Lesson 1.

7 Compensation

a. Employer-employee relationship
The employee to employer relationship definition refers to the working connection
between employees and employers in the workplace. In order to produce outcomes that
are beneficial to the corporation, managers and subordinates are reliant on one another.
As a result, the two must have a strong relationship. In the contact point field, the
management of such a relationship among the two is crucial. Employee satisfaction rises
in direct proportion to the strength of the connection, resulting in improved performance.
To qualify for these advantages, one must keep the importance of the employer-employee
relationship in sight.

Employers and workers have a formal connection called an employment relationship. It

emerges when a person undertakes employment or provides services for a fee within
specific circumstances.

The practice of managing relationships in a company is known as employee relationship

management, or ERM. These connections can be made between the company and its
employees and between coworkers on the same level. Human Resource Management
considers employee relationship management to be a distinct discipline. Employee
relationship management (ERM) is the procedure of implementing control techniques and
procedures to govern employee relationships with one another and with their employers.

b. Forms and measurement of compensation income

 Forms:
o Direct compensation - This involves the financial ways that an employer
gives back to team members. This comes in the forms of salary, hourly
pay, incentive pay and/or bonuses, or overtime pay. For instance, some
jobs are commission based, incentivizing staff to do more in order to
receive higher pay. Allowances for travel, food, and relocation can also be
included.
o Indirect compensation - This includes all the ways an organization can
give back to an employee without paying them directly. For instance, this
can include health insurance; paid time off; a retirement plan; diversity,
equity, and inclusion plans; performance management styles; recognition
of achievements and contributions; internal culture; and more!

 Measurement:
o Compa-ratio - Sometimes referred to as “compensation” or “comparison”
ratio, the “compa-ratio” is the percentage obtained by dividing the actual
salary (AS) paid to an employee by the midpoint (MP) of their position’s
salary range. To find the MP, you might need to do additional research on
 the job role within the larger industry and calculate the middle of the
salary range.

CR (Compa-ratio) = [AS (actual salary) / MP (midpoint of pay range)] X

100

There are usually five zones of compa-ratio, each associated with a pre-
defined level of performance. A commonly accepted range for compa-
ratios is 80% to 120%, which divided into 5 zones are:

 80-87% – new, inexperienced, or unsatisfactorily-performing

incumbents.
 88-95% – those gaining experience but not yet fully competent in
the job.
 96-103% – fully competent performers fulfilling the job as defined.
 104-111% – those consistently performing the job at a level higher
than what the job definition requires.
 112-120% – those universally recognized as outstanding
performers, both inside and outside the organization.

c. Classification of compensation income

 Direct:
o Hourly - Hourly wages are often provided to unskilled, semi-skilled,
temporary, part-time, or contract workers in exchange for their time and
labor. Jobs where some employees receive hourly wage include the retail,
hospitality, and construction industries. Employees who receive hourly
wages are usually able to earn overtime pay. This pay consists of any
additional hours worked outside of their set contract.
o Salary - Annual salaries are typically provided to most full-time
employees or skilled employees and those who fill management positions.
A salary often indicates that the organization has invested in this employee
for the long-term future. Examples of employees who receive a salary
include teachers, accountants, doctors, and retail and hospitality managers.
Both hourly wages and salary make up an employee’s base pay or base
salary.
o Commission - Commission is a common form of compensation provided
to employees in sales roles. It will usually be based on a predetermined
quota or target. The higher the quota reached, the higher the commission
will be. Commission rates are often based on various specified factors,
including revenue and profit margins. Some employees will work on
commission only or obtain a salary with commission.
o Bonuses - Companies often offer bonuses to employees based on year-end
business results or the individual meeting their set goals. Sometimes, the
decision is at the manager’s discretion. Bonuses can be paid annually,
 quarterly, or even after the completion of each project. Both commission
and bonuses fall under incentive pay, along with piece rate, profit sharing,
stock options, and shift differentials.
 Indirect:
o Equity package - Equity as part of a compensation package essentially
means the employee is offered equity (ownership) in the company, either
through shares of stock or the option to buy such shares. An equity
package is common at start-up companies. These businesses may be low
on cash or funding and need other incentives to attract and retain
employees.
o Stock options - This form of compensation entitles employees to purchase
a set number of shares at a fixed price after a certain period. This is
different from an equity package because the employee will not have any
ownership in the company. Many stock options require employees to work
between three to five years before they can access this compensation.
o Benefits - Typical employee benefits usually include health insurance,
life insurance, retirement plans, disability insurance, legal insurance, and
pet insurance. Retirement funds and pension plans are also common
benefits that employees look for when considering a new role at a new
organization.
 Non-monetary compensation:
o paid or non-paid time off
o flexi-time
o learning and development opportunities
o parental leave
o childcare
o company cars
o phones or laptops,
o and meals.

d. Fringe benefits and 13th month pay

 Fringe benefits - Fringe benefits are additions to compensation that companies
give their employees. Some fringe benefits are given universally to all employees
of a company while others may be offered only to those at executive levels. Some
benefits are awarded to compensate employees for costs related to their work
while others are geared to general job satisfaction.

 13th month pay - A 13th month salary—also known as 13 month pay—is an extra
paycheck that is typically equal to one month's salary. It is paid in addition to
your employee's annual salary.

