CHAPTER 8

COMPENSATING HUMAN
RESOURCES
INTENDED LEARNING OUTCOMES
By the end of the learning experience, students
must be able to:
1.Identify the objectives, main
components, and different forms of
compensation;
2.Determine the pay rates; and
3.Discuss the job evaluation
methods.
Compensation
is the set of rewards that organizations
provide to individuals in return for their
willingness to perform various jobs and tasks
within the organization. It includes all forms
of financial returns and tangible services and
benefits employees. It also includes various
elements such as base salary, incentives,
bonuses, benefits, and other rewards
 The objective of compensation is to create a
system of rewards. Compensation should be:

1. Adequate to meet the needs of the

employees and to acquire and retain qualified
personnel.

2. Equitable-Each person should be paid fairly,

in line with his/her efforts, abilities, and training.
Employees will believe their pay is
equitable when they perceive the
following circumstances

a. It is fair relative to the pay co workers in

the same organization receive.
b. It is fair relative to the pay received by co-
workers in other organizations who hold
similar positions.
c. It fairly reflects their input or contribution
to the organization.
The objective of compensation is to create a
system of rewards. Compensation should be:

3. Balanced-Pay benefits and other rewards should

provide a reasonable total reward package.
4.Cost-effective-taking into consideration the
company's ability to pay.
5. Secure-pay should be enough to help an
employee feel secure and aid him/ her in satisfying
basic needs.
The objective of compensation is to create a
system of rewards. Compensation should be:

6. Incentive-providing-pay should motivate

effective and productive work or reward desired
behavior.
7. Acceptable to the employee-The employee
should understand the pay system being
followed by the company and should feel it is
reasonable for the organization and for
him/her.
8. Compliant with legal regulation.
MAIN COMPONENTS OF COMPENSATION
Direct compensation consists of cash directly
paid to the employee in exchange for his/her
work. Included in-this category are:

a.Base pay -the hourly wage or weekly/monthly

salary earned.
b.Premium pay -refers to the additional
compensation required by law for work
performed within eight (8) hours on
nonworking days, such as rest days and
special days.
MAIN COMPONENTS OF COMPENSATION

c. Base pay progression- movement of

base pay overtime, from year to year.
d. Variable pay -incentive or bonus pay
that does not fall into base pay such
earnings may be based on performance
against preset goals (incentives) or pay at
the discretion of the company (bonuses) ;
may be paid at the individual, team,
group, or organizational level.
WAGES VS. SALARIES
Wages generally refer to hourly
compensation paid to skilled and unskilled
workers or those performing blue-collar
jobs, with time as the basis in the
computation.

Salary, on the other hand, is income paid

to an individual not on the basis of time
but on the basis of performance.
Base pay, base pay progression, and variable
pay add up to total cash compensation paid in
any given year.
• Benefits and perquisites or perks -In addition
to direct cash, compensation is also paid in the
form of indirect cash or benefits that have
monetary value.
• Indirect compensation -quality of work life.
Total rewards also include a broad array of
nonmonetary, but extremely important, rewards
that we place under the general umbrella of
quality of work life.
Under Indirect compensation.
These rewards include:

a. Organizational culture -the norms

and values defining appropriate
behavior in the organization.
b. Intrinsic values -rewards inherent in
the work itself. These rewards come
from the act of performing.
c. Career opportunities -the prospects
for development and growth.
DETERMINING PAY RATES
A pay range for a given job establishes a range of
permissible pay, with a minimum and a maximum.
Establishing pay ranges involves two basic phases:

1.Determining the relative worth of the different jobs

to the organization (thereby ensuring internal equity)
2. Pricing the different jobs (thereby ensuring external
equity)
-Job evaluation is the primary method used to
determine the relative worth of jobs to the
organization. Wage surveys represent one of the most
commonly used methods for pricing jobs.
The following are some of the basic
determinants of pay:
I. External Factors
A. Market Factor
1. Supply and demand for labor
2. Economic conditions and unemployment
B. Existing pay level in the community
C. Government regulations and laws.
The following are some of the basic
determinants of pay:
II. Organizational Factors
a. Type of industry
b. Profitability and company's ability to
pay
c. Unionized or nonunionized
d. Size of the company
e. Capital or labor intensive
f. Value of the job-contribution to the
company
The following are some of the basic
determinants of pay:
III. Job Factors
A. Skill
1.Mental requirements
2.Complexity of duties
3.Personal qualifications needed
4.Ability to make decisions, judgments
5.Preparation for the job-education,
training, and knowledge
The following are some of the basic
determinants of pay:

B. Responsibility
1.Money, commitments
2.Decision making
3.Supervision-work of others
4.Quality of work
5.Materials, equipment, property
6.Confidential information
The following are some of the basic
determinants of pay:
C. Effort
1.Physical and mental effort required
2.Attention to details
3.Pressure of work
D. Working conditions
4.Job conditions
5.Physical hazards
The following are some of the basic
determinants of pay:

