COMPENSATING

HUMAN
RESOURCES
COMPENSATION
 Compensation is a set of rewards that
organization provides for individuals for
their willingness to perform various jobs
and tasks within the organization.
 It includes various elements such as
base salary, incentives, bonuses,
benefits, and other rewards.
 Base wages and salaries are the hourly,
weekly, or monthly pay that employees
receive in exchange for their work.
 These form the foundation for most
employee’s total perceptions of the
fairness and equity of the pay system.
 Its primary objective is to establish a
structure for the equitable compensation
of employees depending on their jobs and
their level of performance.
OBJECTIVE OF
COMPENSATION
 The objective of compensation is to
create a system of rewards that is
equitable to the employer and employee
alike.
 The desired outcome is an employee that
is attracted to work and motivated to do
a good job for the employer.
COMPENSATION SHOULD
BE…
 Adequate to meet the needs of the employees
and to acquire and retain qualified personnel.
 Equitable
a) It is fair relative to pay co-workers in the
same organization receive.
b) It is fair relative to the pay received by co-
workers in other organizations who hold
similar positions.
c) It fairly reflects their input or contribution to
the organization.
 Balanced – Pay benefits and other
rewards should provide a reasonable
total reward package.
Cost-effective – taking into consideration
that company’s ability to pay.
Secure – Pay should be enough to help
an employee feel secure and aid him/her
in satisfying basic needs.
Incentive-providing – Pay should
motivate effective and productive work
or reward desired behavior.
Acceptable to the employee – The
employee should understand the pay
system being followed by the company
and should feel it is reasonable for the
organization and for him/her.
Complaint with legal regulation
MAIN COMPONENTS OF
COMPENSATION
 Base pay – the hourly wage or
weekly/monthly salary earned. New Metro
manila minimum wage set at P500-537 (
https://www.rappler.com/nation/215947-new-metro-manila-minimum-wage-
500-to-537-pesos
)

