Compensation

Unit V

Introduction

• Compensation is the HRM function

• It deals with every type of reward individuals receive in exchange for performing organizational tasks

• Employees trade labor & loyalty for financial & non-financial compensation (pay, benefits, services, recognition etc.)

• Non-financial rewards like praise, self-esteem & recognition, affect employees' motivation, productivity, satisfaction

Concept of Compensation

• Workers exchange work for rewards. Probably the important reward, and certainly the most obvious, is money

• Organizations generally seek to pay the least that they have to in order to minimize costs. Workers also want fair compensation

• Government policies set minimum wages and benefits that employers must meet, and these policies provide protection for certain groups.

• Apart from this, compensation administration policies depend upon condition of labour market, trade union influences, internal factors such as attitudes of top management

• Compensation administration seeks to design the lowest-cost pay structure that will not only attract, motivate and retain competent employees but also be perceived as fair by these employees

• Trend changing in compensation management from seniority based to performance based

• Compensation structure should be reviewed from time to time to adapt to changes in the environment and cost of living

Definition of Compensation

• “Compensation refers to all the extrinsic rewards that employee receive in exchange for their work. It is composed of the base wage or salary, any incentives or bonuses, and any benefits”.

Byars and Rue

• “Compensation refers to all forms of financial returns, tangible services, and benefits employees receive as part of an employment relationship”

Milkovich

Compensation can be in the form of:• Wages and salary

– Wage: Remuneration paid periodically to a worker. It is usually the hourly rate paid to blue collar workers

– Salary: Weekly or monthly rates paid to white-collar workers

• Incentives: Extra pay for extra performance in addition to regular salary & wages. It is based on performance

• Employee benefits: Usually known as “fringe benefits”. They are supplements to wages received by employees. E.g. insurance, paid vacations, and holidays, pension & telephone etc.

• Services and Perquisites (privileges): related with quality of work life of the employees such as car, housing loans, reimbursement of the children’s education costs, discounts on company products, recreation etc.

CompensationIntrinsic & Extrinsic Rewards

Intrinsic Rewards Personal Satisfaction Extrinsic Rewards

• Comes from the job itself

• Pride in one's work, feelings of accomplishment, being part of a work team, interesting work, responsibility, job freedom, growth opportunity, participation etc.

• Comes from a source outside the job, offered mainly by management

• Includes rewards, promotions, benefits

• Within Extrinsic Rewards:– Financial Vs. Non-financial Rewards– Performance Based Vs. Membership

Based– Direct Compensation Vs. Indirect

Compensation

Total Compensation

Intrinsic Rewards(Job Factors)

Extrinsic Rewards(Monetary)

Indirect Compensation Direct Compensation

Protection Programs

Pay for timeNot worked

Employee Services &

PerquisitesBasic wages

Performance based pay

Financial CompensationDirect, Indirect

Direct Financial Compensation Indirect Financial Compensation

• Consists of pay an employee receives in the form of wages, salaries, bonuses or commissions

• Benefits consist of all financial rewards that are not included in direct financial compensation

• E.g. vacation, insurance, child care etc.

Purposes of Compensation

• To attract potential job applicants by providing sufficient compensation

• To retain qualified and competent employees by paying them more than what competitors are paying for similar positions

• To motivate employees by compensating on the basis of their performance

• To administer pay within legal regulations for avoiding any sort of legal violation

• To help in achieving organizational strategic objectives by enhancing innovation & quality

PATTON suggests 7 criteria for effective compensation policy

1. Adequate: Minimal governmental criteria, union, managerial levels should be met

2. Equitable: Each person should be paid fairly in line with his effort, abilities & training

3. Balanced: Pay, benefits & other rewards should provide a reasonable total reward package

4. Cost-effective: Pay should not be excessive, considering what the organization can afford to pay

5. Secure: Pay should be enough to help an employee feel secure & aid him in satisfying basic needs

6. Incentive-providing: Pay should motivate effective & productive work

7. Acceptable to the employee: The employees should understand the pay system & feel it is a reasonable system for the enterprise & himself

Job Evaluation System Methods and Process

• Job evaluation is a process whereby an organization systematically establishes its compensation program

• In this process, jobs are ranked in order to arrive at each job's appropriate worth

• By job evaluation, we mean using the information in job analysis, to systematically determine the value of each job in relation to all jobs in the organization.

– Decenzo & Robbins

Ranking Factor ComparisonJob Classification

Methods for Evaluating Jobs

Point Method

Methods of Job Evaluation1. Job Ranking or Ordering method

• Requires a committee composed of both management & employee representatives to arrange jobs in a simple rank order, from highest to lowest

• Involves ranking each job relative to all other jobs, usually based on overall difficulty

• First 2 jobs are compared, then they are compared with another job until all the jobs have been evaluated & ranked

• Ranking each job relative to all other jobs, usually based on some overall factor

• Steps in job ranking:1. Obtain job information.2. Select and group jobs.3. Select compensable factors.4. Rank jobs.5. Combine ratings.

