICE/46%20-%20Reward%20Management.pdf
 26

Practice Exercise (To be presented during online class)

A. Define the following terms:

1. Fringe Benefits

2. Job Security

3. Reward Management

4. Profit Sharing

5. Total Compensation
 27

Suggested time allotment: 2 hours

LESSON 2.3. Compensation Plan

I. LEARNING OUTCOMES

 Define Compensation Plan. (R)

 Apply the concept of Total compensation. (AP)

II. INPUT

The Compensation Plan

The Compensation Plan (CP) under RA No. 6758 is an orderly scheme for
determining rates of compensation of government personnel. It was crafted to attract,
motivate and retain good and qualified people to accomplish the Philippine
Government’s mission and mandates, to encourage personal and career growth, and
to reward good performance and length of service. To achieve these goals, the CP has
a mix of compensation components, namely; basic pay or salaries, fringe benefits,
incentives and non-financial rewards which provide reasonable levels of compensation
packages within existing government resources, and are administered equitably and
fairly.

What is Compensation plan?

A plan of how to compensate employees for their work efforts, is one of the most
common concepts in the professional world. Compensation plans design a number of
payment schemes: wages associated with the amount of hours spent at work, wages
gained from productivity while working, health benefits, bonuses, and even a cafeteria
plan. A compensation plan, explained as the motivational factor which makes
employees show up to work, is the most central concept in the study of human
resources.
Concepts of compensation plan

 Total Compensation – This represents all financial and nonfinancial rewards

and entitlements arising from employment relationship.
 Intrinsic Rewards - These are derived from the work environment, which are
valued internally by an individual, like quality of work life, job satisfaction,
challenge, personal and professional growth opportunities, feeling of belonging,
freedom to act, visionary leadership, and the like.
 Extrinsic Rewards/Entitlements – These comprise all compensation benefits,
both monetary and non-monetary, and received directly or indirectly by the
employee.
 Direct Compensation - These are cash compensation items which are either
fixed or variable and are paid to an employee for the performance of work. These
include basic pay, cash allowances and fringe benefits.
 Indirect Compensation - These are usually non-cash or in-kind benefit items
that contribute to the employee’s welfare, standard of living and personal
 28

development. These include protection programs such as insurances, paid

leaves, perquisites and training programs.
 Fixed Compensation – These are cash compensation items which are regularly
granted to all employees. Examples are: basic salaries, Personnel Economic
Relief Allowance (PERA), and Additional Compensation (ADCOM).
 Variable Compensation - These are cash compensation items which are
granted to employees based on certain qualifications or rendition of special
services. Examples are, hazard pay, honoraria, night-shift differential pay, and
overtime pay.
 Basic Pay - This is the primary cash compensation for work performed,
excluding any other payments, allowances and fringe benefits.
 Salary - This refers to the basic pay for work performed by an employee paid on
a monthly basis.
 Wage – This refers to the basic pay for work performed by an employee paid on
a daily or hourly basis.
 Fringe Benefits - These refer to cash compensation benefits given to an
employee to supplement the basic pay. These include cash allowances,
bonuses, premium payments, etc.

The chart on Figure 2.1 shows the Concept of Total Compensation and
what comprises it under the existing Compensation Plan of the Philippine
Government.
 29

Figure 2.2 The Concept of Total Compensation

Policy of the State

Section 2 of RA No. 6758 provides the compensation policy of the State, to wit:
"It is hereby declared the policy of the State to provide equal pay for substantially
equal work and to base differences in pay upon substantive differences in duties and
responsibilities, and qualification requirements of the positions. In determining rates of
pay, due regard shall be given to, among others, prevailing rates in the private sector
for comparable work.”

Read the full text at https://www.dbm.gov.ph/wp-content/uploads/2012/03/Manual-on-

PCC-Chapter-3.pdf
How to Create a Compensation Plan?
 30

1. Start from scratch.

Think about how many employees your business will need and what positions
are essential to your business operations. Write all of these job titles down.

2. Create a job description for each position.

You should have full job descriptions for every position in your company. You
can get ideas for job descriptions by researching your competitors, or you can use one
of our job description templates.

3. Determine the appropriate amount of compensation.

While you are researching your competitors, pay attention to how much
compensation they are offering for the various positions you need to fill and what special
incentives are common. This will give you an idea of what you need to offer to attract
the best talent. Be sure to look into OTE or on-target earnings.

4. Factor in overtime.
Maybe some of your employees will have to work overtime, or maybe they won't.
If they do, add this into your compensation budget, because overtime costs more and
could affect your bottom line.

5. Identify the benefits and incentives that you will provide.

Popular benefits include things like basic health insurance, vision care, and
dental care. Some employers also offer things like gym memberships, technology
stipends, and so forth. Figure out what benefits you can afford. You may want to look
into voluntary benefits as an affordable option.

As far as incentives go, think about what incentives will motivate your workforce
and fit into your budget. It is common for sales compensation plans to have incentives
for meeting sales targets, such as bonus payments or increased commission payment
rates.

6. Detail your decisions in a document.

After you have determined the compensation for each position, how much it will
increase, what incentives and benefits you will offer, etc., you can put all of these details
down in one document. By having all of this information in one document, you can share
your compensation plan with your employees when they are hired.
 31

ASSESSMENT # 2
Total Compensation

Name: Program/Yr. Level:

Subject: Contact No:
Instructor: Kriska Bea May U. Serentas Date:

Instruction:
Answer the following questions. Use a separate sheet of paper for your answer.
Submit it through silid, messenger or in the school’s dropbox.

A.
1. Search recent online article about an organization that uses rewards.
2. Based on your online research about the organizations strategy on their rewards.
Enumerate all their rewards to their employees. What can you say about the
company’s strategy?
3. To improve the satisfaction of the employees of a certain company, suggest your
own idea on how to make the company more successful to maintain/retain
employees.

4. Use the table for your answer.

Types of Business

List of Rewards What can you say about the rewards?

Suggestion to improve the company’s reward system.

B. Compare and contrast the following types of rewards:

1. Extrinsic Rewards and intrinsic rewards (20pts)

2. Financial and non-financial rewards(20pts)

C. Essay (5pts)
Assume that 10 years from now you are the employer of a certain organization,
which of the different types of rewards do you like to use in your company? Expound
your answer.
 32

UNIT Suggested time allotment: 1 hour

3 REWARDS MANAGEMENT

TARGET GOALS:
 Create a table completion based on the given information. (C)
 Create a graphic organizer that based on the given topic. (C)

DESIRED VALUES: Loyalty, Motivation, Satisfaction and Trust

LESSON 3.1. REWARDS MANAGEMENT

I. LEARNING OUTCOMES

 Define rewards management. (R)

 Analyze the different strategies to achieve the objectives of rewards
management. (An)
 Distinguish reasons why reward management is important. (U)

II. INPUT

What is reward management?

Reward management is a motivational practice that businesses use to reward

employees for their achievements and success. In managerial term, the reward is
defined as the total return given by an employer to an employee for rendering his/her
services towards the organizational objectives. The company sets goals and
establishes rules for its employees to follow to achieve those goals. This is the overall
return from the work. Every person asks for return from the organization before
involving in any type of activities, which is termed as the reward. It attracts a worker’s
attention and inspires him/her to perform the task. Moreover, a reward is a pay-off for
performance which is directly concerned with the level of motivation and job
satisfaction.

The Objectives of Reward Management

The objectives of reward management are stated as follows: (Armstrong, 2007).

1. Reward individuals in accordance to the value they create.
2. Align reward practices with business goals and with employee values and
needs.
3. Reward the right things to convey the right message regarding what is
important in terms of behaviors and outcomes.
4. Help to attract and retain high-quality individuals, taking into consideration the
goals and objectives of the organization.
 33

5. Motivate individuals and obtain their participation and commitment.

6. Develop a high-performance culture.

Strategies to Achieve the Objectives

The aims of reward management are achieved by developing and implementing

various kinds of strategies, policies, practices and procedures that are founded on the
philosophy, operate in accordance to the principles of distributive and natural justice,
function justly, equitably, consistently and transparently, are aligned to the business
strategy, and are in accordance to the context and culture of the organization
(Armstrong, 2007).

These are the following:

Reward Philosophy

Reward management is based on the well-articulated philosophy. It is the set of

beliefs and guiding principles that are consistent with the values of the organization and
help to enact them. Philosophy recognizes that human resource management is about
making investments in human capital from which a reasonable return is required. It is
vital to reward the individuals in a different manner in accordance to their contribution
towards the organization. The philosophy of reward management also recognizes that
it must be strategic in the sense that it addresses longer term issues in terms of how
the individuals should be valued for their achievements.

Distributive Justice

Distributive justice refers to how rewards are given to the individuals. When the
workforce is rewarded for the conduct, performance, completion of targets and
implementation of job duties, they form the viewpoint that their hard work and efforts
have been recognized. This in turn would motivate them to perform their job duties in a
well-organized manner and meet the desired expectations. They believe that rewards
have been distributed in accordance to the value of their contribution. They have
received what was promised to them. This is apparent that employees aspire to get
rewarded for their hard work. Therefore, rewarding them would lead to the feelings of
job satisfaction.

