Compensatio n

Presented By: Sujaya Thapa CAMAD, VI Sem

Concept of Compensation
Employee compensation refers to all forms of pay

or rewards going to employees and arising from their employment. Compensation refers to the extrinsic rewards that employees receives in exchange for their work. It is composed of the base wage or the salary and incentives or bonus and any benefits. Types of Compensation
Direct Compensations They are wages, salaries, incentives, commissions and bonuses Indirect Compensations They are insurance (life, death and health insurance),

Components of Compensation
1. Basic Pay - Basic pay is generally determined through job evaluation through the relative worth of a job. 2. Allowances. Several allowances are paid in addition to basic pay. Some of these allowance are given below:
Dearness Allowance. This allowance is given to protect

real income against inflation. Generally, dearness allowance (DA) is paid as a percentage of basic pay. House Rent Allowance. Employers who do not provide living accommodation pay house rent allowance (HRA) to employees. City Compensatory Allowance. This allowance is paid generally to employees in metros and other big cities where cost of living is comparatively high.

Contd
3. Incentive - Incentive compensation is performance-linked remuneration paid with a view to inspire employees to work hard and do better. 4. Fringe Benefits/Perquisites. Several types of benefits paid particularly to senior managers.
For eg. Provident funds, pensions, company car,

medical aid, entertainment, stock options, etc. are examples of such benefits

Determinants of Compensation
External Factor
Labor Market condition Nature of demand & supply of various types of personnel determine compensation (wage & salary structure) Equity It means fairness in the relation between what a person does (input) & what the person receives (output) Cost of Living Inflation affects purchasing power. Hence, compensation rates have had to be adjusted upward to maintain purchasing power. Labor Unions Employees have legal right to have collective bargaining. Legal Considerations Government influences pay directly through laws, regulation, policies.

Contd
Internal Factor
Compensation Policies Job Evaluation It determines relative worth of a job to organization. Nature of Employees It includes performance Employers Ability to Pay Depends upon financial position & profitability of the organization.

Methods of Establishing Employee Compensation

Job Analysis
It is the first process for establishing compensation. It is the process of determining the tasks that make

the job & skills, abilities & responsibilities required of an individual to successfully accomplish the job. Information obtained from job analysis are necessary to match qualified personnel with job requirements & establish proper compensation.
Job Evaluation
It is the process of assessing the value of each job

in relation to other jobs in an organization.

Job Evaluation Methods

Job Evaluation System - Methods

1. Ranking Method
Jobs are arranged and ranked according to their

importance from simplest to hardest. Merits Simple to use, suitable for small organizations Demerits based on judgment so possibility of biasness
2. The grade or classification method
Overall evaluation of all jobs based on common sense

& experience Job structure is divided into different classes with salary range maximum to minimum. Merits Easy to operate & understand, less costly & suitable for organizations with small work. Demerits Rigid & improper for organization with varied works

Contd
3. Point rating method
Jobs are ranked by assigning points. Sum-total of points will give an index of relative

value of jobs.
4. Factor comparison method
Each job is ranked several times.
Merits uses job-by-job comparison so its accurate,

easy to explain to employees Demerits Costly to install and complex to use, 5 or 7 factors might not be appropriate

Compensation Programme
1. Performing Job analysis
Evaluate to determine its value relative to all other

jobs in organizations
2. Conducting Pay (Wage/Salary) surveys
Benchmark jobs, packaged surveys (information

from agencies), own survey

3. Analysis of Organizational problems
It encounters different problems like; What will be the result of paying higher or lower

compensation? Are prevailing rates in industry are consistent with result of job evaluation?

Compensation Programme
4. Preparation of Pay structure
Joint outcome of all three factors & lots of decisions

need to be taken. Pay range is been determined.

5. Framing pay administration rules
Development of rules/policy of pay system is

finalized.
6. Implementation of wages & salaries
Due to sensitivity of pay system, usually assigned to

high-ranked officers. High involvement of HR department