HUMAN RESOURCE MANAGEMENT MIHE Mashal Institute of Higher Education

Compensation Chapter # 06

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Introduction of Employees Compensation 4  Compensation is a critical area of human resource (HR) management, and one that can greatly affect employee behavior. To be effective, compensation must be perceived by employees as fair, competitive in the market, motivating and easy to understand. HR professionals might create the pay structure for their organization, or they might work with an external compensation consultant.

Definition of Compensation 5  “The total of all rewards provided employees in return for their services.” OR  “Compensation of employees is the total remuneration, in cash or in kind, payable by an enterprise to an employee in return for work done.”

Types of Compensation 6  Direct Financial Compensation  It consists of the pay that a person receives in the form of wages, salaries, bonuses, and commissions.

Types of Compensation 7  Indirect Financial Compensation  All financial rewards that are not included in direct compensation.

Determinants of Individual Financial Compensation 8  The Organization  The Labor Market  The Job  The Employee

Determinants of individual financial compensation 9  The Organization An organization often establishes formally or informally compensation policies that determine whether it will be a pay leader, a pay follower, or strive for an average position in the labor market. 1. Pay Leaders Pay leaders are those organizations that pay higher wages and salaries than competing firms.

Determinants of Individual Financial Compensation 10 Pay Followers Companies that choose to pay below the market rate because of poor financial condition or a belief that they simply do not require highly capable employees. Pay Strivers Average pay to employees.

Determinants of Individual Financial Compensation 11  The Labor Market Potential employees located within the geographical area from which employees are recruited comprise the labor market. Large organizations routinely conduct compensation surveys to determine prevailing pay rates within labor markets. 1. Compensation Surveys Compensation surveys provide information for establishing both direct and indirect compensation. 2. Benchmark Job A job that is well known in the company and industry, one that represents the entire job structure, and one in which a large percentage of the workforce is employed.

Determinants of Individual Financial Compensation 12  The Job Organizations pay for the value they attach to certain duties, responsibilities, and other job- related factors. Techniques used to determine a job’s relative worth include job analysis, job descriptions, and job evaluation.

Determinants of Individual Financial Compensation Job Analysis and Job Descriptions Before an organization can determine the relative difficulty or value of its jobs, it must first define their content, which it normally does by analyzing jobs. Job analysis is the systematic process of determining the skills and knowledge required for performing jobs. The job description is the primary by-product of job analysis, consisting of a written document that describes job duties and responsibilities. Job descriptions are used for many different purposes, including job evaluation. 2. Job Evaluation That part of a compensation system in which a firm determines the relative value of one job compared with that of another.

Determinants of Individual Financial Compensation 14  The Employee In addition to the organization, the labor market, and the job, factors related to the employee are also essential in determining pay. a. Performance Based Pay Performance Appraisal data provide the input for such approaches as merit pay, variable pay, skill- based pay, and competency-based pay.

Determinants of Individual Financial Compensation 15 Types of pay:  Base pay : receiving a fixed amount per hour, week, month or year.  Merit pay: fixed amount and a fixed percentage extra. This amount is given as increase in salary.  Performance pay: base and higher rate for units made above the standard units. It may be individual or group performance pay.  Bonus: an extra amount given to employees due to good performance.  Stock option: offering the companies shares to the employees at a lower rates.

Determinants of Individual Financial Compensation 16  Seniority The length of time an employee has been associated with the company, division, department, or job is referred to as seniority.  Experience Regardless of the nature of the task, very few factors have a more significant impact on performance than experience.