Procedural Justice

Procedural justice refers to the ways in which the managerial decisions are made
and reward policies are put into operation. When the employees are to be rewarded, it
is apparent that various factors need to be taken into account. These include, job duties,
activities, attendance and so forth. On the basis of these factors, decisions are made.
The factors that are taken into account in the case of procedural justice are, viewpoints
of the employees are given recognition, personal bias towards employees is
suppressed, criteria for decisions is applied to all the employees, employees are
 34

provided with early feedback in terms of outcomes of decisions and employees are also
provided with adequate explanations regarding why decisions have been made.

Fairness

A fair reward system is the one that operates in accordance with the principles
of distributive and procedural justice. The assumptions underpinning the theory are
that, there is an unrecognized standard of fair payment for any level of work,
unconscious knowledge of the standard is shared among the population at work, pay
need to be in accordance to the level of work and the capacity of the individual to get
engaged into it and individuals should not receive less pay. The pay and
reimbursements have to be in accordance to the job duties. This felt-fair principle is
passed into the common language of those involved in reward management. In some
cases, it is used as the final arbitrator regarding how job should be graded, possibly
overriding the conclusions reached by an analytical job evaluation.

Equity

Equity is achieved when the individuals are rewarded in an appropriate manner.

Equity in rewards is regarded as one of the important aspects in generation of interest
and enthusiasm among individuals towards the implementation of job duties. Both men
and women need to be given equal pay for the same job duties performed. Furthermore,
there should not be any kind of discrimination on the basis of caste, creed, race,
ethnicity, religion, and socio-economic background. Equitable reward processes
ensure that relativities between jobs are measured as objectively as possible. Equal
pay is given for the work of equal value.

Consistency

A consistent approach to reward management is referred to when decisions are

made in terms of giving of rewards, they do not vary arbitrarily, without due cause
between different people or at different times. They do not deviate irrationally from what
would be regarded as fair and equitable. In giving of rewards, the organization also has
to take into consideration financial resources. When they possess sufficient finances,
they will be able to give rewards. Whereas, when they possess limited financial
resources, they have to plan rewards accordingly. Therefore, consistency and
uniformity are important factors that need to be taken into consideration in giving of
rewards.

Transparency

Transparency takes place when the members of the organization acquire an

efficient understanding in terms of how the processes of rewards are put into operation
and how they are affected by them. The reasons for pay decisions are made at the time
they are made. In transparency, the employees are also provided with the rights to
participate in the decision-making processes regarding development of reward policies
and practices. When the employees are provided with these rights, they develop
 35

motivation towards the performance of job duties and achievement of organizational

goals.

Strategic Alignment

The strategic alignment of reward practices ensures that reward initiatives are
planned with reference to the requirements of the business strategy. The formulation
of measures and strategies has to be in accordance to the organizational goals. When
the organizations are rewarding their employees, it is vital to take into account certain
factors, these include, organizational goals, number of employees, infrastructure,
materials, technologies and equipment, laws and policies, job duties of all individuals
and overall working environmental conditions. These factors need to be taken into
consideration, when not only formulation of reward policies but also ensuring strategic
alignment of reward practices.

Contextual and Culture Fit

The design of reward processes should be governed by the framework, i.e.

characteristics of the organization, business strategy, type of employees and
organizational culture. When it is stated type of employees, it is referred to the
employees engaged in various job positions. Whereas, organizational culture is
referred to values, norms, principles and standards. Worthwhile practices need to be
taken into consideration. Best fit is considered more important as compared to the best
practice. Therefore, it can be stated that cultures, norms and values of the organization
need to be taken into consideration, when giving rewards and formulating reward
practices.

Fit for Purpose

The formulation of reward strategy and design of the reward system have to be
in accordance to the objectives of reward management. The members of the
organization need to work in collaboration and integration in order to ensure reward
strategy and reward systems are in accordance to the aims of reward management.

Developing a High-Performance Culture

A high-performance culture is the one in which the individuals are aware of the
requirements to perform well and implement appropriate conduct in order to meet the
expectations. Employees will be engaged in work and will be wholeheartedly dedicated
towards the achievement of organizational goals. This kind of culture takes into
consideration various interrelated processes that would enable the individuals to work
in collaboration. In the high-performance culture, the individuals are well-aware in terms
of job duties and organizational goals, they are working towards the development of
knowledge, competencies and abilities, particularly the ones, necessary to carry out
their job duties satisfactorily, and managers and supervisors act as supportive leaders,
guides and mentors. They provide feedback and render a significant contribution in the
achievement of desired goals. In this culture, there is a climate of trust and teamwork,
 36

which would enable the individuals to carry out their job duties in a well-organized
manner. Therefore, it can be stated that when the members put into operation these
factors, they will be able to form a high-performance culture.

Reward management is important for the following reasons:

 Retains employees
 Attracts new employees
 Avoids the cost of hiring and training new employees
 Builds loyalty and honesty
 Creates a healthy work environment
 Encourages positive attitudes and behavior
 Makes employees more likely to seek advancement

Tips: The main aim of reward management in a business organization is to reward the
employees fairly for the work that they have completed. The main reason reward
management exists in business organizations is to motivate the employees in that
particular organization to work hard and try their best to achieve the goals which are
set out by the business. Reward management in business organizations not only
consist of financial rewards such as pay but they also consist of non-financial rewards
such as employee recognition, employee training/development and increased
responsibilities.

Practice exercise:

1. In your own understanding, what is reward management?

2. Choose 2 objectives above, and explain based on our discussion?

 37

Suggested time allotment: 1 hour

LESSON 3.2. COMPENSATION MANAGEMENT

I. LEARNING OUTCOMES

 Define rewards management. (R)

 Analyze the different improvements of compensation in the 90’s and 20’s
centuries. (An)

II. INPUT

What is compensation management?

It is an act of distributing some type of monetary value to an employee for their

work by means of the company’s policy or procedures.

Simply put, it is the paycheck plus any benefits that come with the position. A
great pay package is a serious incentive to not only take a job, but to excel at it.

What does compensation management have to do with Human Resources?

The success of the HR Department in any company relies heavily on positive

employee engagement. HR is responsible for hiring, firing, payroll and benefits. These
five matters impact employees more than anything else. Above all, there is perhaps
nothing more motivating for employees, than compensation. It recognizes them and
reinforces positive feedback through tangible pay raises and perks.

Benefits of compensation management

Compensation management helps ensure that the salaries offered are

competitive. If all the data collected tallies with market trends, hiring managers can
make an offer to a prospective candidate without low-balling or being too generous.

Employees may find out what their co-workers earn either online or through word
of mouth, so it’s important to keep all compensation management practices fair and in
line with the market rate. HR can calculate salary increases and bonuses this way too.
However, there are critical arguments that denounce basing an employee’s future worth
on past performance.

Overall, if your compensation management system is correctly projecting

salaries, increases, bonuses, discounts and other perks, then employee retention will
stay steady. Happy employees stay put.
 38

Employee benefits and compensation management

Benefits play a major role whether a candidate accepts or passes on a job offer.
Employers should consider using employee benefits as part of their compensation
management program.

While healthcare differs greatly from country to country, making benefits part of
your compensation management plan can help employees stay healthy. The software
you invest in should help you keep up-to-date with wellness incentives in the workforce.

Whatever benefits you offer your employees, these can be tracked and
compared to the market within a compensation management system. Since benefits
play such a huge role in employee well-being, it’s vital for them to make a positive
impact.

Compensation management software can also help to encourage employees to

take part in wellness programs, which has the potential to lower healthcare costs all
around.

Compensation management and payroll

There is a huge difference between compensation management and payroll.

Payroll is the preparation of worksheets and checks which will subtract income taxes
and other deductions. It can also be used to keep track of salaries, payouts, wages and
budgeting within a company and is a huge cost to most companies. Having accurate
records are a must.

Compensation, on the other hand, refers to all pay types (salary included) and benefits
that are provided to an employee by an employer. Life insurance, disability insurance,
health and dental, and retirement funds are all part of compensation.

Most employers cover a portion of health insurance premiums, and help

employees build their retirement fund. These are two great ways to boost employee
retention.

Compensation management matters

The size of your business might not matter, but your approach to compensation
management does. Smart compensation policies are proven to help businesses
expand. This is because they help with the acquisition and retention of high-quality
motivated employees.

In fact, compensation management is one of the most effective ways to keep

employees happy and focused on achieving personal and business goals. Employers
of any size should want to keep and maintain this goal-oriented attitude from
employees.
 39

Read more about the topic at https://corehr.wordpress.com/

compensation/reward-management/

Compensation management ensures that employees get paid a fair salary based
on:

 Work performance
 Position
 Responsibilities
 Experience
 Job market
 Company budget

Why should HR leaders care about compensation management?

Effective compensation management benefits both the employer and the

employee. Employees who receive a fair base salary, generous benefits, and incentives
in return for their work are much more likely to stay at their job, maintain a high work
performance, and morale.

Effective compensation management fuels employee engagement and thereby

leads to company success.

What can HR leaders do to ensure effective compensation management?

HR leaders can guide compensation management towards building and

implementing successful compensation plans.

These are the following methods:

Develop and apply a compensation philosophy.

A compensation philosophy formally documents the company policies regarding

employee salaries, bonuses, and benefits, as well as shows and transparency.
Consistently adhering to a compensation philosophy demonstrates company integrity
to employees and job candidates.

Explain the compensation plan.

HR can clarify the components of the compensation plan to candidates and new
employees, helping to attract top-notch candidates and retain employees.
 40

Design a robust compensation strategy.

