Session7

EMPLOYEE COMPENSATION

Chapter Objectives
After studying this chapter, you should be able to:
Define the compensation
Identify the objectives of compensation
Describe the various forms of compensation.

Explain the compensation process

Identify the determinants of financial and nonfinancial

compensation.
Explain how compensation is determined and the
types of compensation.
Understand the compensation responsibilities
Identify the types of employee incentives
Explain the employees benefits

I. Definitions of Compensation
Consists of wages paid directly for time
worked, as well as more indirect benefits that
employees receive as part of their
employment relationship with an organization.
Is the type of all payment used by managers
to pay and reward employees direct in return
of their time worked with an organization.
Is total of all rewards provided employees in
return for services

II. Objectives of Compensation

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Is to create a system of rewards that is equitable

to the employer and employee alike.
To be equitable:

compensation should focus on internally

equitable pay for each employee relative to
other employees in organization & externally
equitable pay relative to other employees
doing the similar work of other organizations.
To be legal:
Compensation should be consistent with
government regulations such as Labor Law,
Equal Pay Act

II. Objectives of Compensation (Cont.)

To be adequate

compensation should focus on adequate

pay to employees in order to attract them
to joint & stay with the organization.

To be motivating

Compensation should provide sufficient

incentives to employees in order to
motivate them to perform jobs efficiently.

III. Compensation Process

Refers to every types of reward that individual
receive in return for their labor.
Compensation
Non-Financial

Financial
Direct

-Wages
- salaries
- Commission
Bonuses
- ..

Indirect

- Insurance

- Social Benefits
- Paid Absences
- .

Job

Job
Environment

- Interest

- Coworker

- Responsibility
- Recognition
- .

- Flextime
Cafeteria
-

IV. Compensation Responsibilities

HRD, Manager is responsible for:
Developing compensation policies,
structures
Conducting job evaluation and pay
survey

Managers are responsible for:

Matching performance and rewards
Recommending pay rates, pay increases
based on guideline from HRD.
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V. Salary and Wage R)ak;Ex nigR)ak;Ql

Salary
Is a part of compensation that used by
managers to pay their employees in
the exchange of their services with a
company on monthly basis.

Wage
Is a part of compensation that used by
managers to pay their employees in
the exchange of their services with an
organization on hourly, unit basis.
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V. Salary and Wage (Cont.)

1. Development of a pay
system
Development of a pay system requires
the three basic of pay level decisions:

The wage level decision

The wage structure decision

Individual wage decision

A. The wage level decision

The wage level decision is made by
top managers at all levels of
organization in compensation.

The decision in this level is involved

the wage or salary for sufficiency of
employees.
How does company pay for
their employees?
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A. The wage level decision (Cont.)

1) Establishing the wage & salary level:
This decision is a policy made by top
managers in order to pay their employees,
according to market rates such as above,
the same, and below the market.
The objectives of this policy are:

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o Involve the enough of labor supply

o Attract employees to joint & stay
with a long time in organization.
o Avoid costly turnover.

A. The wage level decision (Cont.)

2) Factors influence pay level decision:
The decision on wages and salary are
affected by policy and satisfaction of
employers.
o Generally, managers use high pay strategy
because they want to get good employees stay
with organization, reduce employees turnover.
o Generally, managers use low pay strategy
because they want to reduce costs & maximize
profits.

Sometime, wages and salary are affected

by other factors such as size of business,
unionization and, productivity.
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A. The wage level decision (Cont.)

3) Pay survey
The decision on wages and salary,
managers conduct a survey for collecting
data on existing compensation rates and
benefits from other organizations in the
same industry.
There are 3 types of survey:
Survey from government or private
agencies.
Survey from business professional.
Survey from private companies or NGO.
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A. The wage level decision (Cont.)

3) Pay survey
Methods of pay survey
Personal interviews: Asking other
organizations employees that
involved with their payment.
Mailed questionnaires: Sending the
list of questions related with payment
to other organizations complete.

