West Coast College

Pio Duran Albay

COMPENSATION
ADMINISTRATION
MODULE 2

JANINE V. TORRES
Instructor
 West Coast College
Pio Duran Albay

COMPENSATION ADMINISTRATION- MODULE 2

FOUNDATION OF COMPENSATION ADMINISTRATION

Learning Objectives:
At the end of the chapter, the students will be able to:
• discuss the nature and objectives of compensation;
• determine the classification of compensation;
• explain the policies affecting compensation;
• identify the components of a compensation system;
• discuss the different theories of wages;
• differentiate between salary and wage as a concept;
• explain the different compensation concepts; and
• identify and discuss labor market theories.

Nature Of Compensation
Compensation Administration of Human Resource Management is considered
as the heart of the Human Resource function because of its complexity in developing pay
structures, implementing compensation system, and controlling its implementation and
administration. The heart pumps blood and compensation denotes the lifeblood of the
employees in terms of satisfying and fulfilling many of their basic needs.

Compensation is defined as the means of giving a monetary value equivalent to

any work performed by an employee. It is also referred to as all financial rewards and
nonfinancial rewards which an employee may receive out of a work rendered for the employer.
Compensation in the form of money is a primary motivator and a ticket to survival. This is the
reason why management is careful not to allow any issue on compensation for it may spark
discontentment and unexpected employee turnover.

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THREE BASIC TYPES OF COMPENSATION:
1. Base Pay
2. Variable Pay
3. Benefits
Base Pay is the basic pay given to the employee for the actual work rendered usually in the
form of salary or wage. It is the pay that was negotiated and agreed upon by the employee and
the employer during the hiring process.
It is expressed in the form of salary or wage which many people use interchangeably.
Salary refers to a fixed amount of pay which is given usually twice a month. Wage is used to
mean an hourly or daily based pay for any work rendered for a particular day.
It is determined by the level of skills required, educational background, work
experience, job grade, and position of an employee. It is also negotiated during collective
bargaining agreements, developed by using market rate analysis and job evaluation.

Variable Pay is the pay linked to actual accomplishments in performance such as bonuses or
incentives based on a target sales quota or target productivity.
Incentives can be paid on individual, group, or team basis, sometimes it is provided for
all employees regardless of rank. Examples: Sales Incentives, PEI, PBB and SRI or Service
Rendered Incentives.

Benefits these are indirect rewards which may either be government-mandated or voluntarily
given by the employer. Examples: Health Insurance , Vacation Leaves, Sick Leaves and Birthday
Leaves.
Benefits help employees to further cope with the demands of the job and their personal
life. Some companies make their benefits attractive to entice job seekers who would like to
work for companies that will take of them for a long time.

Organizations provide their employees with a compensation package in order to

achieve the three-fold objectives:
1. to retain high performance employees and reduce employee turnover
2. to achieve high productivity and efficiency by providing fair
compensation among employees commensurate with their positions;
3. to satisfy pay requirements in accordance with the law.

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CLASSIFICATION OF COMPENSATION
1. Direct Compensation
2. Indirect Compensation

Direct Compensation refers to an actual monetary value that entitles an employee. It can be in
the form of salary or wage. It can also be in the form of variety pay such as bonuses,
incentives, commissions, and other performance-based pay. Money is usually attached to direct
compensation.
Indirect Compensation refers to nonmonetary aspects of compensation, such as benefits
packages that include hospitalization and life insurance plans, sick and vacation leaves, car
plans, and educational grants among others. It is usually referred to as the" add-on" or the
extra component of base pay.

POLICIES AFFECTING COMPENSATION

• Internal Alignment
• External Competitiveness
• Employee Contribution
• Management of the Pay System

COMPONENTS OF A COMPENSATION SYSTEM

• Job Analysis
• Job Description
• Job Evaluation
• Pay Structures
• Salary Surveys
• Policies and Regulations

Job Analysis is defined as the process of determining all the information specific to a particular
job. The different tasks or activities, such as drafting, writing, teaching, and encoding are
obtained. It can also provide the required behavior to perform tasks and the performance
standards needed to evaluate job performance. This is necessary for the development of job
descriptions which are essential in determining pay rates.

Job Description is referred to as the written summary of all the duties and responsibilities of a
particular job position. It also includes the job specification which describes the educational
background, experience, skills, and personal traits that are needed to perform a particular job.

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Job Evaluation is the process of determining the worth of a job. The worth or value of the job
in the organization forms a big part in determining pay rates, specifically basic pay.