HR leaders can collaborate with managers and specialists to offer all-inclusive

compensation plans as well as generous benefits to improve employees’ quality of life.
Assess the results. It’s always helpful to learn from experience. HR leaders can analyze
the results of compensation management to see what is working, and what isn’t through
a compensation scorecard, which can improve the efficacy of compensation
management.

Read more about the topic at

https://www.assignmentpoint.com/business/management/concept-
of-reward-management.html

Compensation management is important in every company.

Compensation management is vital for employee motivation. Employees who

are recognized for the value they bring are more likely to be motivated, loyal and higher
performing than those who’re not.

There are different ways that management and HR department can

communicate appreciation. It’s important than compensation management policies are
in place. Policies that make it clear exactly what the employee is receiving in total
reward.

Importance of Compensation Management

A good compensation is a must for every business organization, as it gives an

employee a reason to stick to the company.

An organization gains from a structured compensation management in the

following:

 It tries to give proper refund to the employees for their contributions to the
organization.

 It discovers a positive control on the efficiency of employees and motivates them

to perform better and achieve the specific standards.

 It creates a base for happiness and satisfaction of the workforce that limits the
labor turnover and confers a stable organization.

 It enhances the job evaluation process, which in return helps in setting up more
realistic and achievable standards.
 41

 It is designed to abide with the various labor acts and thus does not result in
conflicts between the employee union and the management. This creates a
peaceful relationship between the employer and the employees.

 It excites an environment of morale, efficiency and cooperation among the

workers and ensures satisfaction to the workers.

In short, we can say that compensation management is required as it encourages

the employees to perform better and show their excellence as well as provides growth
and development options to the deserving employees.

Practice Exercise:

1. What is compensation management?

2. How important compensation management in the organization?

3. Is it necessary to have compensation management?

 42

Suggested time allotment: 1 hour

LESSON 3.3. BENEFITS, PERKS AND REWARDS

I. LEARNING OUTCOMES

 Differentiate benefits from perks from rewards. (U)

 Describe the rewards management policies. (R)
 Adapt the types of rewards in the workplace. (Ap)

II. INPUT

Reward management policies are also responsible for analyzing and managing
compensation, remuneration, and other benefits of the employees. The reward
structure in an organization may include-

 Pay policy and practices

 Executive pay and team reward
 Salary and payroll administration
 Minimum wage
 Total reward, etc.

Till now, you must have understood what reward management is, but there can be
confusion in differentiating benefits, perks, and rewards.

Are benefits, perks, and rewards the same in Reward Management?

Often, we think of reward management; we are confused between benefits,

perks, and rewards, as all of them seem identical. Let’s clear our doubts and understand
the thin line between them

1. Rewards

Rewards are more about incentives to your employee’s work. It’s just to motivate
them towards the work and promote productivity. To encourage more quality work, you
offer them rewards.

2. Benefits
Benefits are most often not built into one’s salary
For example: health insurance offered by the company.

3. Perks
Perks act as a kind of treat to the employees. It is offered to make their work-life
more enjoyable and stable. This could be anything like – Chill Fridays, less-stressful
 43

Mondays, and so on. Some organizations also provide their employees with other perks
like the subscription to the fitness center and so on.

So, these are the significant difference between perks, benefits, and rewards. It would
be easier for you to distinguish between the three.

Types of rewards in the workplace

Compensation for your employees can come in different shapes and sizes. They’re
either:
1. Performance-based.
2. Membership-based.

It can be an acknowledgement in the company newsletter or a bonus at the end of

the month. It could be a promotion or an exclusive parking spot. Whatever you decide
upon, it needs to be fair and consistent among all employees.

What are performance-based rewards?

As the name suggests, the ability of individual staff members is the basis for this
type of compensation.

You hold a performance appraisal where you review an employee's work and
conduct in the office over a period of time.

What are membership-based rewards?

Irrespective of individual efforts, staff members may receive a bonus based on
the performance of the whole company.

Employee performance and compensation

Compensation of any kind plays a huge role in motivating your staff. As with
most people, we’re more willing to undertake a task when there’s a possibility of a prize
after.

Following successful appraisals, you may want to offer benefits based on the
organization or on an individual employee's performance.

Examples of performance-based reward

Pay: As an employer, you may review and increase a staff member’s salary based on
their abilities and achievements. All information on the salary review process should be
available in your employee handbook.

Bonuses: Creating a company bonus system allows you to issue out bonuses fairly
among all staff members.

Events: Offer training opportunities or social occasions for your workforce to enjoy.
 44

Promotion: Offer promotions to staff that have gone above and beyond. Promoting from
within motivates other staff members as it shows that there are career opportunities for
them as well.

Advantages of reward management

Increased employee productivity: Your staff is likely to be more engaged,
motivated and productive. When you acknowledge good work, they also have the
incentive to work harder still.

Loyalty: It can be difficult to instill loyalty in your employees. Offering bonuses

and other prizes as a way of recognizing their accomplishments not only builds trust, it
also increases engagement with the business.

Job satisfaction: Staff members feel more satisfaction in their job when they
know it contributes to the success of your organization. Recognizing their efforts after
major projects makes them feel valued.

Increased retention rates: Investing in a rewards program for your employees

also allows for a low rate of staff turnover. A high turnover of staff can lead to poor
morale, which in turn may lead to them looking for alternative employment.

Read more about the topic at https://croner.co.uk/resources/pay-

benefits/employee-incentives/

Practice exercise:

Fill in the box.

Definition
Rewards

Perks

Benefits
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Suggested time allotment: 1 hour

LESSON 3.4. REWARD SYSTEM

I. LEARNING OUTCOMES

 Define Reward system. (R)

 Describe the purpose of reward system. (R)
 Discuss the reasons why a reward system is important. (U)

II. INPUT

Reward system puts together the real self-interests with the organization’s
objectives and gives three kinds of management control benefits, informational,
motivational and personnel related.

Purpose of Reward System

The main purpose of reward system is to augment job performance, retain

valuable employees and lead to overall development of the organization. Reward
system puts together the real self-interests with the organization’s objectives and gives
three kinds of management control benefits, informational, motivational and personnel
related. The rewards need to catch the attention of the employees. In other words, when
the employers are providing them with rewards, they need to ensure, they prove to be
beneficial to the employees. Organizations make use of the reward system to put
emphasis upon the parameters, which would stimulate the mind-sets of the employees.
In some cases, individuals need incentives to perform their tasks in a well-organized
manner (Anku, Amewugah & Glover, 2018). Research has indicated that financial
rewards and incentives are regarded to be the most beneficial. As financial resources
are regarded to be the most important in the achievement of various goals as well as
in the adequate sustenance of the living conditions. Apart from financial rewards, there
are other rewards as well, which include, trophies, certificates, other non-monetary
items and so forth, which motivate the human resources towards the performance of
job duties in an effective manner.

Organizations make provision of rewards for number of reasons. The main

purpose of giving rewards is to enhance recruitment and retention of employees,
arouse interest and enthusiasm among them and stimulate their mind-sets towards the
achievement of personal and professional goals and lead to improvements in
productivity and profitability. Reward systems refer essentially to the aspects that
employee value. In other words, apart from obtaining their salaries, when they are given
 46

additional rewards as well for their job duties, they develop motivation. It is vital to
remember that a reward system can comprise of both positive as well as negative
rewards. Positive rewards include, incentives, bonuses, power, autonomy, promotional
opportunities, paid leaves, paid vacations and so forth. Whereas, negative rewards are
referred to as punishments. These include, no increase in salaries, no promotional
opportunities, not any type of guidance and direction obtained from superiors and so
forth. The human resources need to conduct themselves in such a manner so any form
of negative rewards are avoided.

Reasons why a reward system is important:

Mutually beneficial

A reward system is beneficial not only to the employee but also to the
organization. The employee will feel more motivated to work harder by having a reward
system in place the employee will feel more committed to their work and their
productivity will increase. An increase in productivity will then benefit the organization.
Therefore, a reward system is mutually beneficial to the employee and the organization.

Motivation

A reward system will motivate employees by reaching targets and organizational

goals in exchange for rewards. A reward system is great at motivating employees but
they will also be motivated to prove themselves to the organization.

Absenteeism

A reward system will reduce absenteeism in the organization. Employees like

being rewarded for a job well done and if there is a reward system in place, employees
will be less likely to be ringing in sick and not showing up for work. Also by having a
reward system in place the employees will be clearer about the targets and goals of the
organization as they will be rewarded when reach certain targets. So by having a reward
system as an incentive they will be less likely to be absent from work.

Loyalty

A reward system will increase the employee’s loyalty to the organization. By a

reward system being in place the employee feels valued by the organization and knows
that their opinion matters. If an employee is happy with the reward system, they are
more likely to appreciate work place and remain loyal to the organization.

Morale

Having a reward system in place providing employees with incentives and

recognition will boost their morale. By encouraging employees to meet goals and
targets it gives them clear focus and purpose which will their morale. By the employees’
 47

morale being boosted this will increase the morale of the entire organization. This is all
down to a reward system in the organization.

Teamwork

The reward system will increase the teamwork spirit in the organization. The
reward system will promote teamwork to the employees. The employees will work
together as part of a team to achieve their targets in return for rewards. Teamwork
within the organization will help increase efficiency and create a happier workplace.
This is another reason why reward systems are important in business organizations.

