Chap 8

11/6/2022
Lesson 8: Compensation
Tài liệu 1: Chương 9, 10
https://lientran.vn/ 1
Lesson 8:
Compensation
Readings:
[1] Chapter 9, 10
1
11/6/2022
8.1. Introduction of compensation

Reward:
A.Intrinsic
All tangible and intangible
benefits an employee
receiving from doing a job
Organisational A.Reward Extrinsic
Social

• Compensation implies all the tangible benefits and
provisions an employee obtain as part of ‘employment
relationship’
• It is the extrinsic part of REWARDS
15% 30% 50% of total cost

3
11/6/2022

Issues with compensation:
• Obsolescence: with significant shifts in workplaces, the existing systems of narrow

pay ranges, rewarding traditional values, over reliance on cash incentives are some
of the symbols of an outmoded system.
• Changes in psychological contract: the old contract of ‘if you work hard, the firm
will take care of you ‘has been replaced by ‘if we outperform the market, we shall
share the rewards’.
• Lack of alignment with business strategies.
• Gap between espoused theories and theories in action.
• Double standards displayed by senior leadership


• The New New Pay - Total Compensation system - Cafeteria
Compensation.
• TC == (BP
(BP ++ AP
AP++IP)
IP)++(WP
(WP++PP)
PP)++(OA
(OA+ +OG)
OG)+ +(PI
(PI + QL)
+ QL) + X+ X
• TC = total compensation
1. BP = base pay, or salary

2. AP = augmented pay, that is, any one-time payment, even if received at regular intervals (such as overtime)
3. IP = indirect pay (benefits)
4. WP = works-pay, that is, employer-subsidized equipment, uniforms, and so on
5. PP = perks-pay, that is, special benefits-anything from accessories to employee discounts on company products
6. OA = opportunity for advancement and increased responsibility
7. OG = opportunity for growth, both through on-the-job training and through off-site training and degree attainment
8. PI = psychic income, the emotional enhancements provided by the job itself and the setting (the people)
9. QL = quality of life, that is, opportunity to express other important aspects of life (location close to home, flextime, on-site
child care, ski to work, or whatever)
10. X = any unique element that an employee wants that the workplace can facilitate ("Can I bring my dog to work?")
4
11/6/2022
8.1. Introduction of
compensation
TOTAL REWARDS
– It integrates the financial and

non-financial elements of
rewards into a unified whole
– The WorldatWork Total

Rewards Model: Strategic
elements of the employer-
employee exchange

TOTAL REWARDS MIX FORMS OF PAY
BASIC PAY
VARIABLE PAY
Company Performance Linked Pay
Group/Team Performance Linked Pay
Individual Performance Linked Pay
FRINGE BENEFITS
PERQUISITES
ALLOWANCES
Nguồn:
http://www.csae.com/Portals/0/CSAE%20 https://lientran.vn/ 10
2014/Anderson%20Handout%201.pdf
5
11/6/2022
8.2. The importance of compensation

Right compensation produces employees’
Good Feeling of
Motivation
behaviors equity
Reduced
Productivity
agency actions

Produce good behaviors
Reinforcement Theory Vroom’s Expectancy Theory
–Compensation is an reinforcer of
good behaviors
Expectancy of Instrumentality Valuation of the
performance of success in reward in
success getting reward employee’s eyes
–Behavior is controlled by its
consequences – reinforcers
–Reinforcement strongly influences

behavior but is not likely to be the
sole cause
6
11/6/2022

Produce feeling of equity
Adams’ Equity Theory
•Employees compare their ratios of outcomes-to-
inputs of relevant others.
Reactions to Inequity
–When ratios are equal – Equity –No tension = Fair
–Unequal - Tension - Unfairness
Change in actions, perception,
•Under-rewarded states cause anger benchmark, quitting job
•Over-rewarded states cause guilt
–Tension motivates people to act to bring their

situation into equity

Reduce agency actions
• Agency THEORY
7
11/6/2022
8.3. Compensation determinants

EXTERNAL FACTORS
INTERNAL FACTORS
Wage legislation
Labour market conditions
Employers compensation
policy Market rates
Cost of living
Comparative value of jobs
Societal factors
Relative value of employees
Collective bargaining
Employers capacity to pay
The condition of the economy
8
11/6/2022
8.4. Setting up pay process

1.Collect and summarize work content information for each job through 1. Job Analysis.
Establish relative worth of different jobs through 2. Job Evaluation.
Gather Compensation data from other employers for comparable jobs through 3. Salary
survey.
Formulate the 4. Compensation policy in respect of external competitiveness.
Integrate the internal structure (Step 2) with the external market pay rates and create
a 5. Compensation structure.

