8 COMPENSATING HUMAN RESOURCES

INTENDED LEARNING OUTCOMES

By the end of the learning experience, students must be able to:

1. Identify the objectives, main components, and different forms of compensation;
2. Determine the pay rates; and
3. Discuss the job evaluation methods.

OBJECTIVES OF COMPENSATION

Compensation is the set of rewards that organizations provide to individuals in return for their
willingness to perform various jobs and tasks within the organization. It includes all forms of financial
returns and tangible services and benefits employees receive as part of an employment relationship. 57
It also 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. In most situations, these make up the largest portion of an employee's total compensation.
These form the foundation for most employees' total perceptions of the fairness or equity of the pay
system. If the base wage or salary system is perceived as being fair and equitable, the organization is
usually viewed in the same light. Of course, the reverse is also true. It is therefore critical that
organizations develop and maintain a sound base wage and salary system.

The primary objective of any base wage and salary system is to establish a structure for the equitable
compensation of employees, depending on their jobs and their level of performance in their jobs. This
simply means that if the base wage and salary system are effective, a firm's compensation system can
improve cost efficiency, ensure legal compliance, enhance recruitment efforts, and reduce morale and
turnover problems.

People are willing to work in exchange for inducements or rewards they receive from working. The
inducements include both Enanei1 compensation and
nonfinancial 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 the work and motivated to do
a good job for the employer. The following are suggestions to make the compensation policy more
effective. Compensation should be:
1. Adequate to meet the needs of the employees and to acquire and retain qualified personnel.
2. Equitable-Each person should be paid fairly, in line with his/her efforts, abilities, and training.
Employees will believe their pay is equitable when they perceive the following circumstances
a. It is fair relative to the pay coworkers 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.
 3. Balanced-Pay benefits and other rewards should provide a reasonable total reward package.
4. Cost-effective-taking into consideration the company's ability to pay
5. Secure-pay should be enough to help an employee feel secure and aid him/ her in satisfying
basic needs.
6. Incentive-providing-pay should motivate effective and productive work or reward desired
behavior.
7. 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.
8. Compliant with legal regulation.
MAIN COMPONENTS OF COMPENSATION

Direct compensation consists of cash directly paid to the employee in exchange for his/her work.
Included in-this category are
a. Base pay-the hourly wage or weekly/monthly salary earned.
The current daily minimum wage for employees in the National Capital Region (NCR) is P426.
00, per Wage Order No. NCR-16.
b. Premium pay-refers to the additional compensation required by law for work performed within
eight (8) hours on nonworking days, such as rest days and special days.
c. Base pay progression- movement of base pay overtime, from year to year.
d. Variable pay-incentive or bonus pay that does not fall into base pay such earnings may be based
on performance against preset goals (incentives) or pay at the discretion of the company
(bonuses) ; may be paid at the individual, team, group, or organizational level.

WAGES VS. SALARIES

Fundamental to compensation understands the distinction between wages and 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, on the other hand, is income paid to an individual not on the basis of time but on the basis of
performance. Salaries are usually given to professional and managerial employees or those who are
performing white-collar jobs. A salary compensates an individual not for how much time he/she spends
in the organization, but for his/her overall contribution to the organization's performance.

Base pay, base pay progression, and variable pay add up to total cash compensation paid in any given
year.

 Benefits and perquisites or perks-In addition to direct cash, compensation is also paid in the
form of indirect cash or benefits that have monetary value. This will be discussed in details in
the next chapter.
 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. One of the single, most important cultural expectations we encounter
today is employees' confidence in the business and its leaders. Quality of leadership
and supervision are also defining elements of culture.
 b. Intrinsic values-rewards inherent in the work itself. These rewards come from the act of
performing. Among such outcomes are how interesting one's work is, the degree of
variety experienced, the degree of autonomy and control over one's work, and the
significance of the work to the business and the customers.
c. Career opportunities-the prospects for development and growth. For organizations,
careers represent the most efficient way to grow the talent they will need to compete;
while for employees, careers represent valued opportunities to grow and achieve
professional and occupational goals.

DETERMINING PAY RATES

Most wage and salary systems establish pay ranges for certain jobs based on the relative worth of the
job to the organization. An employee's performance on the same job should then determine where that
employee's pay falls within the job's range. The key here is the establishment of different pay ranges for
the various jobs within the organization. A pay range for a given job establishes a range of permissible
pay, with a minimum and a maximum. Establishing pay ranges involves two basic phases:
1. Determining the relative worth of the different jobs to the organization (thereby ensuring
internal equity)
2. Pricing the different jobs (thereby ensuring external equity)
Job evaluation is the primary method used to determine the relative worth of jobs to the organization.
Wage surveys represent 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, I. e., minimum wage law
II. Organizational Factors
A. Type of industry
B. Profitability and company's ability to pay
C. Unionized 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, judgments
5. Preparation for the job-education, training, and knowledge
B. Responsibility
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

These are the major factors influencing pay. These factors are divided into four categories external,
organizational, job, and individual factors. All of these should be taken into consideration to determine
the proper compensation to be given to each employee.