Therefore, management of reward in an organization helps to motivate and

retain employees at work. It is a vital aspect of HRM because a well-designed reward
system will lead towards organizational productivity and employees’ satisfaction.
Moreover, reward management is the process of creating, implementing and controlling
an effective reward system in the organization that helps to maintain and improve
organizational performance. It senses the strategic purposes of attracting, motivating
and retaining employees. Reward management basically focuses on how the
employees can be retained or motivated at work. All employees follow the same reward
system, and the system is organized and just. Using a website to track employee
development enables the employee and employer to monitor progress and easily
identify when goals are reached and rewards earned.

Hence, reward management is a crucial aspect of Human Resource

Management that revolves around designing and implementation of the appropriate
payment system. This system helps improve organizational performance and get
people motivated at work.

Practice Exercise:

1. What is the use of reward system?

2. How can we make a reward system?

3. Do you agree of the statement “reward management is a crucial aspect of Human

Resource Management”? Why?
 48

Assessment # 3
REWARDS MANAGEMENT

Name: _________________ Program and Year: _________

Subject : _________________ Contact Number: _________

I. Table Completion: Complete the table below with the information required
in each column. (5 points/ entry)

 Identify at least 6 examples that are considered as rewards and benefits in the
business industries.
 In each item, provide a short explanation to support your claim.

Rewards Explanation
1.

2.

3.

Benefits Explanation
1.

2.

3.
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II. Task: Follow the instructions outlined below

1. Choose only 1 among the types of rewards in the workplace, either performance
based or membership based which is presented in this lesson and discuss how it is
applied in the organization.

2. Cite one particular business here in the Philippines where your chosen type
of rewards is being followed/ is evident.

3. Discuss the type of reward you choose using your identified business.

4. Use any graphic organizer that can help you explain number 1 to 3.
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UNIT Suggested time allotment: 4 hours

4 Payroll Management

TARGET GOALS FOR THE UNIT

o Compare and contrast Manual payroll from automated payroll system using Venn
Diagram (An)
o Create a payroll system. (C)

VALUES DESIRED: Trust, Loyalty and Honesty

LESSON 1 Payroll

I. LEARNING OUTCOMES

 Define Payroll Management. (R)

 Discuss the functions of payroll. (U)
 Apply payroll mistakes to avoid. (Ap)
 Explore different methods of payroll management. (Ap)

II. INPUT

What is Payroll Management

Payroll is an important document that is used by organizations and companies

to perform day to day staff management activities. It is a document that contains a list
of all the employees of a company who receive remuneration of work carried out or
services offered to that company. It provides a summary of the entire money paid to
staff by a company within a specific time (Schmitt,2008).

A payroll provides the following functions:

 It contains a company’s remuneration strategy, which may include bonuses, leaves,

and deductions.
 It provides a detailed payslip, which can be used for various uses. It also provides a
detailed breakdown of salary or wage.
 It is used for paying salaries or wages.
 It is used to collate payroll-related inputs.
 It is used to determine actual remuneration.

For effective management of financial activities, a company of more than a staff

must possess a comprehensive payroll. The primary function of payroll is to assist a
company in timely payment of staff wages and salaries. It also helps with other essential
activities, such as income tax, unemployment tax, and social security.
 51

In most cases, having a payroll is mandated not only here in the Philippines but around
the world in which a company operates. Certain jurisdictions require that the company
must keep payrolls within a specific timeframe.

Payroll management is the administration and management of staff financial

reports, such as wages, salaries, deductions, bonuses, and other relevant financial
records. It also involves a continuous review and update of the payroll database to
ensure that the status quo is always captured with respect to the remuneration of staff.

10 Costly Payroll Management Mistakes to Avoid

According to Hariyanto (2010) there are probably dozens of errors and mistakes that
can and are made by the typical payroll department whether it is automated payroll or
manual payroll. This are the following:

1. Administrative Staff

Many businesses, especially smaller ones, still carry out their payroll process in-
house and manually. Often, the payroll staff is overworked. A manual payroll system
typically requires a great deal of paperwork and a manual process also creates an
administrative burden for your HR staff.

Example: Errors in data entry can create payment issues and the misapplication
of rules. Being understaffed leads to mistakes.

2. Payroll Documents

A common problem is one of simply keeping all of your important payroll and
employee records and information organized in an effective and accurate manner.
Sometimes it is simply a matter of work flow like not keeping files and documents in a
central location or creating uniform filing processes.

Example: A typical issue is storing and organizing paper checks.

3. Software and Payroll Setup

A troubling reality about technology is that not all payroll programs are
compatible.

Example: The program used for your employee profiles or records may be
different from the system you use for pay and benefits. For some companies this is
compounded with incompatible programs used for employee performance. Too often,
the systems for setting up a payroll process leads to mistakes and errors.
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4. Employee Absences

Having to manually track your employees' vacation and sick days is a task that
has great potential for mistakes. Using paper time cards and even simple digital time
sheets can cause a company to be prone to misuse and unintended errors. In addition
to the payroll, tracking which employees are not available due to various types of
absences is critical for effective planning and optimum productivity.

5. Payroll Deductions

For most businesses and payroll staff, processing employee payroll

deductions is probably one of the most complex parts of the payroll process. Because
of the sheer number of government laws that apply to deductions, it’s easy for smaller
businesses and HR departments to make errors. In addition to being a complex task, it
also one of the common areas for mistakes during payroll processing.

6. Overtime Rules

Government laws require most employers to pay employees overtime for hours
worked above the normal 40 hour work week. While the specific can differ depending
on the city, overtime generally consists of an additional 50 percent of the employee’s
typical hourly wage. However, because of the varying statutes and exceptions that
overtime laws provide for, this is a payroll process that is prone to mistakes.

7. Court Ordered Garnishments

Though not uncommon, the infrequent occurrence of court orders requiring

garnishments from employee's income means the potential for errors. In these
situations, the employer is required to fulfil the court’s terms for an income garnishment.
Failure to do so, or to do so properly, leaves the company subject to penalties.

8. Regulatory Compliance

As noted at the beginning of this lesson, payroll rules and regulations change.
Almost annually there are significant changes made to how payroll is processed. While
businesses typically strive to stay updated with regulatory changes that may occur, too
often the overwhelming amount of information leads to compliance gaps.

9. Employee Classification

Many small and big businesses make use of different types of workers. This can
include permanent part-time employees, temporary employees, seasonal, contractual
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and project based employees. This variety in worker types and classifications can often
lead to payroll issues.

It is critically important for a company’s workers be classified correctly for tax

purposes, since misclassification can result in not paying their owed taxes. Failure to
pay proper payroll taxes will likely lead in requiring the business to pay taxes on income
paid to employees as well as fines and penalties.

10. Payroll Tax Deposits and Payments

Businesses understand that tax deposits are to be made on the 15th day of the
month when taxes were withheld from employee paychecks. However, if payroll tax
deposits and payments are late, the Information Report System will charge you fines
and penalties. Typically these will be 0.5 percent of the tax amount due every month,
and possibly an additional 25 percent penalty for tax deposits that are exceptionally
late.

Payroll Management Process Stages

The process of payroll management requires careful and meticulous planning.

Continuous review and monitoring of changes to details relating to specific employees
concerning payments, deductions, and other financial payments. This payroll
management process consists of three distinct phases, which are before, during, and
after the payroll management activity.

1. Before payroll processing

Various factors are considered, which include bonuses, leaves, and other
benefits. The determination of these factors is based on the approval of the decision-
makers of the company. Payroll generated in small companies is affected by fewer
factors. With more prominent companies, the payrolls usually require software
applications that ease the entire process. In both cases, all data processed must abide
by company policy and procedure.

2. During payroll processing

Verified data is used. This stage involves calculations, taxes, bonuses, and
deductions. Validation and verification of all amounts are done to ensure accuracy and
avoid mistakes.

3. After payroll processing

All deductions are made here. The total funds budgeted on the payroll are
disbursed through the relevant payment channels.
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Methods of Payroll Management

There are three basic payroll methods which are the following:

a. Excel

This is the cheapest option for payroll management. Start-ups and smaller
companies mostly use this approach. This method involves developing a payroll
management template, which allows for calculations and the use of mathematical
formulae on Excel spreadsheets. The downside of this method is that it is challenging
to manage and prone to errors.

b. Outsourced

This is an option for companies that have the resources. A company contracts a
third-party payroll management service provider. For every cycle of payment, the
company compiles and sends out an updated payment schedule to the payroll
consultant for processing. The payroll consultant is responsible for reviewing and
updating all payments and deductions due to each employee. Although this option
simplifies the work of the company, however, the need for confidentiality may prevent
it from outsourcing its payroll management.

c. Payroll management software

This provides a simplified option for a company. There are several reliable
applications for payroll management to choose from. Such software applications
usually provide a template for the input of the employee details and relevant input
factors. The size and composition of the company determine the best type of payroll
software that is suitable for day to day operations.
 55

Practice Exercise:

1. Based on your own understanding, how payroll management is essential in

business?

2. Among the three (3) methods of payroll management, which do you prefer and
why?

3. Assume you are the Payroll in charge, how can you avoid mistakes in your
payroll work?
 56

Suggested time allotment: 2 hours

LESSON 4.2. Payroll Process

I. LEARNING OUTCOMES
 Discuss payroll process. (U)
 Explain payroll checklist.(U)
 Analyze the different between manual and automated payroll.( An)

Payroll processing, quite simply, is the payment of wages made to an employee

by an employer. For most organizations, payroll is its biggest expense. It is,
therefore, by far, the most important human resource management function (Nejad,
2012).

