CHAPTER SIX

COMPENSATION AND BENEFIT

ADMINISTRATION
Contents
Introduction
6.1 Compensation & Benefit Administration
6.2 Objectives of Compensation
6.3 Types of Compensation
6.3.1 Financial Compensation
6.3.2 Non-financial Compensation
6.4 Benefits (Indirect Compensation)

04/30/2023 1
6.1. COMPENSATION AND BENEFIT ADMINISTRATION
 Compensation is the reward employees receive in exchange
for their performance.
 It is concerned with wages and salaries, pay raises, and
similar monetary exchange for employees’ performance.
 The purpose of compensation and benefit administration
should be to enhance the effective and efficient utilization
and management of an organization's workforce.
 The purpose should also contribute to the overall strategic
mission of the organization.

04/30/2023 2
Compensation …
Well-designed pay or compensation system enables the
organization:
 To attract sufficient and qualified employees
 To retain and motivate the existing workforce toward
its goal achievement.
 To reward employees for their effort and
achievement

04/30/2023 3
On the contrary, if compensation is not tied to
work:
 employees are likely to look for a better paying job.
their contribution toward goal achievement tend
to be lower.
In severe cases, pay dissatisfaction may lower
performance, cause strikes, increase
grievances, and lead to forms of physical or
psychological withdrawal.

04/30/2023 4
6.2. OBJECTIVES OF COMPENSATION ADMINISTRATION
Is to establish fair and equitable rewards to the
employees, so that they are motivated.
Other specific objectives are to:
 Acquire qualified personnel
 Retain current employees
 Ensure equity
 Reward desired behavior
 Control costs
 Comply with legal regulations
 Facilitate understanding
 Further administrative efficiency
04/30/2023 5
 6.3. TYPES OF COMPENSATION
 In general, there are two types of compensation.
These are:
Financial

Non financial
  

6.3.1. FINANCIAL COMPENSATION

It includes direct compensation, which is paid to
employees in the form of wages, salaries, bonuses,
and commission in exchange for their performance,
and
indirect compensation includes all financial rewards
that are not included in direct compensation.
04/30/2023 6
 TYPES OF COMPENSATION
Compensation
Financial Compensation Non-Financial Compensation
Direct indirect The job The envt.
Wages  Insurance  Interesting  Sound Policies
Salaries Plans Duties  Competent Supervision
Commissions  Social Assistance  Responsibility  Congenial Co-Workers
Bonus  Employee  Status Symbols
Services  Recognition  Working conditions
 Paid Absences  Achievement  Job Sharing
 Advancement

04/30/2023 7
It is important here to distinguish wage and other
forms of direct financial compensation.
Wages

Salaries

Bonuses

Commission

04/30/2023 8
 DETERMINANTS OF FINANCIAL COMPENSATION

The major parties and issues of concern are:

Parties Main issues of concern
Government Ensure that financial compensation supports the
social and economic interests of the broader
society.
Occupational Protect members’ human capital investment
groups
Unions Protect, maintain, and increase the welfare of the
worker.
Individual Ensure that a balance is maintained between
contributions to work and the outcomes received
from work.
Organization Within budget constraints, attract individuals into
the organization, retain employees, and motivate
behavior toward achievement of organizational
goals.

04/30/2023 9
Financial compensation system is influenced by the
following factors:
the organization,
the labor market,

the job and

the employee have an impact on the job pricing

and the ultimate determination of employee’s
financial compensation.

04/30/2023 10
1) Organizational Interest in Compensation
 Why are organizations interested in compensation?
Organizations view compensation mainly as a
means:
 To attract qualified candidates for vacant positions
 To retain competent and dedicated employees

 To facilitate performance

 To comply with government employment policies.