 Premium pay – refers to the additional

compensation required by law for work
performed within 8 hours o nonworking
days.
 Base pay progression – movement of
base pay overtime, from year to year.
 Variable pay – incentive or bonus pay
that does not fall into base pay.
WAGES VS. SALARIES
 Wages generally refer to hourly
compensation paid to skilled and unskilled
workers or those performing blue-collar jobs,
with time as the basis in the computation.
 Salary is income paid to an individual not on
the basis of time but on the basis of
performance. It is usually given to
professional and managerial employees or
those who are performing white-collar jobs.
 Benefits and perquisites or perks – In
addition to direct cash, compensation is
always paid in the form of indirect cash or
benefits that have monetary value.
 Indirect compensation – quality of work
life. Total rewards also include a broad
array of nonmonetary, but extremely
important, rewards that we place under
the general umbrella of quality of work
life. These rewards include:
a) Organizational culture – the norms and
values defining appropriate behavior in
the organization.
b) Intrinsic values – rewards inherent in
the work itself. These rewards came
from the act of performing.
c) Career opportunities – the prospects for
development and growth.
DETERMINING PAY RATES
 Most wage and salary systems establish
pay ranges for certain jobs based on the
relative worth of job to the organization.
 A pay range for a give job establishes a
range of permissible pay, with a minimum
and a maximum.
 Establishing pay ranges involves two
basic phases:
a) Determining the relative worth of the
different jobs to the organization.
b) Pricing the different jobs.
 Job evaluation is the primary method
used to determine the relative worth of
jobs to the organization. Wage surveys
represents one of the most commonly
used methods for pricing jobs.
 The following are some of the basic
determinants of pay.
I. External Factors
A. Market Factors
1. Supply and demand for labor.
2. Economic conditions and
unemployment.
B. Existing pay level in the community.
C. Government regulations and laws
II. Organizational Factors
A. Type of industry
B. Profitability and company’s ability to pay
C. Ununionized or nonunionized
D. Size of the company
E. Capital or labor intensive
F. Value of the job – contribution to the
company.
III. Job Factors
A. Skill
1. Mental requirements
2. Complexity of duties
3. Personal qualifications needed
4. Ability to make decisions, judgements
5. Preparation for the job education,
training, and knowledge
B. Responsibilty
1. Money, commitments
2. Decision making
3. Supervision - work of others
4. Quality of work
5. Materials, equipment, property
6. Confidential information
C. Effort
1. Physical and mental effort required
2. Attention to details
3. Pressure of work
 D. Working conditions
1. Job conditions
2. Physical hazards
IV. Individual Factors
A. Performance, productivity
B. Experience
C. Seniority, length of service
D. Potential, promotability
ESTABLISHING PAY RATES
1. Conduct the salary survey for the following
reasons:
a) Price benchmark jobs
b) Majority of the positions found in the
company are usually priced directly in the
marketplace.
c) To collect data on benefits to provide a
basis on which to make decisions
regarding employee benefits.
2. Determining the worth of each job through
job evaluation.
JOB EVALUATION
 It refers to a systematic comparison
done in order to determine the worth of
one job relative to another.
 The basic procedure is to compare the
content of jobs in relation to one another,
like in terms of their effort, responsibility,
and skills.
 This process is used for designing a pay
structure, not for appraising the
performance of employees holding the
job.
 The general idea is to enumerate the
requirements of a job and the job’s
contribution to the organization and then
classify to its performance.
JOB EVALUATION
METHODS
A. RANKING METHOD
 It is the simplest and oldest method and
the least often used job evaluation
technique. It involves ranking each job
relative to all other jobs, usually based on
overall difficulty rather than on a number
of compensable factor.
 Advantages:
 Simplest and easiest to explain.
 Takes less time to accomplish than
other methods.
 Disadvantages:
 Provides no yardstick for measuring the
value of one job relative to another
 It is limited to smaller organizations
where employee are very familiar with
various jobs.
The method is highly subjective.
B. JOB CLASSIFICATION
OR JOB GRADING
EVALUATION METHOD
This is a simple, widely used method in
which jobs are categorized into groups.
The groups are called classes if they
contain similar jobs, or grades if they
contain jobs that are similar in difficulty
or sophistication.
 Advantages:
 Provides specific standards for
compensation and accommodates any
changes in the value of individual jobs.
 Can be constructed simply, quickly,
and cheaply.
Easy to understand and explain to
employees.
 Disadvantages:
 Jobs are forced to fit into categories
that are not entirely appropriate and
feelings of inequity can result.
 Problems may arise in deciding how
many classifications there should be
because too few classes will make it
difficult to differentiate job value while
too many classes make writing
definitions almost impossible.
 CLERICAL WORKER
CLASSIFICATION
Class I
SYSTEM
Simple work, no supervisory responsibility,
no public contact.

Class II Simple work, no supervisory responsibility,

with public contact.

Class III Work of medium complexity, no supervisory

responsibility, with public contact.