What Is Payroll Processing?

The payroll process broadly involves two steps. The first step is the preparation
of payroll inputs. The second step is generating payroll reports based on those
inputs. These reports are finally used to make salary payments. Processing payroll
is a complex activity and involves many factors. In most organizations, these factors
are usually documented as a checklist. The checklist serves as a guideline for
processing payroll.

Typical payroll checklist would include the following,

 The employee register must be current and up to date.

 All new hire documentation must be completed ahead of processing payroll.
 Impending employee exits must be tracked.
 Vacation time and sick leave must be accounted for.
 Salary changes and other payroll adjustments must be noted.
 Attendance and overtime data must be collected and approved by the
business heads.

All this information is then consolidated and used to determine the payroll inputs.
Salary adjustments, employee additions, and deletions are made based on the payroll
inputs. Government taxes and other statutory deductions are applied. The final amount
payable to each employee is determined. Full and Final Settlement Statements are
generated. These payroll reports are then verified and approved. Salary payments are
then made as per the reports.
 57

Payroll may be processed using the either the following:

Manual Payroll Process

A manual payroll process requires one to manage the entire payroll process
without using any systems. It depends entirely on human effort. It involves managing
the entire process by hand. This would even include monitoring attendance data and
calculating statutory deductions.

Automated Payroll Process

The automated payroll process, on the other hand, uses specialized payroll
software. This software can automate almost all the steps of the payroll process and
requires only minimal human intervention. Time-keeping systems can be used to track
attendance and overtime. They can be linked with the payroll software which can also
track leave requests. At the most, one might need to enter new hire information and
employee exit dates into the system. Automated payroll systems can typically take over
the rest. This could even include calculating tax and statutory deductions based on the
applicable region.
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Issues with Manual and Automated Payroll Processing

Manual payroll process requires a lot of human effort. There is increased scope
for errors and it is a far more time-consuming activity. Recruiting, training and managing
a team of skilled individuals is also a considerable expenditure.

An automated payroll process is also not without its challenges. It typically

involves a huge initial investment and a long-term commitment. Individuals in the
organization should be willing to step out of their comfort zone. They should be ready
to commit to a new system. More often than not, new systems are perceived to be
complicated and are met with resistance. Automated systems are standard and
impersonal, which may be problematic at times.

Benefits of Manual and Automated Payroll Processing

A manual payroll process can be ideal in a small organization with a limited

workforce. It can be personalized and tailored to fit the requirements of an organization.
It could be more flexible, unlike a rigid automated system. It is easier to adopt as it
requires a much lesser investment.

An automated payroll process, however, is an excellent option for larger

enterprises. It ensures efficiency and eliminates much of the effort. It requires much
less time and resources. It may be a considerable investment, but one can stand to
gain a lot from this investment in the long run. For larger organizations that have a huge
workforce and multiple offices across various regions, a manual process may be quite
impractical.
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Practice Exercise:

Advantages Disadvantages
Payroll

Manual Payroll

Automated payroll
 63

Suggested time allotment: 5 hours

LESSON 4.3. Payroll Computation

I. LEARNING OUTCOMES
 Discuss 3 stages of payroll. (U)
 Explain payroll checklist. (U)
 Compute how to make payroll. ( Ap)

II. Input

Figure 3.1 Stages payroll

The payroll process can be split into three stages as shown in figure 3.1. The
pre-payroll, actual payroll and post payroll activities.

PRE-PAYROLL ACTIVITIES

Defining policy: In these beginning stages, it is important to establish a company’s

policies such as a pay policy, leave and benefits policy and attendance policy.

Ensure that these policies are well defined and signed off by your company’s
management so that standard payroll processing can be established.

Gathering input data: Interacting with multiple departments and payroll is often an
integral part of the payroll process. These are the people who can give you more access
to important information like midyear salary revisions and attendance data.

The process might be more consolidated in smaller organizations and more

robust in larger companies. Gathering this data can be overwhelming but payroll
 64

software has integrated features like leave and attendance management and employee
self-service portals to make the job easier.

Input validation: The next step in the process is checking the validity of the input data
and whether it adheres to company policy. This is the time to make sure no active
employee has been missed and no inactive employee has been included in salary
payment.

ACTUAL PAYROLL PROCESS

Payroll calculation: This is the stage in the payroll process where input data is put into
the payroll system or manual based using excel to actually process the payroll. This
process results in net pay being generated after adjusting necessary taxes and
deductions.

After this process is complete, it is best practice to reconcile the values and verify
accuracy to avoid errors.

POST-PAYROLL PROCESS

Statutory compliance: At the time of processing all statutory deductions, the payroll
administrator then sends the amount to the appropriate government agencies.

The frequency of this process can vary depending on the dues. Most of these
fees can be made through specific forms set in place. After all the dues are paid, return
reports are filed.

Payroll accounting: It is important that every organization keep a record of all its
financial transactions for the payroll process.

According to Grande (2011) salaries are one of the most vital parts of operating
costs to be recorded in your book of accounts. Payroll management should always
ensure that all salary and reimbursement data is accurately entered into the company’s
accounting or ERP (Enterprise Resource Planning) system in HR department.

Payout: Salaries can be paid out by cash, check or bank transfer. Typically, employers
deposit salaries directly into an employee’s bank account.

Once payroll is processed, a company needs to ensure their bank account has
enough funds to make salary payments if it is send directly in the employees’ ATM card.

The next step is getting a salary bank advice statement to the company’s branch.
This statement includes details like employee id, bank account number and amount of
wages.
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Reporting: After you’ve completed payroll for a particular month, your finance
department or management team might ask for a report on things like department
employee costs or location employee costs.

Payroll Calculation

First Step

Compute Gross pay including Basic Pay and other pays like overtime pay holiday pays.

Second Step

Compute all deductions like statutory benefits, loans, insurance, income tax and
late/absences.

Third step
(Gross pay – Total Deduction = Net Pay)

How to compute employees’ daily rate

One of the most common errors that we see in businesses is in how they
compute their employee’s daily rate. This is only applicable if your employee’s salary is
fix per month and you just deduct absences and add overtime pays.

1. You need the correct daily rate of the employee when you are deducting their
absences. If you are deducting absences for your employees, you want to make sure
that you are not under-deducting or over-deducting them. The same applied when you
are deducting their tardy and undertime.

2. Their daily rates have an impact to their tax computation. Starting of 250,000 annually
or 25,000 above new law based on TRAIN law approved by our President Rodrigo
Duterte.

3. It is important when computing overtime pays, if you incorrectly computing your

employee’s daily rates, it is more likely that you are incorrectly computing their hourly
rates as well which you normally used in computing their overtime pays.

Here is how you should compute your employee’s daily rates, you can surely
come up with the same result with different formulas but at least this is the most
common formula that we see in many companies.

Daily Rate = (Monthly Rate X 12) / Total working days in a year.

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Php 575.08 = (Php 15,000 X 12) / 313 if working Mondays to Saturdays

Php 689.66 = (Php 15,000 X 12) / 261 if working Mondays to Fridays.

Note: Total working days in a year is 312 days if you’re working Monday to
Saturday and 260 days but during leap years we sometimes get additional 1
working day but several companies’ use 313 and 261 days.

Keywords

Basic salary is the amount paid to an employee before any extras are added or taken
off, such as reductions because of salary sacrifice schemes or an increase due to
overtime or a bonus.

Gross income for an individual also known as gross pay when it's on a pay check is
the individual's total pay from his or her employer before taxes or other deductions.

Holiday pay is the amount that eligible employees in the private sector receive whether
they worked or not on a regular or special non-working holiday.

Under the Philippine Labor Code, employees covered by holiday pay rules
should receive at least 100% of their salary even if they did not report for work, as long
as they’re present on the workday or on paid leave on the day immediately before the
holiday.

Who is entitled to holiday pay?

Not all employees in the Philippines are entitled to this kind of pay.

You’re exempted from receiving this government-mandated benefit if you belong to any
of the following groups:

 Workers for retail and service companies with less than 10 regular employees
 Managerial employees
 Managerial staff members and officers
 Government employees
 Kasambahays
 Employer’s family members who are dependent on the employer for support
 Employees engaged on task, contract, or purely commission basis

The Department of Labor and Employment (DOLE) enforces two different sets of
holiday pay rules in the Philippines: one for regular holidays and another for special
non-working days.
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1. Regular Holiday Computation

Here are the holiday pay computation rules that apply to the following regular holidays:

 New Year’s Day – January 1

 Araw ng Kagitingan – April 9
 Maundy Thursday – Varies per year
 Good Friday – Varies per year
 Labor Day – May 1
 Independence Day – June 12
 National Heroes Day – Last Monday of August
 Bonifacio Day – November 30
 Christmas Day – December 25
 Rizal Day – December 30
 Eidul Fitr – Varies per year
 Eidul Adha – Varies per year

You can check it at Holidays in the Philippines and long weekends guide.

a. Computation for Employees who didn’t work

If you didn’t report for work on a regular holiday, you’ll still receive your full salary
for that day. You shouldn’t be deducted for work that isn’t performed on a holiday.

b. Computation for Employees who worked for 8 hours

If you reported for work on a regular holiday, you should be paid double your
salary (basic wage + cost of living allowance or COLA) for the first eight hours worked.