IV. Individual Factors

A.Performance, productivity
B.Experience
C.Seniority, length of service
D.Potential, promotability
ESTABLISHING PAY RATES
1.Conduct the salary survey (aimed at
determining prevailing wage rates) for the
following reasons:
a.Price benchmark jobs
b.Majority of the positions found in the
company are usually priced directly in the
marketplace.
c.To collect data on benefits so as to provide
a basis on which to make decisions
regarding employee benefits
ESTABLISHING PAY RATES

2. Determining the worth of each job

through job evaluation. Job evaluation
refers to a systematic comparison done
in order to determine the worth of one
job relative to another.
JOB EVALUATION METHODS

a. Ranking Method. This is the

simplest and oldest method and the
least often used job evaluation
technique. It involves ranking each job
relative to all other jobs, usually based
on overall difficulty rather than on a
number of compensable factors
 Ranking Method
Advantages Disadvantages
• Simplest and easiest to • Provides no yardstick for
explain measuring the value of one
• Takes less time to job relative to another
accomplish than other • It is limited to smaller
methods organizations where
employees are very familiar
with various jobs.
• The method is highly
subjective.
 b. Job Classification or Job
Grading Evaluation Method.
This is a simple, widely used
method in which jobs are groups.
The groups are called classes if they
contain similar job or grades if they
contain jobs that are similar in
difficulty but otherwise different.
Job Classification or Job Grading
Evaluation Method
Advantages
• Provides specific standards for • Jobs are forced to fit into
compensation and
accommodates any changes in
the value of individual jobs
• Can be constructed simply,
quickly, and cheaply
• Easy to understand and explain
to employees
Disadvantages
categories that are not entirely
appropriate and feelings of
inequity can result.
• Problems may arise in deciding
how many classifications there
should be because too few
classes will make it difficult to
differentiate job value while too
many classes make writing
definitions almost impossible.
C. Point System.
Point system requires evaluators to
quantify the value of the elements of a
job. On the basis of the job description
or interviews with job occupants, points
are assigned to the degree of various
compensable factors to do the job.
Steps of point system
1. Selection of key jobs. This represents jobs
that are common throughout the industry.
The goal here is to select enough key job to
represent each major internal variable in the
pay structure for all the jobs being evaluated.
2. Selecting compensable factors. Compensable
factors are factors or characteristics of jobs
that are deemed important by the
organization to the extent that it is willing to
pay for them.
Subfactors 1st degree 2nd degree 3rd degree 4th degree
Education College level College graduate with MA/MS with Ph. D
Experience Less than l year 1 year or more 2 years or more 3 years or more
Job Complexity Diversified work Difficult or Difficult or Unusual work of
of a routine involves work not involves work complex nature
nature requiring necessarily new comprising new requiring the use
considerable care requiring problems of judgment
and attention considerable care requiring the use
and attention of judgment
Manual skills Able to operate Able to operate or Able to set up, Able to
simple office apply various operate, drive, manipulate and
equipment like kinds of and handle office tend office
telephone, fax management and machinery needed machinery
machine, systems in the in performing job (including tools,
typewriter, effective and whenever company vehicles,
calculator, and performance of necessary and laboratory
computer job equipment)
needed in
performing job
requiring the use
of judgment
ASSIGNING WEIGHTS TO FACTORS

Weights are assigned to each of the

factors, subfactors, and degrees to
reflect their relative importance.
Naturally, the weight assigned varies
from job to job.
ASSIGNING POINTS TO SPECIFIC JOBS

After the point scale has been agreed

on, point values are derived for key jobs
using the following steps:
1.Examine the job descriptions.
2.Determine the degree statement that
best describes each subfactor for each
compensable factor.
3.Add the totals number of points
 • Advantage • Disadvantage
• Can be easily interpreted and • Time consuming and costly to
explained to employees develop
because of its mathematical • Requires significant interaction
nature and decision-making by the
• Detailed and specific-Jobs are different parties involved in
evaluated on a component conducting job evaluation.
basis and compared against a
predetermined scale.
• The system is easy to keep
current as jobs change.
• Because of its quantitative
nature, it is easy to assign
monetary values to jobs.
D. Factor Comparison Method.
This method is similar to the point
method but slightly more complex, and it
involves a monetary scale instead of a
point scale, thus, not as popular as the
point method. Examples of compensable
factors are
1.Skills
2.Responsibilities
3.Effort
4.Working conditions
Steps of Factor Comparison Method

1.Identify key (benchmarks) jobs.