Moreover, compensation is an expense in the sense

that it reflects the cost of labor.
Organization often has compensation policies. As
organizations differ in size and purpose, so do in pay
levels
04/30/2023 11
 There are three alternative strategies, this
might be chosen by organizations. These are
high, low, and comparable.
 The high-pay-level strategy
 The low-pay-level strategy
 The comparable-pay-level strategy

04/30/2023 12
The choice of any of the above pay-level strategies may be
affected by factor internal or external to the organization
Quality and quantity of needed skill
The organization’s current financial position and financial
prospects for the coming year.
Cost of living index
Employees behavior, such as performance, turnover,
absenteeism, unionization attempts, and sabotage.
The profit levels of an organization can also affect employees’
salaries or wages.
This being the case, who is a pay policy-decision maker?
In most organizations, the top-level management makes
pay decisions by considering the above factors.
04/30/2023 13
2) Labour Markets Influence on Compensation
The number and types of employees indicated in the organization’s
human resource planning are mainly drawn from the labor market.
Since the market directly affects the pay-levels, analysis of the demand
for and supply of labor is imperative.
The demand for human resources largely depends on organization's
ability to pay.
On the other hand, the supply focuses on:
 the number of persons of work age;
the attractiveness of the job in pay, benefits, and psychological
rewards;
the availability of training institutions, and so on.
When the supply of employees exceed the demand, the initial pay-
levels tend to go down.
On the contrary, when the demand for employees exceed the supply,
the initial pay-levels tend to go up.
04/30/2023 14
 3) Job Influence on Compensation
Jobs employees are assigned to perform are a major decisive
factor of the amount of pay they will in turn receive.
Organizations pay for the value they attach to certain
duties, responsibilities, and other job-related factors.
If this is the case, the question of what are the techniques
used to determine the value of jobs is an important one that
requires an answer.
Compensation techniques used by organizations for
determining the relative value of jobs are:
I) job analysis and
II) job evaluation.

04/30/2023 15
 I. Job Analysis
If compensation policy is to be based on the nature of job, a job
analysis activity must be conducted to identify the similarities and
differences among the various jobs in the organization.
As we discussed earlier, job analysis is a systematic process of
determining the skill and knowledge required for performing jobs.

It reveals the major tasks, duties and responsibilities, the

relationship of a job to other jobs, the skill and knowledge
required for each job, the outcomes that are expected and
working conditions.
The basic premise underlying job analysis is that jobs are more
likely to be described, differentiated, and evaluated
consistently if accurate information is available to reward
managers.
04/30/2023 16
What are job description, specification and standard?
If we recall, job description is written document that
describes the duties and responsibilities of a specified
job.
Job specification is a statement that explains the
skill, knowledge, and experience needed to perform
the job.
Job standard, on the other hand, is a minimum
acceptable level of performance.

04/30/2023 17
 It is based on job analysis that organizations
assign a financial value to each job.
Thus, unless there is a clear definition of the job
and job performance standards it would be
difficult to imagine how pay can be linked to
individual performance.
It is worth noting that job evaluation is also a
means to compare the relative values of various
jobs in an organization.
Hence, the next pages briefly examine how it is
used to determine financial compensation.

04/30/2023 18
 II) Job Evaluation
A certain public enterprise may hire a chief administrative
officer, accountant, mechanic, engineer, janitor, economist,
and so on.
Here it is necessary to get a clear understanding of how is
compensation determined for various jobs in an organization.

Compensation within an organization is determined by

comparing one job to other job.
This comparison is made possible with job evaluation. Thus,
what is job evaluation?
Job evaluation is that part of a compensation system in
which a firm determines the relative value of one job in
relation to another.
04/30/2023 19
 The major reason of job evaluation is to maintain
internal pay equity among various jobs in the
organization.
Moreover, job evaluation is used to:
Identify the organization’s job structure
Bring equity and order to the relationships among
jobs
Develop a hierarchy of job value that can be used
to create a pay structure
Achieve a consensus among managers and
employees regarding jobs and pay with in the firm.