Here’s how to compute regular holiday pay:

(Basic wage + COLA) x 200%

Example: If your daily rate is PHP 1,000, your holiday pay should be calculated
as follows:

PHP 1,000.00 x 2 = PHP 2,000.00

c. Computation for employees who worked overtime

If you worked for more than eight hours during a regular holiday, you should be
paid an additional 30% of your hourly rate.

Hourly rate x 200% x 130% x number of hours worked

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Let’s say your hourly rate is PHP 125, and you worked overtime for two hours
(for total overtime of 10 hours). Here’s how to calculate your regular holiday pay:

PHP 125.00 x 2 x 1.30 x 10 hours = PHP 3,250.00

d. Computation for employees who worked for 8 hours during their rest day
If you worked during a regular holiday that also falls on your rest day (a Saturday
or a Sunday, for example), you must receive 30% of your 200% salary in addition to
200% of your salary.

Use this holiday pay formula for a simpler computation:

[(Basic wage + COLA) x 200%] + [30% (Basic wage x 200%)]

For a daily rate of PHP 1,000.00, the holiday rest day pay is computed as follows:

[(PHP 1,000.00 x 2)] + [0.30 (PHP 1,000.00 x 2)]

[PHP 2,000.00] + [0.30 x PHP 2,000.00]

PHP 2,000.00 + PHP 600.00 = PHP 2,600.00

e. Computation for employees who worked overtime during their rest day
If you worked for more than eight hours on a regular holiday (which is also your
rest day), you’ll get paid an additional 30% of your hourly rate.

Hourly rate x 200% x 130% x 130% x number of hours worked

Here’s how to compute your holiday pay with overtime on your rest day:

PHP 125.00 x 2 x 1.30 x 1.30 x 10 hours = PHP 4,225.00

2. Special Holiday Computation

Here are the holiday pay computation rules that apply to the following special
non-working days:

 Chinese New Year – Varies per year

 EDSA People Power Revolution – February 25
 Black Saturday – Varies per year
 Ninoy Aquino Day – August 21
 All Saints’ Day – November 1
 All Souls’ Day – November 2
 Feast of the Immaculate Conception of Mary – December 8
 Christmas Eve – December 24
 Last Day of the Year/New Year’s Eve – December 31
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a. Computation for Employees who didn’t work

The no work, no pay rule applies when you don’t report for work on a special
non-working day, unless your employer has a policy or collective bargaining agreement
(CBA) that requires payment on such a holiday.

b. Computation for employees who worked for 8 hours

If you work during a special non-working day, you must receive an additional
30% of your basic wage on the first eight hours worked.

Here’s the special non-working holiday pay computation:

(Basic Wage x 130%) + COLA

If your daily rate is PHP 1,000 (no COLA), your holiday pay is computed as
follows:

PHP 1,000.00 x 1.30 = PHP 1,300.00

c. Computation for employees who worked overtime

If you worked overtime, you’ll get an additional 30% of your hourly rate.

Hourly rate of the basic wage x 130% x 130% x number of hours worked

With an hourly rate of PHP 125.00 and two hours of overtime work, here’s how
to calculate your pay during a special non-working day:

PHP 125.00 x 1.30 x 1.30 x 10 hours = PHP 2,112.50

d. Computation for Employees Who Worked for 8 Hours on Their Rest Day
If you worked on a special non-working day that also falls on your rest day, you’ll
get an additional 50% of your basic wage for the first eight hours.

For a simpler computation, use this formula:

(Daily rate × 150%) + COLA

For a daily rate of PHP 1,000 (no COLA), your holiday pay is computed as
follows:

PHP 1,000.00 x 1.50 = PHP 1,500.00

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e. Computation for Employees Who Worked Overtime on Their Rest Day

If you worked overtime on a special non-working day (which is also your rest
day), you will receive an additional 30% of your hourly rate.

Hourly rate of the basic wage x 150% x 130% x number of hours worked

Here’s how to compute your holiday rest day pay with overtime of two hours:

PHP 125 x 1.50 x 1.30 x 10 hours = PHP 2,437.50

Night Differential

Every employee is entitled to a Night Differential of Night shift pay of not less
than 10% of his regular wage for each hour of work performed between 10pm and 6am.
To determine the employee Night Differential pay: Ordinary Day Night Differential =
(Hourly rate × 10% × 8 hours)

Mandatory Employee Benefits and Contributions in the Philippines

Employee Benefits, Coverage, and Contributions
The Philippine Social Security System, strengthened by the provisions of the
Republic Act No. 8282 or the Social Security Law, is the country’s social insurance
program and consists of the following bodies:

 Social Security System (SSS) – The SSS was created to provide private
employees and their families protection against disability, sickness, old age, and
death. The Government Service Insurance System (GSIS) is the equivalent
system for Philippine government employees.
 Home Development Mutual Fund (HDMF) – The HDMF, also known as the
Pag-IBIG Fund, is a provident savings system supplying housing loans to private
and Philippine government employees, and to self-employed persons who elect
to join the Fund.
 Philippine Health Insurance Corporation (PhilHealth) – PhilHealth is
administered by the Philippine Health Insurance Corporation, and provides
employees with a practical means of paying for adequate medical care in the
Philippines.
Coverage in the Philippines
All employed persons under the age of 60 who earn a monthly income of more
than P1,000 are required to contribute to the three social insurance funds previously
mentioned. Government employees under the retirement age of 65 and officers of the
Armed Forces of the Philippines (AFP), Philippine National Police (PNP), Bureau of
Fire Protection (BFP), Bureau of jail Management and Penology (BjMP), and the
Philippine Coast Guard (PCG) who are under the age of 60 are mandated by law to
contribute to the GSIS.
 71

Both private and government employees must contribute to the Pag-IBIG Fund
and PhilHealth. Membership is optional, however, for self-employed persons, Overseas
Filipino Workers (OFWs), and Non-Working Spouses (NWSs).

Foreign nationals working in the Philippines must also make contributions to

SSS, HDMF and PhilHealth. Membership is mandatory unless exempt under some of
the Philippines Totalization Agreements.

Updated Government Contributions in the Philippines for 2019

Employee’s SSS contributions are deducted from their salaries and withheld by
their respective employers on a monthly basis. Employers have a share in the monthly
contribution.

Below is a copy of the revised schedule of SSS contributions applicable to

employers and employees (from SSS Circular 2020-033-b).
 72

How to Compute SSS Contribution

Knowing how to use the SSS contribution table can help you better understand
if the monthly SSS premium deducted from your salary is correct.

To know this, you must be able to properly identify the following information from
the rows and columns in the SSS contribution in tables.

1. Range of Compensation. This is the category where your monthly salary

belongs.

For example, if you’re an EMPLOYEE receiving P20,000 monthly salary, your

“Range of Compensation” is P19,750 - 20,249.99 from the SSS Monthly Contribution
Schedule for Employees and Employers.

SSS Benefits are the following:

(whole details will be send at Silid and messenger)or you can download at
https://www.sss.gov.ph/sss/DownloadContent?fileName=SUMMARY_OF_BENEFITS
.pdf)
 73

Effective January 2018 onwards, monthly premium contributions to PhilHealth

will be 2.75% of the employee’s basic monthly salary and will be shared equally by
both employer and employee.

You can check at Social Security System (www.sss.gov.ph), Pag-IBIG Fund

(www.pagibigfund.gov.ph), Philippine Health Insurance Corporation
(www.philhealth.gov.ph).

Practice Exercise:

1. What is the three mandatory benefits?

2. What if employer don’t want to give the mandatory benefits to the employees?

3. In relation to number 2, what would HR do?

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Assessment # 4
PAYROLL MANAGEMENT

Name: _________________ Program and Year: _________

Subject : _________________ Contact Number: _________

Instruction:
Answer the following questions. Use a separate sheet of paper for your
answer. Submit it through Silid, messenger or in the school’s dropbox.

I. Comparison. Compare and contrast manual from automated payroll using a

Venn Diagram.

Manual Payroll Automated Payroll

Differences Differences
Simmilarities

Task II.

Make a simple payroll using excel. (Other details will be at Silid)

The following inclusions are:

 Basic salary
 Other Additional Pay
 Deductions
 75

UNIT Suggested time allotment: 3 hours

5
WAGE AND SALARY ADMINISTRATION

TARGET GOALS FOR THE UNIT

o Critique the case about job evaluation and technique. (An)

VALUES DESIRED: Trust, Loyalty and Commitment

LESSON 5.1. Wage and Salary

I. LEARNING OUTCOMES

 Define Wage and Salary Administration. (R)

 Apply the development of Pay System (AP)
 Define guide charts. (R)
 Analyze the different methods of Job Evaluation (AN)

III. INPUT

The development, implementation and ongoing maintenance of a base pay system

usually is described as wage and salary administration. The purpose of wage and
salary administration is to provide pay that is both competitive and equitable. Underlying
the administered activities are pay policies that set the overall direction of pay within
the organization ( Mathis, 2000).

1. Pay Policies

Organizations must develop policies as general guidelines to govern pay

systems. Uniform policies are needed for coordination, consistency, and fairness in
compensating employees. One specific organizational policy defines the relationship
between pay expenditures and such factors as productivity, sales, quality, or customer
satisfaction. These policies reflect a major consideration in management decision-
making, how much an organization can afford to pay employees and how.