2. Job evaluation
Internal
Job analysis Job Job Job structure
alignment
description evaluation
Some Major Decisions in Job Evaluation

• Establish purpose of evaluation
Work relationships
• Decide whether to use single or multiple plans
within organization • Choose among alternative approaches
• Obtain involvement of relevant stakeholders
• Evaluate plan’s usefulness
9
11/6/2022

2. Job evaluation - Methods
Ranking
Factor comparison
Classification
Point method

2. Job evaluation - Ranking Method
• Each job is ranked in relation to all other jobs, usually based on general
attributes such as job complexity
• Two approaches
– Alternation ranking
– Paired comparison method

10
11/6/2022

2. Job evaluation - Ranking Method

2. Job evaluation - Factor Comparison Method
Factor Comparison method ranks
1.Select the Analyze
each several times - once for each benchmark jobs
Agree on factors
benchmark jobs
compensable factor.
Five compensable factors :

Determine the
Allocate money relative importance Rank benchmark
value to factors of factors in each jobs by factors
1. Mental requirements job
2. Skill requirements
3. Physical requirements
4. Responsibilities
Evaluate other jobs
5. Working conditions.
11
11/6/2022

2. Job evaluation - Classification Method
• Uses class descriptions that serve as the

standard for comparing job descriptions
• Classes include benchmark jobs
• Outcome
– Series of classes with a number of jobs in each

2. Job evaluation - Point Method
• Three common characteristics of point methods
– Compensable factors
– Factor degrees numerically scaled
– Weights reflect relative importance of each factor
• Most commonly used approach to establish pay structures in U.S.
• Differ from other methods by making explicit the criteria for evaluating jobs --
compensable factors
12
11/6/2022
8.4. Setting up pay

process
2. Job evaluation –
Point Method

2. Job evaluation - Point Method
• Steps
2. Determine 4. Weight the

1.1. Conduct job compensable 3. Scale the factors factors according to
analysis
factors importance
6. Communicate
the plan, train 7. Apply to non-
5. Evaluation
users, prepare benchmark jobs
manual
13
11/6/2022

3. Market Survey
• Salary survey is the

process of analyzing
compensation data 1.1. Select the jobs 2. Identify the target
3. Identify the key
to be used in the organizations:
jobs for survey
gathered from other survey Competitors
employers in a survey of
the relevant labor market
• To achieve external equity 6. Tabulate the 5. Send the Survey 4. Decide on what
survey data. Questionnaire information
• Formal or informal
manner.

4. Compensation policy
• The Compensation policy or stance expressed where it wants its rates to be
positioned relatively to the market place. Does the organization want to
lead, lag or meet the market in compensation?
The Compensation policy could cover the following matters:

• 1. How will internal compensation levels compete with market rates?
• 2. How will internal equity and external competitiveness be balanced?
• 3. How much information to be shared on compensation?
• 4. How will pay be fixed on appointment or on progression?
• 5. How employees will be fitted into revised grades?
• 6. How employees’ pay be covered to avoid stagnation at maximum of the grade
14
11/6/2022

5. Compensation - Pay Structure
Pay Grades •A Pay grade consists of jobs of approximately equal difficulty or importance
•A grade structure consists of a sequence of grades, bands or levels into which groups of jobs that are broadly comparable in size are placed
Grade structures .
•The main types: narrow graded structure, broad graded structure, broad banded structure…
Rate Ranges •The Pay ranges usually have a minimum, midpoint, and a maximum
•A Wage Curve: A scatter-gram with a series of dots that present the current wage rates, which indicates
The Wage Curve
the relationship between the comparative value of jobs and their established wage rates

5. Compensation Structure
15
11/6/2022
8.4. Setting
up pay
process
5. Compensation
Structure
16
11/6/2022
8.5. Employee benefits

Employee Benefits:
The indirect financial and non financial remuneration, which an

employee is eligible to receive in addition to their normal wages or
salaries, in their job
Objective:
To address the economic security concerns of the employees, to

improve employee retention in the organization.
Major benefits Allowances Perquisites
Dearness Allowance Leave Travel concession

• Accident insurance
• Retirement benefits Conveyance allowance Advances
• Scholarships
• Educational assistance House Rent allowance Soft Furnishing
• Various kinds of leave reimbursements
• Social security Deputation allowance
• Housing/ Club membership,
Accommodation Education allowance etc
Expense account
17
11/6/2022

Factors influencing choice of benefit package

Design principles and issues of benefit packages
Principles Issues
• Statutory requirements • The targeted beneficiary

• The extent of choice to be given to
• Employer branding strategies employees
• The funding of the programs
• Concern for security • The legal defensibility
• The eligibility gates, if at all ( coverage
• Tax angles, and of Probationers or Trainees)
• The coverage of dependents
• Utilization of leisure time • The differentiation between full time
/part time employees.
18
11/6/2022

Flexible Benefit programs
Flexible benefits schemes or ‘cafeteria benefits’ / ‘flex plans’ provide the
employees choices to personalize their pay and benefits package in line with
their personal needs
Advantages Disadvantages
employee vulnerability to bad choices,

freedom of choice to suit personal needs
and
Increased involvement leads to better