ESTABLISHING PAY RATES

1. Conduct the salary survey (aimed at determining prevailing wage rates) 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 so as to provide a basis on which to make decisions
regarding employee benefits
2. Determining the worth of each job through job evaluation. Job evaluation 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 classily it
according to its importance. For instance, a web designer's job would involve more complex
requirements and with a potentially greater contribution to an organization than that of a
person who simply weighs raw materials.

JOB EVALUATION METHODS

A. Ranking Method. This 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 factors. Often, the evaluator
prepares cards with basic information about the jobs and then arranges the cards in the order of
 importance of the positions. The job ranking method produces only an ordering of jobs and
does not indicate the relative degree of difference among them. For example, a job with a
ranking of four is not necessarily twice as difficult as a job with a ranking of two.

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 employees are very familiar with various jobs.
 The method is highly subjective.

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B. Job Classification or Job Grading Evaluation Method. This is a simple, widely used method in
which jobs are groups. The groups are called classes if they contain similar job or grades if they
contain jobs that are similar in difficulty but otherwise different. These sets of jobs are ranked
on levels of difficulty or sophistication. Certain classes or grades of jobs are defined on the basis
of differences in duties, responsibilities, skills, working conditions, and other job-related
factors.

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.

Table 4. Clerical Worker Classification System

Class I 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, with supervisory responsibility, and 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 the job description or interviews with job occupants, points are assigned to the
degree of various compensable factors to do the job.
 For example, points are assigned based on skill required, physical and mental effort needed,
working condition, and amount of responsibility involved in the job. When these points are
summed, the job has been evaluated.

Steps:
1. Selection of key jobs. This represents jobs that are common throughout the industry. The goal
here is to select enough key job to represent each major internal variable in the pay structure
for all the jobs being evaluated. A full and detailed job description is necessary 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 example, the compensable factors selected for evaluating production jobs might
include skill, effort, and working condition whereas compensable factors for evaluating
managerial and professional jobs might include knowledge, responsibility, and decision-making
requirements.

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. For instance, the compensable factor of knowledge might include subfactors such as
education, experience and training, job complexity, and manual skills. 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.

Degree statements describe the specific requirements of each subfactor. Table 5 presents possible
degrees and subfactors for the compensable factor of knowledge.
Breaking compensable factors into subfactors and degrees allows for a more preciee definition of the
job and facilitate the evaluation process.

Table 5. Possible Subfactors and Degrees for Knowledge as Compensable Factor

Subfactors 1st degree 2nd degree 3rd degree 4th degree
Education College level College graduate with MA/MS with Ph. D
Experience Less than l year 1 year or more 2 years or more 3 years or more
Job Complexity Diversified work Difficult or Difficult or Unusual work of
of a routine involves 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 operate, drive, manipulate and
equipment like kinds of and handle office tend office
telephone, fax management and machinery machinery
machine, systems in the needed in (including tools,
typewriter, effective performing job company
calculator, and performance of and whenever vehicles, and
computer job necessary laboratory
 equipment)
needed in
performing job
requiring the use
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. For example, skill might be the most
important factor used in evaluating a machinist’s job, while responsibility might be more critical to a
supervisor’s job. Table 6 presents a possible point breakdown that totals 1,000 points. In this example,
the compensable factor of responsibility was deemed to be the most important factor and was awarded
360 points.

Table 6. Sample Point Values

Compensable Maximum 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 80 120 160
Physical Demand 20 40 60 80
Working 140 Working Condition 20 40 60 80
conditions Hazards 15 30 45 80
Total Possible 1,000
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 totals number of points

The point totals should present the same general relationships that the actual pay scales show for the
key jobs. That is, a rank ordering of the key jobs according to points totals should be approximately
equivalent to a rank ordering of key jobs according to pay. Table 7 presents another example of point
assignment for four compensable factors to evaluate the job of a machine operator. Regardless of the
technique used, both past experience and judgment play major roles in assigning weights. Generally,
weights are assigned on the basis of a maximum number point for any job; this number is often decided
arbitrarily.

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 a
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 involved in
conducting job evaluation

Table 7. Points Assignment for Four (4) Compensable Factors

Compensable factor Weighted Degree/Points
% 1 2 3 4 5
Skills 40% 20 32 48 72 100
Responsibility 30% 15 24 36 54 75
Effort 20% 10 16 24 36 50
Working conditions 10% 5 8 12 18 25
Example Compensable Factor Degree Points
Machine Operator Skill 3 46
Responsibility 2 24
Effort 4 36
Working Condition 4 18
Total Points 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. Compensable factors are then identified. Typically, the number of compensable
factors is email (4 or 5). Examples of compensable factors are
1. Skills
2. Responsibilities
3. Effort
4. Working conditions

Unlike the point system, however, the factor comparison method does not break down the
compensable factors into subfactors and degrees. It requires that each job be compared and ranked
with their jobs under each separate factor.

