1. Compensation
Unit V

2. Compensation is the HRM function
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

3. 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

4. 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

5. 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.

6. Compensation Intrinsic & Extrinsic Rewards
Intrinsic Rewards
Personal Satisfaction
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

7. Indirect Compensation
Total Compensation
Intrinsic Rewards
(Job Factors)
Extrinsic Rewards
(Monetary)
Direct Compensation
Indirect Compensation
Performance based pay
Basic wages
Protection
Programs
Pay for time
Not worked
Employee Services &
Perquisites

8. Financial Compensation Direct, 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.

9. 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

10. PATTON suggests 7 criteria for effective compensation policy
Adequate: Minimal governmental criteria, union, managerial levels should be met
Equitable: Each person should be paid fairly in line with his effort, abilities & training
Balanced: Pay, benefits & other rewards should provide a reasonable total reward package
Cost-effective: Pay should not be excessive, considering what the organization can afford to pay
Secure: Pay should be enough to help an employee feel secure & aid him in satisfying basic needs
Incentive-providing: Pay should motivate effective & productive work
Acceptable to the employee: The employees should understand the pay system & feel it is a reasonable system for the enterprise & himself

11. 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

12. Methods for Evaluating Jobs
Ranking
Factor Comparison
Job Classification
Methods for Evaluating Jobs
Point Method

13. Methods of Job Evaluation 1. 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:
Obtain job information.
Select and group jobs.
Select compensable factors.
Rank jobs.
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

14. Example of a Job Ranking Method
Ranking order of the jobs
Monthly pay scale
Manager
Supervisor
Foreman
Machine operator
Rs. 25, 000
Rs. 15, 000
Rs. 10, 000
Rs. 5,000

15. 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

16. Methods of Job Evaluation 2. 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

17. Methods of Job Evaluation 2. 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)

18. Example of a Grade Level Definition
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.
Source: Accessed May 18, 2007.

19. Methods of Job Evaluation 3. 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

20. Factors for comparison Rs Responsibility Skills Mental efforts
Determination of Wage Rate of a Machinist under Factor Comparison Method
Factors for comparison Rs
Responsibility
Skills
Mental efforts
Physical efforts
Working conditions 12 16 6 4
Total wage per hour 50

21. Methods of Job Evaluation 4. 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

22. Figure: Point System Matrix
Compensable Factors
Level (Degrees)
Minimum Low Moderate High
Responsibility
equipment process
material/product
safety of others
work of others
Skill
education
experience
knowledge
Effort
physical
mental
Job Condition
working conditions
hazards
Total points

23. Job Evaluation System Process
Job Analysis
Determinants of compensation factors
Determine the relative importance of compensable factors
Deciding about job evaluator

24. 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.

25. 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