04/30/2023 20
Job evaluation rates the job and not the employee performing the
job - analyzing the worth of a job to that of another, without
regard to personalities on the jobs.
In this process accurate job descriptions and job specifications
must be available to analyze and assign monetary value to
organizational jobs.
As Ahuja (1988) noted, the more skill, education and
responsibility required in a job, the more it worth.
 Organizations use four major types of job evaluation methods.
There are:
 Job Ranking

 Job Grading

 Factor Comparison

 Point System
04/30/2023 21
1. Job Ranking Method
The simplest method of job evaluation is ranking.
A committee or evaluators review the job descriptions
and rank each job from the simplest to most
challenging job in the organization.
This job-ranking method is based on subjective
evaluation of relative value.
Compensation for each job will be based on the job
hierarchy.
The ranking method is more suitable for small
organizations having a limited number of employees.

04/30/2023 22
2. Job Grading Method
The job grading or the classification method works by
having each job assigned to a grade by matching
standard descriptions with each job’s description
.( see on the HO).
To determine appropriate job grade, match standard
description with job description.
Here jobs are assigned to grades by comparing the job
description with the standard description. The
sample above indicates five grades.

04/30/2023 23
Jobs, which might be classified under grade I, are simple
and routine. Jobs become more difficult as the grade
level increases.
For example, jobs under grade IV are believed to be
complex and require high-level skill.
In attaching monetary values to the various jobs, the rater
makes pay-level differentials between jobs, based on their
complexity.
More challenging jobs in an organization are paid more.
In this non-analytical method “complex jobs are difficult
to fit into the system; a job may seem to have the
characteristics of two or more grades.

04/30/2023 24
3. Factor Comparison Method
In this method, each job is broken down into factors,
which are considered common to all types of jobs.
The compensable factors used to compare jobs in the
organization are skill, mental requirements, physical
requirements, responsibilities and working
conditions.
For each job in the organization, the factors are “ranked
according to their relative importance in each job and
then the job evaluator assigns a monetary value to each
factor.
For example, a job with worth of Birr 1,200 per month may
have its different contributing factors costed as shown in
HO.
04/30/2023 25
4. Point Method

The point rating system is the most accurate and

widely used method of job evaluation.
This system resembles the factor comparison method
in that, in both cases, jobs are broken down into
factors like skill, mental effort, responsibility, physical
effort and working conditions.
However, unlike the factor comparison where
monetary value is assigned to each job, here points
are used to determine the worth of jobs in the
organization.

04/30/2023 26
 In allocating range of points to each job factor, the
following steps may be followed.
Assign a number (between 1 and 100) to each
factor.
Closely examine each factor in terms of its
importance in relation to the other. For example,
as shown in the figure below, the physical effort
requirements for the job of labor is thrice as
important as skill requirements.
Finally, each factor point value is added, to place
job in order of importance. Note

04/30/2023 27
 4. Employee Influences on Compensation
The major goals of compensation are to attract and
retain qualified employees to the organization.
In other words, compensation affects employee decision
to stay or leave the organization, to work effectively and to
accept additional responsibilities.
 Recall from the earlier discussion that organization,
labour market, and the job influence compensation
system.
Moreover, factors related to employee like performance,
seniority, and experience also determine pay levels in
an organization.
04/30/2023 28
 COMPENSATION AND PERFORMANCE
Paying for performance is the process of providing a
financial reward to an individual, which is linked
directly to his/ her performance.
Nothing is more de-motivating to productive
employees than to be paid equal salary as less
productive employees.
If this is the case, organizations need to practice varies
method to improve job performance.
The most common once are piecework, bonus
schemes and commission.