2.Identify job factors.
3.Rank jobs with respect to each of the
factors independently.
4.Assign monetary amounts to each job on
each factor.
5.Compare unique jobs with key jobs. This
should be done factor by factor, to
determine how much each unique job
should be paid.
Steps of Factor Comparison Method

6. Group similar jobs into pay grades.

A pay grade is comprised of jobs of
approximately equal difficulty or
importance as determined by job
evaluation.
7. Price each pay grade. The jobs are
then priced and the total pay for each
job is divided into pay for each factor.
See example matrix below
Factor Comparison Method
• Advantage
• Relatively detailed and
specific- jobs are evaluated on
a component basis and
compared against other jobs
• Usually easier to develop than • The standards used to
the point method
• Valued of the job is expressed
in monetary terms
• Can be applied to a wide range
of jobs
• Can be applied to newly
created jobs
• Disadvantage
• Relatively difficult to explain to
employees since the pay for
each factor is based on
judgments that are subjective
determine the pay for each
factor may have built in biases
that would affect certain
groups of employees like
female or minorities.
In conducting job evaluation, the following must be taken into
consideration:
1.Consistency- this is to establish reliability.
It is achieved when two people evaluating
the same jobs provide similar ratings made
by one person on two different occasions.
2.Freedom from bias-The process should be
free from political considerations or
personal biases. Those making the
evaluations should be objective.
3. Correctability-
Firms should provide mechanisms to modify
inaccurate or out-of-date evaluations, thus, the
need to periodically review and update job
evaluation results.
4. Representativeness-
All employees affected by the process should
have their concerns represented.
5. Accuracy of information-
Ratings must be based on accurate
information, jobs being rated that is, those
making the evaluations should be quite
knowledgeable.
DIFFERENT FORMS OF COMPENSATION

Employees can be paid for the time they work,

the output they produce, or a combination of
these two factors.

1. Payment for Time Worked.

Pay surveys are used to
establish competitive pay for the
industry and job evaluation is the
principal method for setting time-pay
schedules
Payment for Time Worked.
Pay is usually adjusted upward
through six types of increases
a.General-across-the-board increase for
all employees
b.Merit increases-paid to employees
based on some indicator of job
performance
c.Cost of living adjustment
d.Reclassification increase
e.Level adjustment
f. Promotional increase
DIFFERENT FORMS OF COMPENSATION

2.Incentive Forms of Compensation.

This is a method of compensating
employees on the basis of output which
means, more production, more earnings.
The organization first establishes
performance standards to determine the
quantity a person can be expected to
produce in a given period of time
CLASSIFICATION

1. Piecework or payment by
results-
This is a system of pay based on
the number of items produced or
processed by each individual worker
in a unit of time such as items per
hour or items per day
CLASSIFICATION
2. Individual incentive plans-
This rewards individual performance
on a real-time basis for meeting a goal or
hitting a target rather than increasing a
person's base salary at the end of the year.
Advantage: simple to calculate, and easily
understood by employees
Disadvantage tendency of employer to
raise production standards whenever
workers are found earning "excessive"
wages.
CLASSIFICATION

3. Group incentives-
These are given when it is
difficult to measure individual
output or when cooperation is
needed to complete a task or
project. The Japanese used group
cohesiveness to reduce jealousy.
DIFFERENT FORMS OF COMPENSATION

3. Performance-Based Rewards

Organizations want employees to perform

at relatively high levels and need to make
it worth their efforts to do so. It is believed
that when rewards are associated with
higher levels of performance, it will
presumably motivate the employees to
work harder to achieve awards.
DIFFERENT FORMS OF COMPENSATION
4. Spot Bonuses
These are spontaneous. Incentives
awarded to individuals for accomplishment
not readily measured by a standard.
5.Skill and Knowledge-based
pay/Competency-based pay
This sets pay levels on the basis of how
many skills an employee has or how many
jobs he/she can do. This emphasizes the
importance of an employee's ideas, growth,
and development.
DIFFERENT FORMS OF COMPENSATION
6. Merit Pay Plans
Merit pay is usually awarded to
employees on the basis of the relative
value of their contributions to the
organization. Employees who make
greater contributions are given higher
pay than those who make lesser
contribution.
DIFFERENT FORMS OF COMPENSATION

Profit Sharing

At the end of the year, some

portion of the company's profits is
paid into a profit sharing pool,
which is then distributed to all
employees.
DIFFERENT FORMS OF COMPENSATION

8. Stock Ownership Plans

Employees are gradually given a

minor stake in ownership of a
corporation. Employees receive a
claim of ownership of some portion of
the stock held by the company based
on seniority and perhaps
performance.
DIFFERENT FORMS OF COMPENSATION
9. Executive Compensation

a. Base pay-guaranteed amount of money that

the executive will get from the company.
b. Incentive pay/executive perquisites or
perks, e. g., stock option plan-an incentive plan
established to give company executives the
option to buy company stocks in the future at a
predetermined fixed price. This is over and
above the other executive perks solely given to
executives.
Thank you so much
For listening
Prepared by:
ARANTON, KRIZHA O.
ESTEBAN, MAYBELIN
VIADO, JOHN-BEL JOSHUA