Development of a Pay System: The Compensation Administration Process

Once pay policies have been determined, the actual development of a pay
system begins. As Figure 3.0 indicates, the development of a wage and salary system
assumes that accurate job descriptions and specifications are available. The job
descriptions then are used in two activities: job evaluation and pay surveys. These
activities are designed to ensure that the pay system is both internally equitable and
externally competitive. The data compiled in those two activities are used to design pay
structures, including pay grades and minimum-to-maximum pay ranges. After the pay
 76

structures have been developed, individual jobs must be placed in the appropriate pay
grades, and employees pay adjusted based upon the length of service and
performance. Finally, the pay system must be monitored and updated.

Fig. 3.0 "Compensation Administration Process"

Job Evaluation: Determining Internal Job Worth

Job evaluation

Job evaluation is the output provided by job analysis. Job evaluation uses the
information of job analysis to evaluate job and valuing its components and ascertaining
relative job worth to formulate proper wages or salary structure (Elcher & David, 1974).
So it is a process through which jobs are evaluated in organization (cited in Mamoria &
Ganker, 2011).

It is the systematic determination of the relative worth of jobs within an

organization. As stated above, it flows from the job analysis process and is based on
job descriptions and job specifications. In a job evaluation, every job within an
organization is examined and ultimately priced by comparing.
 77

 the relative importance of the job;

 the relative skills needed to perform the job; and
 the difficulty of the job compared with other jobs.

There are several methods used to determine internal job worth through job
evaluation, including:

a. The Ranking Method

The ranking method is one of the simplest methods of job evaluation. It places
jobs in order, ranging from highest to lowest in value to the organization.

The main problem with ranking methods is their extreme subjectivity. Thus,
managers may have some difficulty explaining why one job is ranked higher than
another to employees whose pay is affected by these rankings. Also, when there a
large number of jobs, the ranking method may be awkward and unwieldy. Therefore,
the ranking method is more appropriate to a small organization having relatively few
jobs.

b. The Classification Method

In this method, a number of classes [grades] are defined. Then, the various jobs
in the organization are put into grades according to common factors found in jobs, such
as degree of responsibility, abilities or skills, knowledge, duties, volume of work and
experience needed. The grades are then ranked into an overall system.

The major difficulty with the classification method is that subjective judgments
are needed to develop the grade descriptions and to place jobs accurately in them.
With a wide variety of jobs and generally written grade descriptions, some jobs may
appear to fall into two or three different grades.

Another problem with the classification method is that it relies heavily on job titles
and duties and assumes that they are similar from one organization to another.

c. The Point Method

The point method is the most widely used job evaluation method. It breaks down
jobs into various compensable factors and places weights or points on them.
A compensable factor is one used to identify a job value that is commonly present
throughout a group of jobs. The factors are determined from the job analysis as being
ones present in the jobs under study. Consequently, the compensable factors used and
the weights assigned to each degree of each factor must reflect the nature of the job
under examination.
 78

The point method is more sophisticated than the ranking and classification
methods. Because the different components carry different weights, each is assigned
a numerical value. The values of the various components are then added for each job
and compared with other jobs.

Thus, the individual using the point chart at Figure 3.2 looks at a job description
and identifies the degree to which each element is necessary to perform the job
satisfactorily.

CLERICAL GROUP
SKILL 1ST 2ND 3RD 4TH 5TH
DEGREE DEGREE DEGREE DEGREE DEGREE
1. Education 14 28 42 56 -

2. Experience 22 44 66 88 110

3. Initiative & 14 28 42 56 -
ingenuity
14 28 42 56 -
4. Contacts with
others - - - - -

Responsibility 10 20 35 50 -

5. Supervision 20 40 70 100 -
received
5 10 15 20 -
6. Latitude & depth
10 20 35 50 70
7. Work of others
7 14 21 28 35
8. Trust imposed
- - - - -
9. Performance
10 25 45
Other
10 20 35
10. Work
environment 28

11. Mental or visual

demand

12. Physical effort

 79

The specific degrees and points for Education, Trust Imposed, and Work
Environment are as follows:

Education is the basic prerequisite knowledge that is essential to satisfactorily

perform the job. This knowledge have been acquired through formal schooling such
as grammar school, high school, college, night school, correspondence courses,
company education programs, or through equivalent experience in allied fields.
Analyze the minimum requirements of the job and not the formal education of
individuals performing it.

1st Degree- Requires knowledge usually equivalent to a two-year high school

education. Requires ability to read, write, and follow simple written or oral instructions;
use simple arithmetic processes involving counting, adding, subtracting, dividing, and
multiplying whole numbers. May require basic typing ability.

2nd Degree- Requires knowledge equivalent to a four-year high school education in

order to perform work requiring advanced arithmetic processes involving adding,
subtracting, dividing, and multiplying, or decimals and fractions; maintain or prepare
routine correspondence, records, and reports. May require knowledge of advanced
typing and/or basic knowledge of shorthand, bookkeeping, drafting, etc.

3rd Degree-Requires knowledge equivalent to four-year high school education plus

some specialized knowledge in a particular field such as advanced stenographic,
secretarial or business training, elementary accounting, or a general knowledge of
blueprint reading or engineering practices.

4th Degree- Requires knowledge equivalent to two years of college education in order
to understand and perform work requiring general engineering or accounting theory.
Must be able to originate and compile statistics and interpretive reports, and prepare
correspondence of a difficult or technical nature.

Responsibility for Trust Imposed: This factor appraises the extent to which the job
requires responsibility for safeguarding confidential information and the effect of such
disclosure on the Company's relations with employees, customers, or competitors.

1st Degree- Negligible. Little or no confidential data involved.

2nd Degree- Some access to confidential information but where responsibility is

limited or where the full import is not apparent.

3rd Degree- Occasional access to confidential information where the full import is
apparent and where disclosure may have an adverse effect on the Company's
external or internal affairs.
 80

4th Degree- Regularly works with and has access to confidential data, which if
disclosed could seriously affect the Company's internal or external affairs or
undermine its competitive position.

5h Degree- Full and complete access to reports, policies, records, and plans of
Company-wide programs, including financial cost and engineering data. Requires the
utmost discretion and integrity to safeguard the Company's interests.

Work Environment: This factor appraises the physical surroundings and the degree
to which noise is present at the work location. Consider the extent of distraction and
commotion caused by the sounds.

1st Degree- Normal office conditions. Noise limited to the usual sounds of word
processing and other equipment.

2nd Degree- More than average noise due to the intermittent operation by several
employees of adding machines, calculators, word processing equipment, or
duplicating machines.

3rd Degree- Considerable noise generated by constant machine operation such as is

present in the Data Processing Section

Fig. 3.2 "Point Chart"

For example, the points assigned for a payroll clerk might be as follows:

Education - 42 points, 3rd degree

Responsibility for Trust Imposed -50 points, 4th degree

Work Environment - 25 points, 2nd degree

Once point totals have been determined for all jobs, the jobs are grouped
together into pay grades.

The point method has grown in popularity because it is a relatively simple system
to use. It considers the components of a job rather than the total job, and is a much
more comprehensive system than either the ranking or classification method. Another
reason for the widespread use of the point method is that it evaluates the components
of a job and determines total points before the current pay structure is considered.

One major drawback to the point method is the time needed to develop a system.
Also, point systems have been criticised for reinforcing traditional organizational
structures and job rigidity. Although not perfect, the point method generally is better
than the classification or ranking methods because it quantifies job elements.
 81

d. The Factor Comparison Method

The factor comparison method is a very quantitative and complex combination

of the ranking and point methods. It involves first determining the benchmark jobs in an
organization

Example jobs being performed by several individuals with similar duties, that are
relatively stable, requiring similar KSAs and found in many other organizations;
selecting compensable factors; then ranking all benchmark jobs factor by factor.

Next, the jobs are compared with market rates for benchmark jobs, and
monetary values are assigned to each factor. The final step is to evaluate all other jobs
in the organization by comparing them with the benchmark jobs.

One of the major advantages of the factor comparison method is that it is tied
specifically to one organization. Each organization must develop its own key jobs and
its own factors. Additionally, factor comparison not only tells which jobs are worth more,
it also indicates how much more, so factor values can be more easily converted to
monetary wages.

The major disadvantages of the factor comparison method are its difficulty and
its complexity. It is not an easy system to explain to employees and it is time-consuming
to establish and develop.

2. Pay Survey

Another part of building a pay system is to survey the pay that other
organizations provide for similar jobs. A pay survey is a collection of data on
compensation rates for employees performing similar jobs in other organizations.

Many surveys are available form a variety of sources - such as the Chamber of
Commerce, the Department of Labour, the Bureau of Labour Statistics or Trade
Associations]. Yet, if needed pay information is not already available, the employer can
undertake its own pay survey. In this case, employers with comparable positions should
be selected. Also, employers considered to be representative should be surveyed. The
positions to be surveyed also must be decided. Not all jobs in all organizations can be
surveyed, and not all jobs with the same titles in all organizations will be the same. The
next and last phase of the pay survey is for managers to decide what compensation
information is needed for various jobs. Information concerning starting pay, base pay,
overtime rate, vacation and holiday pay and policies, and bonuses all can be included
in a survey.