04/30/2023 29
Seniority and Experience
Seniority refers to the length of time employees have been
working in an organization.
Employees are more likely to be committed to the achievement
of organizational objectives, if their long services are
considered as a basis for pay increases or have some value
during promotion.
Advocates of paying for seniority believe that it enables the
organization to maintain stable workforce without excessive
turnover.
The seniority must be linked with experience on the job.
Organizations compensate employees on the basis of
experience, because “sometimes the practice is justified because
of the valuable insights that can only be acquired through
experience on the job“. 
04/30/2023 30
Pay Structures
In the process of considering the values of jobs in an
organization, attention must paid to the job evaluation
results and the pays in the labor market.
The relative value of jobs, in the organization, is
determined by the job evaluation whereas its absolute
value is determined by the labor market (supply and
demand).
To set the pay level the job evaluation and pay survey
rates are combined using graph. (Refer to your handout)
All similar jobs are classified in one grade and they have
the same range.

04/30/2023 31
 A pay grade is the grouping of similar jobs to simplify
the job pricing process.
For example, as can be noted from the graph, key jobs
ABC (grade 1) have lower pays and pay range than
jobs DEF (grade 2).
The pay range defines the lower and upper limits of
pay for jobs in a grade (Bratton & Gold, 1995).
The range allows organizations to pay according to
seniority and or performance.

04/30/2023 32
 The vertical axis in the graph represents the pay rates.
The midpoint can be established by the use of pay-
survey data from similar jobs.
In the graph, on the vertical axis the pay level policy
line has been set to equal the average paid by the
organization’s competitors for each of the jobs: a
matching-competition policy.
Here, if the organization wants to lead or lag behind
the market rate, the pay policy line can be shifted up or
down.
The pay policy line represents an organization’s pay
level in the market and serves as a reference point
around which pay structures are established .
04/30/2023 33
 INDIRECT COMPENSATION (BENEFITS)

04/30/2023 34
1.3. INDIRECT COMPENSATION (BENEFITS )
In addition to financial compensation, employees
enjoy other benefits because of their membership in
the organization.
What then are benefits?
Employee benefits are the indirect form of the total
compensation; they include:
 paid time away from work,
 insurance and health protection,
 employee services, and
 retirement income

Benefits, however, are indirect compensation that

organizations provide to their employees and are not
directly related to performance.
04/30/2023 35
Objectives of benefit:
What do organizations gain from benefits?
Benefits enable organizations to retain and attract
qualified personnel. Moreover, employee benefits
policies of an organization are to:
- Reduce fatigue
- Discourage labor unrest
- Satisfy employee objectives
- Aid recruitment
- Reduce turnover
- Minimize overtime costs

04/30/2023 36
 Major Categories of Benefits
Employee benefits can be divided in the
following major categories:
Insurance Benefits
Security Benefits
Employee Services
Time-off Benefits

04/30/2023 37
 2. Non-financial Compensation
So far, we have discussed employee benefits, which cost the
organization money either directly or indirectly.
Advocates of motivation claim that employees are not only be
satisfied with basic needs, but other subsequent needs such as
social, ego, and self-actualization are becoming more
important.
These higher order needs may be satisfied through the job or
job environment or both.
The benefits each employee would value depend on their
personal preferences.
In most cases, employees may get personal satisfaction if the
job provides them opportunities for recognition, feeling of
achievement, and above all advancement opportunities.
04/30/2023 38
Non financial Compensation:
It includes any satisfaction, which employees receive
from the job, such as the need for recognition,
responsibility, personal growth and the like
or from environment in which they work.
This job environment consists of comfortable
working conditions, competent supervision,
pleasant work companions and other related
physical and social needs of employees.
For example, being an accepted member of the
work group results in social motive satisfaction

04/30/2023 39
Jobs to be challenging, meaningful, and interesting, organizations
must attempt to match the job requirements and individual
abilities.
The selection and placement processes are extremely important
in this context.
In addition, organizations must establish the proper working
environment so that employees perform their jobs effectively. By
creating a conducive job environment, supervisors should enable
their subordinates to do their jobs to the best of their abilities.
Other major factors that are part of job environment include
sound policies, congenial co-workers, appropriate status
symbols and comfortable working conditions.
These factors, among other things are hoped to lead to job
satisfaction, improve morale and increase employee commitment.

