Remuneration and Compensation Systems.

Compensation refers to the type of reward an individual receives in return for performing organizational tasks. It
can be of two basic types;

[a] Financial- (i). Direct- where wages, salaries, bonuses and commissions are received.

(ii) Indirect- where vacation, insurance, health plans or other fringe benefits are received.

[b] Non-Financial relating to praise, recognition and self-esteem enhancement.

The compensation system will not only reward individuals but it will also serve to motivate them. As such the
emphasis of the system will be determined by the management's view of the workforce. Most systems are
incentive-based using mechanisms such as training, job enlargement, job enrichment, opportunities for further skill
development, increased communication and job description changes [esp. job titles].
OBJECTIVE OF THE SYSTEM
A check for effectiveness is based on criteria such as:

1. Adequacy: minimum wage levels/salaries should be met as dictated by industry standards or government
legislation.

2. Equitable: the reward obtained should be in line with the effort, ability and training of the individual.

3. Balance: pay, benefits, and other rewards should be reasonable in comparison to industry standards and the
pay structure of different employees.

4. Cost-effective; the cost of managing the system should be commensurate with acceptable productivity
levels.

5. Secure: the system should be able to provide employees with the ability to provide for their basic needs

6. Incentive providing: the system should act as a motivator for further employee development.

7. Acceptable: the employee should understand the workings of the system and accept it.
The Design of the Compensation Package

The reward package is often correlated to the performance of the individuals, and as such managers must be able
to :
● Allocate pay on the basis of objective merit
● Specifically discriminate among employees
● Communicate the pay system, in terms of initial pay, expected long term progressions and pay adjustments.
● Clearly explain the pay for performance linkage with all levels of employees.

To effectively do this one must share information, reinforce performance, recognize performance and periodically
evaluate performance. Difficulties in linking the two will arise due to differences in :

(i) the range of behaviours that pay can impact on positively and/or negatively

(ii) the amount of change pay can effectively influence

(iii) the kind of employee that pay influences positively or negatively

(iv) the internal /external conditions that are present.

The Wage Policy
This tends to reflect both internal and external influences, the emphasis of each being dependent on existing
business environments. External considerations relate to nationally negotiated wage settlements by unions,
competitor rates and other job opportunities available in the field. Internal considerations will reflect the value
placed on the job in light of organizational activities and fairness and equity as perceived by employees .
https://www.slideshare.net/aliraza201/job-evaluation-its-methods-and-advantages-disadvatages
The Wage policy will normally reflect a division of two types of employees, wage-paid and salaried staff. The
recognition of this can be important in determining the final offer as each may view themselves differently from the
other, in terms of value to the organization. Main aspects to be noted are:
(i) manual/production workers are paid on a weekly basis , usually in cash
(ii) clerical, professional and managerial staff are on a salaried basis.
(iii) production line is on a week’s notice, whilst staff is on a month’s.
(iv) piece rate on production output is often used as an incentive, whilst staff enjoy bonuses, share options
or profit sharing schemes as incentive mechanisms.
(v) staff tend to enjoy various privileges/benefits as part of their position.

These differences are notable when developing an overall policy as it recognises that other motivators may be
present, and these may serve to retain the skills of workers. Such motivators may include:
● Security of tenure
● Comparative incomes in light of wage differentials in relation to similarly qualified workers.
● Status of the job as perceived by the individual and society.
● Group acceptance or belonging to an exclusive team.
● Job satisfaction.
In designing the pay system the following alternatives can be used:

● Flat rate scheme: where a basic rate per period of time worked is paid. Time worked beyond the agreed
upon number of hours usually qualifies for overtime pay at a higher rate. In the case of salaried workers, time
off may be given instead. This system is appropriate where payment cannot be related to output. Incentive
pay is possible and merit awards may also be used.
● Incentive schemes: found in piece rate systems, they are calculated using work study methods. The logic is
that the individual is paid a basic low rate plus payment by the piece, or output produced. It is assumed that
productivity will increase and unit costs will decrease, as well as supervisory costs. However, greater quality
checks will have to be initiated. In reality , conflict often arises between workers and managers, and among
employees. Workers will try to manipulate the standard rate, whilst ‘piece rate’ workers dependent on ‘flat
rate’ workers for inputs or maintenance will resent the latter’s higher pay. A possible remedy is to offer group
incentives but may require restructuring the organisation.
● Measured Day Work: This is a bridging scheme as it seeks to have both employer and employee agree on a
level of output that is attainable. The employer will agree to pay on the basis of this output , regardless of
short term variations. It offers the employee a stable and predictable wage, whilst the employer has a
predictable level of productivity. The system is workable where a high level of trust is evident and delays or a
breakdown of equipment is minimal.