Advantage• Simple and economical to use

Disadvantage• Difficult to use if no. of employees is large• Subjectivity of the method, no standards to justify the ranking

Example of a Job Ranking Method

Ranking order of the jobs Monthly pay scale

ManagerSupervisorForemanMachine operator

Rs. 25, 000Rs. 15, 000Rs. 10, 000Rs. 5,000

Job Ranking by Olympia Health Care

1. Office manager $43,000

2. Chief nurse 42,500

3. Bookkeeper 34,000

4. Nurse 32,500

5. Cook 31,000

6. Nurse’s aide 28,500

7. Orderly 25,500

Ranking Order Annual Pay Scale

Methods of Job Evaluation2. Job Classification or Job Grading

• Made popular by the U.S. Civil Service Commission

• Job are categorized in different class or grades for different jobs requiring similar skills, efforts, difficulty and responsibility

• Raters categorize jobs into groups or classes of jobs that are of roughly the same value for pay purposes– Classes contain similar jobs

• Administrative assistants

– Grades are jobs similar in difficulty but otherwise different• Mechanics, welders, electricians, and machinists

– Jobs are classed by the amount or level of compensable factors they contain

Methods of Job Evaluation2. Job Classification or Job Grading (conti…)

• There are several ways to categorize jobs:– Write-up class or grade descriptions (similar to job descriptions) and place

jobs into classes or grades based on how well they fit these descriptions

– Draw up a set of guidelines for each class (for instance, how much independent judgment, skill, physical effort, and so on, does the class of jobs require?). Then categorize the jobs according to these rules

• Advantages• simple• easy to use for large numbers of jobs• one rating scale

Disadvantages• Difficult to write the class or grade descriptions (ambiguous)

Example of a Grade Level Definition

Source: www.opm.gov/fedclass/gscler.pdf. Accessed May 18, 2007.

This is a summary chart of the key grade level criteria for the GS-7 level of clerical and assistance work. Do not use this chart alone for classification purposes; additional grade level criteria are in the Web-based chart.

Methods of Job Evaluation3. Factor Comparison

• The factor comparison method entails deciding which jobs have more of the chosen compensable factors

• The method is actually a refinement of the ranking method

• With the ranking method, you generally look at each job as an entity and rank the jobs on some overall factor like job difficulty

• With the factor comparison method, you rank each job several times—once for each of several compensable factors

• Compensable factors that can be applied to each jobs is identified like responsibility, skills, mental and physical effort, working condition

• According to the difficulty and complexity of task related with each factor certain amount is given and the total amount in each job is calculated as wage rate

+ Advantage: More accurate, systematic and quantifiable than previous methods; Easy to understand

- Disadvantage: Complex and difficult to operate; Difficult to identify compensable factors

Determination of Wage Rate of a Machinist under Factor Comparison Method

Factors for comparisonRs

ResponsibilitySkillsMental effortsPhysical effortsWorking conditions

12161264

Total wage per hour 50

Methods of Job Evaluation4. Point Method

• The point method is more quantitative, Most widely used method

• Identifies compensable factors

• Compensable factors necessary for successful completion of the job is determined like responsibility, skills, mental efforts, physical efforts, working condition

• Factors are evaluated in a scale and points are given to each factors

• Total points are calculated and each job is evaluated according to the points and pay scale is determined

Advantages• more specific and larger numbers of factors• more precise measurements

Disadvantages• Time-consuming process• More difficult to understand

Figure: Point System Matrix

Compensable Factors Level (Degrees)Minimum Low Moderate High 1 2 3 4

ResponsibilityI) equipment process II) material/productIII) safety of othersIV) work of others

5 10 15 20 5 10 15 20 5 10 15 20 5 10 15 20

SkillI) educationII) experienceIII) knowledge

14 28 42 56 22 44 66 88 14 28 42 56

EffortI) physicalII) mental

10 20 30 40 5 10 15 20

Job ConditionI) working conditionsII) hazards

10 20 30 40 5 10 15 20

Total points 1000 100 200 300 400

Job Evaluation SystemProcess

Job Analysis

Determinants of compensation factors

Determine the relative importance of

compensable factors

Deciding about job evaluator

1. Job Analysis• Provides information through job description and

job specification• Using these sources of information, the evaluator

can assess job duties & responsibilities & correspond skills or knowledge required

2. Determinants of compensable job factors• The next step is to identify the main compensable

factors• These factors differ as per the job position• E.g. Accountability, know-how, problem-solving

ability, physical demands etc.

3. Determining the relative importance of compensable factors

• The next step is to assign the relative weight according to their importance

• A manager’s judgmental & decision making abilities will be required to weight these factors

4. Deciding about the job evaluator• The final step is to decide on who evaluates the jobs in

the organization• A number of experts are available to evaluate jobs• The policy of job evaluation is made by the HR dept.

whereas the method is selected by the team of job analysts