04/30/2023 40
 According to the Federal Civil Servants Proclamation
515/2006 Part 2 Art. 6. deals with salary scale.
The agency shall prepare a salary scale to be applicable to the civil
service in general and submit the council of ministers, and
supervise its proper implementation up on approval. (sub.art.1)
The salary scale shall contain the base, maximum pay and step
increments of each grade.
According to the Federal Civil Servants Proclamation
515/2006 chapter 2 and 3, address annual and other leave.
Annual leave Article 36
Maternity leave Article 41
Sick leave Article 42
Leave for personal matters Article 43
Special leave with pay Article 44
Special leave with out pay Article 45
Medical benefit Article 46
04/30/2023 41
Discussion point.
The fair wage ought to be sufficient to permit the worker
and his family to leave in decent comfort according the
increasing standards of society.
This comfort includes the possibility of making some
provision for sickness and old age as well as for the
education of children.
In an ideal world, the fair wage would certainly be
measured up to the minimum described above.

04/30/2023 42
 CHAPTER SEVEN
EMPLOYEE / LABOUR
RELATIONS

04/30/2023 43
What is Employee Relations?
Management of all organizations is mainly concerned
with what should be done to enhance the contributions of
its employees to achieve objectives.
This means maintaining good employee relations
through creating good working atmosphere,
providing attractive rewards, having good
leadership, and assigning employees to interesting
and challenging jobs.
An employee relation is the interactions between the
employer (represented by management) and the work-
force (represented by trade unions).

04/30/2023 44
Here, interactions imply that management must support
and address issues of employee job satisfaction and
employees must show commitment towards the success
of the organization.
Moreover, employee relations is concerned with:
Managing and maintaining formal and informal
relationships with trade unions and their members.
Sharing information with employees and involving
them in decision making on matters of mutual
interest
Creating and transmitting information of interest
to employees.
04/30/2023 45
Employee Relations Objectives
Employee relations activities are those, whose objective is
to create an atmosphere of trust, respect, and
Cooperation. Further more, employee relations:
Provide a conducive work environment in which
employees can do their jobs better
Help management to mutually solve employees
problems which otherwise might affect
performance
Helps employee to control over important aspects
of work life.

04/30/2023 46
Trade Unions and Collective Bargaining
 Trade Unions
Trade union is an organization of workers whose purpose
is to protect and maintain the interests of union
members.
As workers representative, trade unions “provide workers
with a 'collective voice' to make their wishes known to
management and thus bring actual and desired
conditions closer together .

04/30/2023 47
This worker organization is established to bargain with
management about pay, working hours, conditions of
employment and to make joint decisions with management
on matters affecting their members' well being.
Furthermore, the following broad objectives characterize the
trade unions as a whole.
To secure and, if possible, improve the living standards and
economic status of its members.
To enhance and, if possible, guarantee individual security
against threats and contingencies that might result from
market fluctuations, technological change, or management
decisions.
To create mechanisms to guard against the use of arbitrary
and capricious policies and practices in the workplace.
04/30/2023 48
Collective Bargaining
Collective bargaining is basic to labor- management
relations.
It is a joint process of job regulation undertaken by
management and trade unions who negotiate to establish
pay and conditions of employment.
This contractual agreement is hoped to give workers and
management an identity of purpose and provide an
atmosphere in which both focus their attentions towards
the achievement of organizational objectives.
Such union-management agreement enables to negotiate
better position to urge workers to do their jobs as per the
contract.
04/30/2023 49
In an organization where a trade union is established
and recognized by the management, collective
bargaining will take place. For the bargaining to take
place, the following conditions must exist:
Employees must be prepared to act collectively and
recognize their common interests.
Management must recognize trade unions and
their representatives as legitimate bargaining
agents for labor,
Trade unions must be free to organize employee
without pressure from state or employer control.