Pay Structures this is usually through standardization using grades or levels. It helps in
determining entry pay and incremental increases during performance evaluation or promotion.
It minimizes complaints on corresponding amount of increase because they are structured and
systematically arranged per grade or level.

Salary Surveys. Some organizations participate in salary surveys and purchase market data on
prevailing rates for different positions in the industry where they belong. These help in
determining appropriate rates and at the same time remaining competitive among
competitors.

Policies and Regulations. Each organization has its policies in administering and implementing
its payment system. These depend on many factors including the organization's capacity to
provide compensation and the standards set by law. They also indicate the kind of support that
the top management has given in the implementation of compensation packages.

THEORIES ON WAGES
Over the years, economists have developed theories that are designed to explain the
factors that affect wages. These theories were developed since the giving of wages to workers
is a means to sustain the worker's survival. Wage is in the form of money as a means to pay for
basic necessities.
• Subsistence Theory
• Just Price Theory
• Wage Fund Theory
• Residual Claimant Theory
• Standard of Living Theory
• Bargaining Theory

Subsistence Theory
➢ the most popular economic theory on wages
➢ became the basis for the minimum wage concept
➢ based on the theory of population by Thomas Malthus
➢ an increase in wages above the minimum or subsistence level will only lead to an
increase in population at a faster rate
➢ increase of population= increase or labor supply=lower wages
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 ➢ below minimum wages=decrease in population= lower labor supply= increase in wages
➢ effect will lead to famine, starvation and disease

Just Price Theory

➢ upholds the equity theory of J. Stacey Adams
➢ emphasizes that employees would like to maintain equity between inputs and outputs
➢ wages are provided based on the status or position of each employee
➢ high positions=high wages
➢ complex task = higher wages
➢ bigger responsibility=higher position=higher wages
➢ lesser responsibility=lower position=lower wages

Wage Fund Theory

➢ developed by Adam Smith
➢ workers are paid based on a fund that is already there in the first place
➢ employees or workers will be paid equally by dividing the wage fund over the number of
workers
➢ the lower the number of workers , the higher the wages

Residual Claimant Theory

➢ first stated by William Stanley Jevons IN 1862
➢ with profound analysis after 20 years by Francis Walker
➢ wages are residual claims after rent, interest, and profits are deducted from the total
product

Standard of Living Theory

➢ better version of subsistence theory
➢ wages is determined by the standard of living of the workers

Bargaining Theory
➢ developed by John Davidson
➢ highlights the bargaining power of workers in negotiating their wages
➢ wages are high if the workers are stronger than the employer

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DIFFERENCE BETWEEN WAGE AND SALARY

Paid semi-monthly or on a
fixed period such as every
SALARY

Based on the number of

15th and 30th of the month
SALARY

hours worked multiplied by

Does not change each month
or for a long time
May change only if there is a
directive for a salary increase
or promotion, etc
the employee's hourly rate
Received either daily,
weekly, or earlier than the
semimonthly payment of
salaries

Maybe considered as a total Usually follow the no work,

compensation package which no pay rule

also includes benefits
Determined thru market pay
rates, industry average,
compensation analysis among
competitors
WAGE
Usually paid on the basis of
work hours rendered; no
paid vacation or sick leaves
to be credited

COMPENSATION CONCEPTS

1. Economic Concept
2. Psychological Concept
3. Sociological Concept
4. Political Concept
5. Equity Concept
6. Communication Concept

Economic Concept - compensation is the price given for labor services

Psychological Concept- compensation is a form of motivation

Sociological Concept- compensation is a form of status symbol

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Political Concept - compensation is negotiated at the bargaining table using power and
influence.

Equity Concept - fairness is always attached to compensation. Employees want to perceive

their pay as commensurate with their contributions in the organization.

Communication Concept - the internet can provide salary surveys of different positions
anytime.

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Name: Year and Section
Subject:

QUESTIONS FOR REVIEW

Directions: Briefly answer the following questions:

1. Discuss briefly the meaning of compensation.

2. What are factors that affect compensation? Briefly explain each.

3. Explain briefly one objective of compensation.

4. Differentiate salary from wage. Discuss the most obvious difference between the two. Why?

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YOUR TURN

Imagine you have graduated from college and you are seated beside a K-12 graduate who is
also applying for the same position. If he/she asks you, " Do I have a chance for this job?" How
will you respond? Explain.

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