Compensation Policy – Chapter 02

Compensation Administration Process

Principles of Administration of Compensation

 There should be a definite plan to ensure that differences in pay for jobs are based upon variations in
job requirements.

 Prompt and correct payments of the dues of the employees.

 The plan should carefully distinguish between jobs and employees.

 Equal pay for equal work.

 The wage and salary structure should be flexible.

 The employees and the trade union, if there is one, should be informed about the procedures used to
establish wage rates.

 The wage should be sufficient to ensure for the worker and his family reasonable standard of living.

Purpose of Compensation

For Employer

 Brand image (employer of choice) for attracting candidates

 Motivating employees for higher productivity and performance

 Retaining talent

 Consistency in compensation

 Provoking healthy internal competition

For Employee

 Work-life Balance

 Recognition as tool to self esteem

 Planning for better quality of life

Factors affecting Compensation

 Mental requirements,
 Physical requirements,
 Skill requirements,
 Responsibility level, and
 Working conditions (risk, time, hazards)
  Organizational Affordability
 Man power planning
 Output vs salary ratio
 Market Rate for Talent
 Economic Conditions

Laws governing and affecting Pay Structure

 Minimum Wages Act (minimum remuneration, its heads)

 Income Tax Act (heads which provide tax relief)
 Equal Remuneration Act
 Payment of Wages Act (permissible deductions)
 Acts on social securities (PF, Bonus, Gratuity, Employee Compensation)

Inputs we get in Compensation Structure

 Job Evaluation
 Job Specification
 Job Description
 Time and Motion Study
 Market Survey
 Demand and Supply- Talent Mapping
 Industry wise bench marking

Sources of Compensation Data

 Labor Market
 Employer Information
 Employer Association
 Professional Association
 Salary Survey
 HR Service Providers

Compensation Administration

The major functions of an administration consist of the following:

 Approval and /or recommendation of management on job evaluation methods and findings.
 Review and recommendation of basic wage and salary structure.
 Co-ordination and review of relative departmental rates to ensure conformity.
 Review of budget estimates for wage and salary adjustments and increases.
Compensation Administration process

Job Evaluation & job description

JOB EVALUATION: The process of analysing jobs from which job descriptions are developed.
Job evaluation techniques include the use of interviews, questionnaires, and observation.

A system for comparing jobs for the purpose of determining appropriate compensation levels for individual
jobs or job elements.

JOB DESCRIPTION: A critical component of both compensation and selection systems, job descriptions define
in writing the responsibilities, requirements, functions, duties, location, environment, conditions, and other
aspects of jobs. Descriptions may be developed for jobs individually or for entire job families.

Job Evaluation - Objectives

Job evaluation is used to determine the relative value of each job in relation to all jobs within the organization.
Immediate objective: to obtain internal and external consistency in wages and salaries.
Ultimate objective: employee and employer satisfaction with wages and salaries paid.

Job Evaluation – HISTORY

 1865 - Karl Marx wrote in Das Kapital that the value of goods and services is based on the amount of
labor that goes into them
 1885 - Frederick Winslow Taylor stated that the content of labor in labor determines the price of labor
 1935 - Edward Hay developed the Hay point factor system
 1963 - The Equal Pay Act prohibited discrimination on the basis of sex…for equal work on jobs, the
performance of which requires equal skill, effort, and responsibility and which are performed under
similar working conditions.

Importance of job evaluation

1. To involve the people occupying the positions under evaluation. This is especially so if you think your
organizations job descriptions are poorly written or out of date. The people in positions and their
immediate supervisors have the best idea of what the job is really about.
2. Job evaluation is most effective as a participative exercise and this in itself can improve employment
relations. It is therefore recommended that job evaluation is introduced or revised jointly by allowing
management and employee representatives to discuss relevant issues initially in a non-negotiating
forum
3. To ensure integration of internal fairness and external competitiveness.

Job Evaluation Methods

• Job Ranking Method

– Examines job description and arrange jobs according to value to company e.g. highest to
lowest.
• Job Classification Method
– Classes or grades are defined to describe a group of jobs
• Point Method
– Breaking down jobs on identifiable criteria and the degree to which these criteria exist on the
job.
• Factor Comparison
– Comparing value of different jobs and deciding the value of that job.

Job Evaluation Methods (advantage Vs Disadvantage)

 Advantage Disadvantage

Ranking Fast, simple, easy to explain. Cumbersome as number of jobs increases. Basis for
comparisons is not always acceptable.

Classification Can group a wide range of work Descriptions may leave too much room for
together in one system. manipulation.

Point/Factors Compensable factors call out basis for Can become bureaucratic and rule-bound.
comparisons. Compensable factors
communicate what is valued.

JOBS evaluation FACTORS

A set of compensable factors are identified as determining the worth of jobs. Typically the compensable factors
include the major categories of

SKILLL EFFORT WORKING CONDITION RESPONSIBILITIES

– Experience – Mental – Location - Fiscal
– Education – Physical – Hazards - Supervisory
– Ability – Extremes in
Environment
Decision making and problem solving Accountability

Job Evaluation – benchmarking

Job Evaluation

Internal External
consistency consistency

Industry, national,
Intra-organisation
global

This potential to blend internal forces and external market forces both strength and an opportunity to job
evaluation system.
Hay’s Method – 3 Factors

Hay’s Method – Process

Success factors of job evaluations

• Purpose of evaluation should be clearly defined

• Adoption of appropriate technique
• Allocation of sufficient resources