04/30/2023 50
 Collective bargaining is a means to reach negotiable
agreements on matters pertaining to employment.
This joint labor-management agreement has two outcomes.
These are:
 Substantive agreements- agreed terms and conditions of
employment covering pay and working hours and other
aspects such as holidays, overtime regulations, flexibility
arrangements allowance.
Procedural agreements - an agreed up on course of
actions for various eventualities such as equal opportunities,
recruitment, redundancy, discipline etc.
04/30/2023 51
The process of bargaining is carried out by
negotiation where workers' representative
(union) and management discuss issues with a
view to relating a common agreement. ,
Formal negotiations often follow the following
stages.
Preparation:
Negotiation

Closing

04/30/2023 52
 Although the aim of collective bargaining is to reach a
common agreement, sometimes there may be disputes
that need resolution.
How can such disputes of two parties be resolved?
Various methods can be used to resolve disputes. These
are conciliation, mediation or arbitration.
Conciliation - a means where by a neutral third party acts
as a go-between to settle the disputes.
Mediation - a means where by a third party propose
recommendations which enable the two parties to resolve
the disagreement.
Arbitration - the submission of a dispute to a neutral
third party. Both sides of the issue are heard by an
arbitrator who acts as judge and jury. After weighing the
facts, the arbitrator renders a decision.
04/30/2023 53
Employee Relations Practices
In many organizations, the immediate bosses are
responsible for assigning tasks, counseling and providing
information to employees.
This being the case, concerning issues related to the
entire organization “managers and human resources
departments directly affect employee relations through:
communication,
counseling,
discipline practice"
In-addition, employee participation can also affect
employee relations.

04/30/2023 54
 Discipline
The organizational rules and regulations are
intended to direct and control the effective functions
of employees.
Thus, to ensure compliance with organizational
standards rules and regulations must be
communicated to all employees.
This will enable employees to maintain desired
discipline in the workplace.
Discipline is the state of employee self-control and
orderly conduct and indicates the extent of genuine
teamwork within an organization.
04/30/2023 55
Werther and Davis (1996) suggest two ways to handle
disciplinary cases in an organization. These are:
Preventive discipline is an action taken to
encourage employees to follow standards and rules
so that infractions are prevented. Its basic
objective is to encourage self-discipline.
Corrective discipline is an action that follows a
rule infraction. The corrective or disciplinary action
is a penalty, such as warning or suspension without
pay.
In principle, disciplinary action should aim at correcting
unaccepted behavior.

04/30/2023 56
 Disciplinary action may include:
 Informal talk or counseling
 An oral warning
 A written warning
 A final written warning
 Suspension without pay
 Transfer to another task, or section of the
enterprise
 Demotion
 Dismissal/Discharge.

04/30/2023 57
 DETERMINANTS OF DISCIPLINARY ACTION
Four main factors when determining an employee’s
disciplinary action:
Seriousness of offense
Repetition or duration of offense
Existence of any prior offenses and disciplinary
actions
Employee response to previous disciplinary
actions and current impending disciplinary
action
Depending on these four factors, we may skip any
of the disciplinary progression steps listed above.
In the most serious cases, termination may be the
first and only disciplinary action taken.
04/30/2023 58
The Federal Civil Servants Proclamation 515/2007, PART
NINE deals with disciplinary measures and grievance
procedure.
“the objectives of disciplinary penalty shall be to rehabilitate
the delinquent civil servant when he can learn from his
mistakes and became a reliable civil servant or to discharge
him when he becomes recalcitrant” (Art. 66)
Depending on the gravity of the offence, one of the following
penalties may be imposed on civil servants for breach of
discipline.
 Oral warning;
 Written warning;
 Fine up to one month’s salary;
 Fine up to three month’s salary;
 Down grading up to the period of two years;
 Dismissal

04/30/2023 59
 THE END!

I wish you all

success in your
Academic
Journey!!!!!
61