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Telephone: To clarify information with

mailed questionnaires in order to obtain
information about pay quickly.

B. The wage structure decision

The decision on wages and salary
structure is involved identifying to each
performance in organization.
This decision, generally happened by

a) Management edict
b) Collective bargaining between
managers and union.
c) Job evaluation

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B. The wage structure decision (Cont.)

a) Management edict: Managers discuss with
HRD and Accounting officers in order to
find out market rates, various pay structure.
b) Collective bargaining: Is the process
whereby employers and employee
representative jointly negotiate a contract
that specifies wages, hours, vacation and
other conditions of employment.

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c) Job evaluation: Is the systematic

determination the value of individual jobs
in relation to other jobs in the organization,
and avoid inequality of wages.

B. The wage structure decision (Cont.)

n

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In order to implement job evaluation

effectively, it requires:
Obtaining the cooperation between
managers and employees.
Choosing job evaluators: Consists of 5
or more people work as job evaluation
committee.
Obtaining job descriptions: Job evaluation
committee should have access to write job
descriptions.
Choosing a job evaluation system
Job ranking
Paired comparison MBO (Actual
performance compares with goals)

c) Individual wage decision

This decision concerns with relative
payment to employees who perform
similar jobs in company.
Factors influence individual wage pay are:
i. Performance:
Employee who works more gets
more pay.
Employee will feel un-satisfaction
when they work more but get less.
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c) Individual wage decision (Cont.)

ii. Work experience & evaluation:
High salary is provided depend on
employees work experience and
education such as BBA, MBA experience.
Seniority or length of service:
o Faith fullness with a company even if his
or her performance can not justify pay.

Potential:
o Which employee demonstrate he or she
has potential to become supervisor or
upper level of management get high pay.
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2. Employee Incentives
1. Definition
Incentives are the compensation that
rewards employee's efforts beyond
normal performance expectations.
2. Types of incentives

a) Individual incentives:

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Differences piece rate system: Pay

lower piece rate wage if employee
works less than standard output and
higher piece rate wage if they produce
over standard output.

2. Types of incentives (Cont.)

a) Individual incentives (Cont.)
Commission: Percentage on unit of sales
Straight commission: No salary but
commission of unit sold.
Salary-plus-Commission
Bonuses
Special incentive program
b) Group incentive systems:

Based on group rather individual

performance: Profit and reduce
production cost.
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2. Types of incentives (Cont.)

c) Organizational incentives
Pay all employees based on
performance of entire organization.
Profit sharing plans:
- Equally all employees
- Base on salary
- Individual performance
- Seniority

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Stock ownership employee which

employee works well in company,
he or she can buy share of stock
with low price.

3. Employee Benefits
a) Benefits
are indirect compensation in a form of
something rather than money.
Most organizations recognize that they have
responsibility to their employees to provide
insurance and other programs for their health,
safety, security, and general welfare.
b) Types of benefits
Security benefits
Workers compensation
Unemployment compensation
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Health care benefits

b) Types of benefits (Cont.)

Retirement-related benefits
Retirement policies
Pension plans

Financial or other insurance benefits

Financial benefits
Other insurance benefits
- Life insurance
- Disability insurance
Educational benefits

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Time-off benefits
Holiday pay
Paid vacations

VI. The objectives of compensation

function should be:
1) Secure
Pay should be enough to help an
employee feel secure and aid him or
her in satisfying basic needs.

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2) Incentive-providing
Pay should motivate effective and
productive work.
3) Acceptable to the employee
The employee should understand the
pay system and feel it is a reasonable
system for the enterprise and himself
or herself.

5) Secure
Pay should be enough to help an
employee feel secure and aid him or
her in satisfying basic needs.
6) Incentive-providing
Pay should motivate effective and
productive work.
7) Acceptable to the employee

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The employee should understand the

pay system and feel it is a reasonable
system for the enterprise and himself
or herself.