This tradition started in the Philippines in the 1970s and has since spread to other
countries. The 13th month's salary goes by different names depending on the
country, but the principle is the same.
 Whether it is called 13 month pay, Christmas pay or holiday pay, global
employers may be required to make these payments to employees at designated
times throughout the calendar year (often paid in July or paid in December).

Computation: Salary / 12 = 13 month payment

e. Fixed or variable allowances

The fixed and variable rate allowance (FAVR), or fixed and variable rate reimbursement,
is a way of reimbursing employees who use their own or leased vehicles for work-related
activities. For tax purposes,

FAVR payments must be made at least quarterly, according to Internal Revenue Service
(IRS) guidelines, which also imposes certain restrictions on how and how much an
employee's vehicle must be used to qualify for the FAVR allowance.

A fixed and variable rate allowance includes two payment types: periodic fixed payments
and periodic variable payments. The periodic fixed payment includes fixed costs
associated with driving and owning the vehicle, including depreciation, insurance,
registration fees, and taxes. The total costs for these expenses are calculated and then
adjusted to reflect the percentage of time the vehicle is used for business purposes. The
periodic variable payment includes operating costs, such as fuel, oil changes, tires, and
routine maintenance.

f. Tips and gratuities

Tips, gratuities and service charges are commonly associated with the hospitality,
tourism, hairdressing, taxi and delivery services, amongst others. From 1 December
2022, the Payment of Wages (Amendment) (Tips and Gratuities) Act 2022 introduces
new rules as to how employers have to share tips, gratuities and service charges amongst
employees.

A ‘tip or gratuity’ is a voluntary payment made by a customer to, or left for, an employee
or group of employees which they intended or assumed that the payment would be kept
by the employee or shared with other employees.

g. Vacation and sick leave allowance

 Vacation leave allowance - Granted for personal reasons, the approval of which is
contingent upon the necessities of the service.

Monetization:
o Allowed with 15 days VL balance
o 5 days retained after monetization
o 30 days maximum
 Forfeiture:
o Mandatory annual 5-day vacation leave forfeited if not taken during
the year.

 Sick leave allowance - Granted only on account of sickness or disability on the

part of the employee or any member of his immediate family.

Monetization:
o Monetization of 50% or more of the accumulated leave credits may be
allowed for valid & justifiable reasons such as:
o Health, medical and hospital needs of the employee & the immediate
members of the family;
o Financial aid & assistance brought about by force majeure events such
as calamities, typhoons, fire, earthquake & accidents that affect the
life, limb & property of the employee & his/her family;

h. Representation and transportation allowances

 RATA, is primarily granted by law to cover expenses incidental to and in
connection with the actual performance of the functions of local government
officials.
 It is attached to the performance of duties and responsibilities of the incumbents
of positions and not to the positions as viewed and implemented before.
 The salary grades of positions do not automatically entitle the incumbents thereof
to RATA.
 Rata schedule:
Number of workdays in actual work Actual RATA for a month
performance in a month
1 to 5 25% of the monthly RATA
6 to 11 50% of the monthly RATA
12 to 16 75% of the monthly RATA
17 and more 100% of the monthly RATA

 The sanggunian has the discretion to determine whether an organizational unit may be
considered a department/division which may entitle the head thereof to RATA.

i. Cost of living allowances

The Cost of Living Allowance (COLA) — also known as Goods and Services
Differential, Commodities and Services Allowance, or Cost of Living Index – is a
critical element of international assignee pay. It is the allowance you provide and update
over time to protect assignees against excess goods and services costs in a host location.
 j. Computation
Salary in city 1 x Cost of living index of city 2
--------------------------------------- = equivalent salary in city 2
Cost of living index of city 1

REFERENCES:
Air Inc. (n.d.). Cost of Living Allowance (COLA). Retrieved from: https://www.air-
inc.com/services/allowances/cost-of-living-allowance/
Carver, C. (2022). Employee Compensation 101: What Your Org Needs to Know. Retrieved
from: https://astronsolutions.net/employee-compensation/
Hayes, A. (2021). Fixed and Variable Rate Allowance (FAVR). Retrieved from:
https://www.investopedia.com/terms/f/fixed-and-variable-rate-allowance.asp
Jay, S. (n.d.). Types of Compensation: Everything HR Professionals Need to Know. Retrieved
from: https://www.aihr.com/blog/types-of-compensation/
Jenkins, F. (2018). COMPENSATION AND BENEFITS OF LOCAL GOVERNMENT
EMPLOYEES. Retrieved from: https://slideplayer.com/slide/13298491/
Johnston, M. (2018). Cost of living and Employee Benefits. Retrieved from:
https://slideplayer.com/slide/15004045/
Kagan, J. (2022). What Are Fringe Benefits? Types and Benefits. Retrieved from:
https://www.investopedia.com/terms/f/fringe-benefits.asp
Morris, A. (2021). Employee Employer Relations – An Overview. Retrieved from:
https://www.emexmag.com/employee-employer-relations/
Safeguard Global. (2022). What is 13 month pay? Get a grip on this popular payment. Retrieved
from: https://www.safeguardglobal.com/resources/blog/what-is-13-month-
pay#:~:text=A%2013th%20month%20salary%E2%80%94also,since%20spread%20to%20other
%20countries.
Workplace Relations Commission. (n.d.). Retrieved from:
https://www.workplacerelations.ie/en/what_you_should_know/hours-and-wages/tips-and-
gratuities/