Class IV Work of medium complexity, no supervisory

responsibility, with public contact.
Class V Complex work, with supervisory
responsibility, and with public contact,
C. POINT SYSTEM
 Point system requires evaluators to
quantify the value of the elements of a
job. On the basis of job description or
interviews with job occupants, points are
assigned to the degree of varios
compensable factors to do the job.
STEPS
1. Selection of key jobs. This represents
jobs that are common throughout the
industry. The goal here is to select
enough key jobs to represent each
major internal variable in the pay
structure for all the jobs being
evaluated. A full and detailed job
description is necessary for each job.
2. Selecting compensable factors.
Compensable factors are factors or
characteristics of jobs that are deemed
important by the organization to the
extent that it is willing to pay for them.
The degree to which a specific job
possesses these compensable factors
determines its relative worth.
 For companies with recognized labor
union, compensable factors selected must
be acceptable to both management and
the union. In this method, job subfactors
are used to describe compensable factors
in more detail. Knowledge here is defined
as the familiarity or level of education or
skill that must either be possessed or
acquired by an individual to be able to
discharge the duties of the job.
 POSSIBLE SUBFACTORS AND DEGREE FOR
KNOWLEDGE AS COMPENSABLE FACTOR
Subfactor 1st degree 2nd degree 3rd 4th degree
s degree
Education College Level College grad With MA/MS With Ph.D.
Experience Less than 1 year 1 year or more 2 years or more 3 years or more
Job Complexity Diversified work Difficult or involves Difficult or Unusual work of
of a routine work not involves work complex nature
nature requiring necessarily new comprising new requiring the use
considerable care requiring problems of judgment.
and attention. considerable care requiring the use
and attention. of judgment.
Manual Skills Able to operate Able to operate or Able to set up, Able to
simple office apply various kinds operate, drive, manipulate and
equipment like of management and handle office tend office
telephone, fax and systems in the machinery machinery
machine, type effective needed in needed in
writer, calculator performance of job. performing job performing job
and computer. and whenever requiring the use
necessary. of judgment.
ASSIGNING WEIGHTS TO
FACTORS
 Weights are assigned to each of the
factors, subfactors, and degrees to reflect
their relative importance. Naturally, the
weight assigned varies from job to job.
 Compensable
SAMPLE POINT VALUES
Max. Subfactors Assigned points per Degree
Factors Points
1st 2nd 3rd 4th
Skill 260 Job Knowledge 35 70 105 140
Experience 20 40 60 80
Job Complexity 10 20 30 40
Responsibility 360 For Company
Policy 20 40 60 80
Work of others 40 80 120 160
External Contact 20 40 60 80
Money Matters
Equipment 10 20 30 40
Effort 240 Mental Exertion 40 80 120 150
Physical Demand 20 40 60 80
Working Conditions 140 Working Condition 20 40 60 80
Hazards 15 30 45 60
Total Possible 1000
Points
ASSIGNING POINTS TO
SPECIFIC JOBS
 After the point scale has been agreed on,
point values are derived for key jobs using
the following steps:
1. Examine the job descriptions.
2. Determine the degree statement that
best describes each subfactor for each
compensable factor.
3. Add the total number of points.
ADVANTAGES AND
DISADVANTAGES
Advantages:
 Can be easily interpreted and explained to
employees because of its mathematical nature.
 Detailed and specific – Jobs are evaluated on a
component basis and compared against
predetermined scale.
The system is easy to keep current as jobs
change.
Because of its quantitative nature, it is easy to
assign monetary values to jobs.
Disadvantages:
 Time consuming and costly to develop
 Requires significant interaction and
decision-making by the different parties
involve in conducting job evaluation.
POINTS ASSESSMENT OF 4 COMPENSABLE FACTORS

Compensable Weighted Degree/Points

Factors
% 1 2 3 4 5
Skill 40% 20 32 48 72 100
Responsibilty 30% 15 24 36 54 75
Effort 20% 10 16 24 36 50
Working 10% 5 8 12 18 25
Condition
Example Compensable Degre Points
Machine Operator Factor e 46
Skill 3 24
Responsibility 2 36
Effort 4 18
Working Condition 4 126
D. FACTOR COMPARISON
METHOD
 This method is similar to the point
method but slightly more complex, and it
involves a monetary scale instead of a
point scale, thus, not as popular as the
point method. It is absolutely essential
that the rates of pay of key jobs be
viewed as reasonable and fair to all those
making evaluations.
Examples of compensable factors are:

1. Skills
2. Responsibilities
3. Effort
4. Working conditions
STEPS
1. Identify key (benchmarks) jobs.
2. Identify job factors
3. Rank jobs with respect to each of the factors
independently.
4. Assign monetary amounts to each job on each
factor.
5. Compare unique jobs with key jobs.
6. Group similar jobs into pay grades.
7. Price each pay grade.
 JOB EVALUATION USING FACTOR
COMPARISON
Job Hourl Pay
METHOD
Pay for Pay for Pay for
y for Effort Responsibiliti Working
Rate Skill es Conditions
Secretary P P26.00 P 12.00 P 12.00 P 2.00
52.00
Admin 62.50 30.00 15.00 15.00 2.50
Asst.
Supervisor 105.00 50.00 25.00 25.00 5.00