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. This should be done factor by factor, to
determine how much each unique job should be paid.
6. Group similar jobs into pay grades. A pay grade is comprised of jobs of
approximately equal difficulty or importance as determined by job evaluation.
7. Price each pay grade. The jobs are then priced and the total pay for each job is
divided into pay for each factor. See example matrix below.

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Table 8. Example of Job Evaluation Using Factor Comparison Method
Job Hourly Rate Pay for Skill Pay for Effort Pay for Pay for
Responsibility working
Condition
Secretary P52.00 P26.00 P12.00 P12.00 P2.00
Admin Asst. 62.50 30.00 15.00 15.00 2.50
Supervisor 105.00 50.00 25.00 25.00 5.00
Manager 200.00 100.00 45.00 45.00 10.00

This process establishes the rate of pay for each factor of each benchmark job.

Advantages:
 Relatively detailed and specific- jobs are evaluated on a component basis and compared against
other jobs
 Usually easier to develop than the point method
 Valued 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 employees like female 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.
Those making the evaluations should be objective.
3. Correctability -Firms should provide mechanisms to modify inaccurate or out-of-date
evaluations, thus, the need to periodically review and update job evaluation results. Employees
 should also be allowed to review the evaluation of their jobs and to appeal the ratings if
dissatisfied.
4. Representativeness-All employees affected by the process should have their concerns
represented.
5. Accuracy of information-Ratings must be based on accurate information, jobs being rated that
is, those making the evaluations should be quite knowledgeable of the

DIFFERENT FORMS OF COMPENSATION

Employees can be paid for the time they work, the output they produce, or a combination of these two
factors.

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. This method has no direct
relation to the workers' output.
Pay is usually adjusted upward through six types of increases
a. General-across-the-board increase for all employees
b. Merit increases-paid to employees based on some indicator of job performance
c. Cost of living adjustment
d. Reclassification increase
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 a person can be expected to produce in a given
period of time. The firm sets wages based on how well workers perform relative to that standard ;
their pay typically equals the market rate for the job, and if they exceed the standard, they receive
higher than market wages.

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 hour or items per day. Since
individual output can be easily quantified, peso value for each unit or item produced is also given a
fixed rate or amount. This provides a strong incentive to the worker to produce more.
b. Individual incentive plans-This rewards individual performance on a real-time basis for meeting a
goal or hitting a target rather than increasing a person's base salary at the end of the year. An
individual receives some level of salary increase or financial rewards in conjunction with
demonstrated outstanding performance. This is used when performance can be quantified in terms
of number of units of output or similar measures, I. e., sales commissions (salary is not guaranteed
and paid only if sales reach some target level)
 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. The Japanese used group cohesiveness to
reduce jealousy. They assume that rewarding only an individual or a few workers will discourage a
sense of teamwork.

An example of this is the gain-sharing program. This is designed to share with employees the savings
from productivity improvements. This is based on the belief that employer and employees have the
same goals and thus should approximately share in incremental economic gains. 6o

Gain-sharing program also 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. It is believed that when rewards are associated with higher levels of performance, it will
presumably motivate the employees to work harder to achieve awards. In this manner, their own self-
interest coincides with the organization's interests Thus, managers who truly want to motivate people
to perform at their highest level should structure a reward system that engages in such behavior.

4. Spot Bonuses

These are spontaneous. Incentives awarded to individuals for accomplishment not readily measured by
a standard. An example is to "recognize exemplary customer service each month to identify employee
of the month awardee. “

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 emphasizes the importance of an employee's ideas, growth, and development. Rewards are based
on acquisition of and proficiency in new skills and knowledge regardless of the employee's length of
service. Thus, this system rewards employees for the acquisition of more skills or knowledge instead of
for increased performance.

This plan is advantageous for companies that face intense competitive

Pressure, companies that are downsizing, or companies that want to encourage involvement.

6. Merit Pay Plans

Merit pay is usually awarded to employees on the basis of the relative value of their contributions to the
organization. Employees who make greater contributions are given higher pay than those who make
lesser contribution.

Merit pay plans are compensation plans that base compensation on merit, e. g., giving employees pay
raise with the use of valid and reliable measures of what merit entails.

7. Profit Sharing
At the end of the year, some portion of the company's profits is paid into a profit sharing pool, which is
then distributed to all employees. The rationale behind this scheme is that everyone in the organization
can expect to benefit when the company does well.

8. Stock Ownership Plans

Employees are gradually given a minor stake in ownership of a corporation. Employees receive a claim
of ownership of some portion of the stock held by the company based on seniority and perhaps
performance. Eventually, even an individual becomes an owner of the company.

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, e. g., stock option plan-an incentive plan
established to give 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.