Additional cost of administration
understanding of benefits, and
Cost containment for benefits https://lientran.vn/ 37

Flexible Benefit programs
Steps in implementing a Flexible benefit program:
• 1. Setting up a menu of benefits options
• 2. Working out the cash value for each option.
• 3. Estimate the likely take-up of specific benefit
• 4. Present the choice of benefits to employees.
• 5. Fix dates for next review.
Flextime, Job sharing and Telecommuting are some of the other examples of Flexible
Benefit Programs.
19
11/6/2022
8.6. Compensations for special groups
Supervisors Board of directors Professionals Scientists
Contingent
Top management Sales representatives
employees
They are treated differently from the standard compensation programs, on account of
their unique nature of work and competencies of strategic importance to the
organization

The Supervisors
Pulls of implementing the
Leadership Team
organization’s business plans
Supervisors
Employees
Pushes for keeping the

employees happy, motivated
and productive
20
11/6/2022

Top Executives Compensation Determinants
1.Personal
Firm Size
attributes
The widening chasm

between the CEO's pay and Managerial Power of the
the median remuneration of Discretions CEO
employees (MRE)
Diversification
of Firm
Business

Top Executives Compensation - Issues
1.Governance
Shareholders: Say on Pay
Objectivity of the Compensation Consultant
Aligning Long Term Incentive Awards to Performance
Peer Groups
Relative Performance
Claw backs
The role of the Government
21
11/6/2022

Sales personnel Issues
The relative pay and structural
Salary plus differences of sales professionals at
Salary only
commission different levels of the sales
organization: field salespeople, sales
managers and key account managers
Salary plus Commission
bonus only Right parameters for developing the
sales compensation architecture
Additional
non-cash The time horizon for sales force
rewards compensation

Scientists and Engineers in High Tech Industry
• The war of talent

• Should rely on Total rewards approach
• Relatively higher base pay and small percentage of

variable pay.
• Create Dual career ladder system: Technical and

managerial to deal with technical obsolescence and
career plateauing.
22
11/6/2022

Contingent workers
Contingent workers are engaged through staffing or manpower

leasing firms for fixed time periods
Contingent employment has been witnessing rapid growth
Contingent workers continue to insulate businesses from demand

fluctuations
Fair wages and equal pay for equal work is the biggest concern
Conclusion
• Compensation is a part of all rewards that employees
receive thanks to their employment
• Two biggest sections of compensation are pay and

benefits
• Special groups need different compensation approaches.
23

Chap 8

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Chap 8

Uploaded by

Copyright:

Available Formats

11/6/2022

8.1. Introduction of compensation

Organisational A.Reward Extrinsic

8.1. Introduction of compensation

• It is the extrinsic part of REWARDS

15% 30% 50% of total cost

8.1. Introduction of compensation

• Obsolescence: with significant shifts in workplaces, the existing systems of narrow

• Lack of alignment with business strategies.

• Gap between espoused theories and theories in action.

• Double standards displayed by senior leadership

8.1. Introduction of compensation

1. BP = base pay, or salary

– It integrates the financial and

– The WorldatWork Total

8.1. Introduction of compensation

Group/Team Performance Linked Pay

Individual Performance Linked Pay

8.2. The importance of compensation

8.2. The importance of compensation

–Reinforcement strongly influences

8.2. The importance of compensation

–Tension motivates people to act to bring their

8.2. The importance of compensation

8.3. Compensation determinants

Labour market conditions

8.4. Setting up pay process

Establish relative worth of different jobs through 2. Job Evaluation.

Formulate the 4. Compensation policy in respect of external competitiveness.

8.4. Setting up pay process

Some Major Decisions in Job Evaluation

8.4. Setting up pay process

8.4. Setting up pay process

– Paired comparison method

8.4. Setting up pay process

8.4. Setting up pay process

Five compensable factors :

8.4. Setting up pay process

• Uses class descriptions that serve as the

8.4. Setting up pay process

• Most commonly used approach to establish pay structures in U.S.

8.4. Setting up pay

8.4. Setting up pay process

2. Determine 4. Weight the

8.4. Setting up pay process

• Salary survey is the

8.4. Setting up pay process

The Compensation policy could cover the following matters:

8.4. Setting up pay process

8.4. Setting up pay process

8.5. Employee benefits

The indirect financial and non financial remuneration, which an

To address the economic security concerns of the employees, to

8.5. Employee benefits

Major benefits Allowances Perquisites

Dearness Allowance Leave Travel concession

8.5. Employee benefits

8.5. Employee benefits

• Statutory requirements • The targeted beneficiary

8.5. Employee benefits

employee vulnerability to bad choices,

Increased involvement leads to better

Cost containment for benefits https://lientran.vn/ 37