3. Establishing a Pay Structure

Once survey data are gathered, the pay structure for the organization can be
developed using the process depicted in Figure 3.3
 82

Fig. 3.3 “Establishing a Pay Structure”

As indicated in this Figure, one means of tying pay survey information to job
evaluation data is to plot a wage curve or pay scattergram, shown in Figure 3.4. This
plotting is done by first making a graph that charts job-evaluation points and pay-survey
rates for all surveyed jobs. In this way the distribution of pay for surveyed jobs can be
shown, and a trend line using the least squares regression method can be drawn to
plot a market line. This line shows the relationship between job value, or points, and
wage/salary survey rates.

Fig. 3.4 “Pay Scattergram”

In the process of establishing a pay structure, pay grades are used to group
together individual jobs having approximately the same job worth. While there are no
set rules to be used when establishing pay grades, generally 11 to 17 grades are used
in small companies. By using pay grades, management can develop a coordinated pay
system without having to determine a separate pay rate for each job in the organization.
All the jobs within a grade have the same range of pay regardless of points.
 83

In addition, using the market line as a starting point, maximum and minimum pay
levels for each pay grade can be determined by making the market line the midpoint
line of the firm's new pay structure. By calculating values that are the same percentage
above and below the midpoint value, the minimums and maximums can be determined.

GRADE MINIMUM MIDPOINT MAXIMUM POINT

PAY PAY PAY RANGE

1 $ 5.92 $ 7.26 $ 8.59 240-269

2 6.94 8.50 10.06 270-299

3 7.96 9.75 11.54 300-329

4 8.98 11.00 13.02 330-359

5 10.00 12.24 14.49 360-389

6 11.01 13.49 15.97 390-419

7 11.79 14.74 17.69 420-449

8 12.79 15.99 19.18 450-479

9 14.51 18.14 21.77 480+

Fig. 3.5 “Example of Pay grades”

4. Individual Pay

Once managers determine pay ranges, they can set the specific pay for
individuals. Each of the dots in Figure 3.6 represents an individual employee's
current pay in relation to the pay ranges that have been developed. Setting a range
for each pay grade gives flexibility by allowing individuals to progress within a grade
instead of having to be moved to a new grade each time they receive a raise. Also,
a pay range allows managers to reward the better-performing employees while
maintaining the integrity of the pay system.
 84

Fig. 3.6 "Pay structure Depicted Graphically"

Regardless of how well-constructed a pay structure is, there usually are a few
individuals whose pay is lower than the minimum or higher than the maximum. A job
whose pay is above the range is identified as a red-circle job. A red-circle job is noted
on the graph in Figure 3.6.

Several approaches can be used to bring a red-circled person's pay into line.
Although the fastest way would be to cut the employee's pay, that approach is not
recommended and is seldom used. Instead, the employee's pay may be frozen until
the pay range can be adjusted upward to get the employee's pay rate back into the
grade. The employee can also be transferred to a job with a higher grade or have
responsibilities added to the red-circled job, which would result in greater job evaluation
worth, thus justifying its being upgraded. Another approach is to give the employee a
small lump sum payment but not adjust the pay rate when others are given raises.

Adversely, an individual whose pay is below the range is in a green-circle job.

Generally it is recommended that the green-circled individual receive pay increases to
get to the pay grade minimum fairly rapidly.

Once pay ranges have been developed and individuals placements within the
range have been identified, managers must look at adjustment to individual
pay. Decisions about pay increases often are some of the more critical ones that affect
relationships among employees, their managers and the organization. Individuals have
 85

expectations about their pay and about how much increase is fair, especially in
comparison to the increases received by other employees. There are several ways to
determine pay increases, including: pay-for-performance systems; lump sum pay
increases; cost-of-living adjustments; seniority; and maturity curves.

Pay-for-Performance Systems

Many employers profess to have a pay system based on performance. But

reliance on performance-appraisal information for making pay adjustments assumes
that the appraisals are done well; and this is not always the case, especially for
employees whose work cannot be measured easily. Consequently, some system for
integrating appraisals and pay changes must be developed and applied equally. Often,
this integration is done through the use of a pay adjustment matrix or salary guide chart
see Figure 3.7. These charts base adjustments on a person's compa-ratio, which is a
pay level divided by the midpoint of the pay range.

Fig. 3.7 "Pay Adjustment Matrix"

Such charts reflect a person's upward movement in an organization. Upward

movement depends on the person's performance as rated on an appraisal and on
where the person is within the pay range, which has some relation to experience as
well. Notice that as employees move up the pay range they must exhibit higher
 86

performance to obtain the same raise as those lower in the range performing at the
'meets performance expectations level.

Lump-Sum Increases

Sometimes called a performance bonus, a lump-sum increase is a one-time

payment of all or part of a yearly pay increase. As with any plan there are advantages
and disadvantages with respect to LSIs. The major advantage of an LSI plan is that it
heightens employees' awareness of what their performance merited. Whereas, one
serious disadvantage of an LSI plan is administrative tracking.

Cost-of-Living Adjustments

One common pay-raise practice is the use of a standard raise or cost-of-living

adjustment. Giving all employees a standard percentage increase enables them to
maintain the same real wages in a period of economic inflation. Often these
adjustments are tied to changes in the Consumer Price Index or some other general
economic measure.

Seniority

Seniority, or time within the organization or on a particular job, also can be used
as the basis for giving pay increases. Pay adjustments based on seniority often are set
as automatic steps once a person has been employed the required length of time,
although performance must be at least 'satisfactory'.

Maturity Curves

A closely related approach uses a maturity curve that depicts the relationship
between experience and pay rates. Pay rises as an employee's experience increases,
which is especially useful for professionals and skilled craft employees. Unlike a true
seniority system in which a pay raise occurs automatically once someone has put in
the required time, maturity curves are built on the assumption that as experience
increases, proficiency and performance also increase. Once a person plateaus in
his/her proficiency, then the pay progression is limited to following the overall
movement of the pay structure.

Practice Exercise:

Define the following:

1. Pay Policies
 87

2. Job Evaluation

3. Seniority

4. Individual Pay

5. Pay Survey

B. Essay
Give at least two (2) methods to determine internal job and explain it.
 88

ASSESSMENT # 5
WAGE AND SALARY ADMINISTRATION

Name:___________________________ Program/Year:____________________
Subject: HRM5 Student’sContact Number:__________
Name of the Instructor: Mrs. Kriska Bea May U. Serentas

Instruction:
Answer the following questions. Use a separate sheet of paper for your
answer. Submit it through schoology, messenger or in the school’s dropbox.

Case Study

Pacific Coast Electric Company (PCEC) is a public utility company located in

San Francisco. The company is so successful that is considered a model for other utility
companies. Over the past two years, however, PCEC management has become
concerned with increasing payroll costs. Cost containment and a 'lean and mean'
structure are key ingredients in the company's success. Management wants to study
this problem and, if warranted, take corrective action.

Roger Waters is a compensation specialist with PCEC. Roger has been

assigned to study PCEC's compensation practices and determine whether any action
is required. He decides to compile compensation data for the past five years by using
the company's human resource information system (HRIS). Five years will reveal any
trends, and the HRIS allows him to breakdown the data by department, length of
service, gender, exempt vs non-exempt employees, and the like.

Roger has uncovered a startling situation. The data indicate that certain non-
exempt employees are receiving compensation far in excess of their base pay rate. It
seems that these employees are working excessive overtime because of the specific
expertise they possess. Overtime rates are one-and-one-half times through 48 hours
and double time after that. Employees who work overtime also receive additional
compensation, including meal and travel allowances. The base salary for these
employees averages $25,000 per year with overtime. These employees make between
$35,000 and $39,000 a year. This situation would be less of a concern if it involved only
a few individuals, but hundreds of employees are in this situation. It should be noted
that PCEC initiated the overtime policy because of the high cost of consultants -
besides, the company feels that its own employees are better skilled and more capable
than most consultants.

The employees in question make more than their superiors. First-line

supervisors, for example, make approximately 15 percent more than the base
compensation of the top craft employees. In other words, supervisors are making
approximately $28,750 on the average. Supervisors can receive merit pay, but only a
small number of supervisors are eligible for merit awards. Further, supervisors are not
 89

paid overtime and receive no meal allowances. Fortunately for PCEC, thinks Roger,
our supervisors are not aware of the extent of the pay inequities.

Aside from the obvious problem of employees making a great deal more money
than their supervisors, another problem becomes apparent. Examination of the internal
labour market reveals that all of the first-line supervisors have come from outside the
company. The qualified employees are not accepting promotions because they do not
want to get a cut in pay. The long-term consequences of this situation could be very
serious.

Then Roger looks at a breakdown of the data by gender for the non-exempt
employees in question. Women have an average base salary of $23,500 while the
average base salary for men is $25,900. Furthermore, not one of the employees
receiving high salaries resulting from overtime is female. Roger is very concerned about
the differences in compensation for men and women, especially because PCEC prides
itself on its equal employment/affirmative action reputation. Men and women are doing
essentially the same jobs.

Roger becomes lost in thought as he contemplates his findings. He knows that

it will be difficult to frame a report around the compensation issues that he has
uncovered. He suspects that it will be even more difficult to recommend changes that
will resolve these thorny issues.

QUESTIONS

Answer the following questions in at least 5 sentences. Use separate sheet of

paper for your answer.

1. Are there cases in which employees should be paid more than their supervisors?

2. What kind of compensation problems does Roger face?

3. What recommendations should he make?

4. Should he make compensation changes? How? Why?