Manager 200.00 100.00 45.00 45.00 10.00

 ADVANTAGES AND
DISADVANTAGES
Advantages:
 Relatively detailed and specific – jobs are
evaluated on a component basis and compared
against other jobs.
 Usually easier to develop than point method.
Value of the job is expressed in monetary terms.
 Can be applied to a wide range of jobs.
 Can be applied to newly created jobs.
Disadvantages:
 Relatively difficult to explain to
employees since the pay for each factor
is based on judgments that are
subjective.
 The standards used to determine the pay
for each factor may have built-in biases
that would affect certain groups of
employess like females or minorities.
In conducting job evaluation, the following
must be taken into consideration:
1. Consistency – this is to establish
reliability. It is achieved when two
people evaluating the same jobs
provide similar ratings made by one
person on two different occasions.
2. Freedom from bias – The process
should be free from political
considerations or personal biases.
3. Correctability – Firms should provide
mechanisms to modify inaccurate or out-of-
date evaluations, thus, need to periodically
review and update job evaluation results.
4. Representativeness – All employees
affected by the process should have their
concerns represented.
5. Accuracy of information – Ratings must
be based on accurate information, that is,
those making the evaluation should be quite
knowledgeable of the jobs being rated.
 DIFFERENT FORMS OR
COMPENSATION

1. Payment for Time Worked

Pay surveys are used to establish
competitive pay for the industry and job
evaluation is the principal method for
setting time-pay schedules.
Pay is usually adjusted upward through six
type of increases:
a. General
b. Merit increases
c. Cost of living adjustment
d. Reclassification increases
e. Level adjustment
f. Promotional increase
2. Incentive Forms of Compensation
This is a method of compensating
employees on the basis of output which
means, more production, more earnings.
The organization first establishes
performance standards to determine the
quantity of a person can be expected to
produce in a given period of time.
Classification:
a. Piecework or payment by results -
This is a system of pay based on the
number of items produced or processed
by each individual worker in a unit of
time such as items per day.
b. Individual incentive plans – This
reward individual performance on a real-
time basis for a meeting a goal or hitting
a target rather than increasing a person’s
base salary at the end of the year.
Advantage:

Simple to calculate, and easily understood

by employees.

Disadvantage:

Tendency of employer to raise production

standards whenever workers are found
earning “excessive” wages.
c. Group incentives – These are given
when it is difficult to measure individual
output or when cooperation is needed
to complete a task or project. An
example of this is the gain-sharing
program. Gain-sharing program
measures team or group level activity.
The team or work group is given the
responsibility for attempting to lower
costs or improve productivity through
any measure.
3. Performance-based Rewards
Organizations want employees to perform
at relatively high levels and need to make it
worth their efforts to do so.

4. Spot Bonuses
These are spontaneous incentives
awarded to individuals for accomplishments
not readily measured by a standard.
5. Skill and Knowledge-based Pay/
Competency-based Pay
This sets pay levels on the basis of how many
skills an employee has or how many jobs
he/she can do. This system rewards employees
for the acquisition of more skills or knowledge
instead of for increased performance.
6. Merit Pay Plans
Merit pay is usually awarded to employees on
the basis of the relative value of their
contributions to the organizations. These are
compensation plans that base compensation
on merit.
7. Profit Sharing
At the end of the year, some portion of
company’s profits is paid into a profit
sharing pool, which is then distributed to all
employees.

8. Stock Ownership Plans

Employees are gradually given a minor
ownership of a corporation.
9. Executive Compensation
a. Base pay – guaranteed amount of money
that the executive will get from the
company.
b. Incentive pay/executive perquisites or
perks – an incentive plan established to
give a company executives the option to
buy company stocks in the future at a
predetermined fixed price. This is over
and above the other executive perks
solely given to executives.