CHAPTER 7 REPORT: COMPENSATION

Compensation is significant for the design of work systems as it helps to attract and retain
employees and motivate workforce that contribute to the competitiveness and success of an
organization. But what is compensation?
Compensation the money received by an employee from an employer as a salary or wages for
doing a job or in exchange of their service.
Salary is the payment receives by employee as a fixed rate per month or year no matter how
many hours a week they work. On the other hand
Wage is the rate of pay employee receives if they are being paid by the hour.
It is important for an organization to develop suitable compensation plans for their employees.
For the reason that, it may affect the productivity of workers and the profit of the business. If
wages are too low, organizations may find it difficult to attract and hold competent workers and
managers. And, If wages are too high, the increased costs may result in lower profits, or may
force the organization to increase its prices, which affects the demand for the organization’s
products or services.
Organizations use a variety of approaches to compensate employees, including:
Time based Systems
Time-based systems, also known as hourly and measured daywork systems, it compensate
employees for the time the employee has worked during a pay period.
- Salaried workers also represent a form of time-based compensation because they are
expected to work a set number of hours each day or each week.
- Time-based systems are more widely used, particularly for office, administrative, and
managerial employees, and also for blue-collar workers because that computation of
wages is straightforward, and managers can readily estimate labor costs for a given
employee level.
- Employees are also often preferred time-based systems because the pay is steady, and
they know how much compensation they will receive for each pay period.
Output-based (incentive) systems
Output-based (incentive) systems, compensate employees according to the amount of output
they produce during a pay period, thereby they paid directly to performance.
- Incentives reward workers for their output, that cause some workers to produce more
than they might under a time-based system.
- Some workers may prefer incentive systems because they see a relationship between
their efforts and their pay/ since incentive system presents an opportunity for them to
earn more money.
 There are Two types of Incentive Scheme Design: The Individual Incentive Plan and Group
Incentive Plan
Individual Incentive Plan is where workers are paid on the basis of their personal
performance.
- So, this means that the worker’s wages will be directly linked to their efforts.
- And, A worker may improve his remuneration by raising the level of output. 
There are also various form of Individual Incentive Plan, and the two common are the
Straight Piecework and the Bonus System

 Straight Piecework is the Simplest plan where worker’s pay is a direct linear function of
his or her output.
 Bonus System – is giving reward to employee for producing output above standard, and
the pay is called bonus.
Group Incentive plan - A variety of group incentive plans, which stress sharing of productivity
gains with employees.
- With this there is a number of workers may be associated in completing a task.
- Employees are encouraged to cooperate with one another so that all employees can
benefit.
- So the work of one person may be influenced by the work of the other/ since they are
work as a team
- Group incentive plan reward all team members equally based on overall performance of
the team members.

Damian, JM A
Comparison of advantages and disadvantages of time-based and output-based pay systems
The advantages of time based in management are:/ Stable labor cost,/ Easy to administer,/
Simple to compute pay/ and stable output./ However, the disadvantages is that, there are no
incentive to increase output.
The advantages in workers having time-based compensation is that/ they can gain stable pay
with the less pressure to produced/ than under output system./ However the disadvantages in
workers is that there efforts are not rewarded.
Output-Based advantages in management are Low cost of labor per unit and greater output.
/And the disadvantages are Wage computation is more difficult,/ Need to measure the output
produced by each worker,/ Quality may suffer because workers are just more focused in
producing more quantity,/ Difficult to incorporate wage increases,/ and increase problem in
scheduling.
On the other hand,/ the advantage of output based compensation on workers are/: their efforts
are being paid/ so there is an opportunity to earn./ However, The disadvantages are/ the pay
fluctuates/ and workers may be penalized because of the factor beyond control.
The third approach in compensating employees is the knowledge based system
Knowledge Based System is a pay system used by organizations to reward workers who
undergo training that increases their skills.
- It is a portion of a worker’s pay that is based on the knowledge and skill that the worker
possesses.
- In other words, the more you know and can do, the more your employer will pay you.
Knowledge-based pay has three dimensions:

 Horizontal skills - reflect the variety of tasks the worker is capable of performing
 vertical skills- reflect managerial tasks the worker is capable of
 depth skills- reflect quality and productivity results.
Management Compensation
Many organizations that traditionally rewarded managers and senior executives on the basis of
output. However with the new emphasis on customer service and quality, reward systems are
being restructured to reflect new dimensions of performance.
Executive compensation is also different from compensation for lower-level employees.
Because/ the salary and other benefits are negotiated and are documented in a
customized employment contract.
Recent Trends
In recent trends the compensation systems emphasize flexibility and performance objectives,
with variable pay based on performance. Some are using profit-sharing plans, or bonuses based
on achieving profit or cost goals. And some are placing more emphasis on quality of work life.
An ideal compensation package is one that balances motivation, profitability, and retention of
good employees.

Let’s pass the floor to the next reporter Ms. Aira Shayne Echavera