AN OVERVIEW OF

COMPENSATION
Compensation
- It is the human resource management function that deals
with every type of reward of individuals receive in
exchange for performing organizational tasks.

- It is the chief reason why most individuals seek employment.

- It is an exchange relationship.

*Employees’ trade labor and loyalty for financial and

nonfinancial (pay, benefits, services, recognition, etc.).
Two Types of Compensation
1.Nonfinancial Compensation
2.Financial Compensation
Nonfinancial Rewards
Rewards like praise, respect and recognition affect
employees’ motivation, productivity and satisfaction.
Financial Compensation
Rewards like money or other things
of economic value in exchange for their labor
Two Types of Financial Compensation
• Direct Financial Compensation
It consist of the pay an employee receives in the
form of wages, salaries, bonuses or commissions.

• Indirect Financial Compensation or Benefits

It consists of all financial rewards that are not
included in direct financial compensation.
Example: vacation, various kinds of insurance,
services like childcare or eldercare and so forth.
Table 1. Example
Objective of Compensation
Compensation should be:
1. Adequate – Minimal governmental, union and
managerial levels should be met.
2. Equitable – Each person should be paid fairly, in
line with his or her effort, abilities and training.
3. Balanced – Pay, benefits and 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.
Objective of Compensation
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 – The employee

should understand the pay system and feel it is a
reasonable system for the enterprise and himself or
herself.
Compensation Decisions
Pay for a particular position is set relative to the three
groups:

1) Group A – Employees working on a similar jobs in

other organizations

2) Group B – Employees working on different jobs within

the organization

3) Group C – Employees working on the same job within

the organization
Compensation Decisions
1. The Pay-Level Decision
The pay-level strategy is a major strategic choice
managers must take. Essentially, three pay-level
strategies – high, low or comparable – can be
chosen.
Compensation Decisions
1.1 Three pay-level strategies

A. High-Pay Strategy
In this strategy, managers choose to pay at higher-than average levels. The
assumption behind this strategy is that you get what you pay for.

B. Low-Pay Strategy
At the opposite extreme is the low-pay strategy. In this case, the manager
pays at the minimum level needed to hire enough employees.

C. Comparable-Pay Strategy
The most frequently used strategy is to set the pay level at the going wage
level. The wage criteria are comparable wages, perhaps modified by cost-
of-living or purchasing power adjustments.
Compensation Decisions
2. The Pay-Structure Decision
The next step is to construct an internal pay hierarchy or
pay structure. The traditional way to develop the pay
structure was to make a systematic comparison between the
worth of one job and the worth of another using job
evaluation.

*Job Evaluation
Job evaluation is a formal process by which the relative
worth of various jobs in the organization is determined
for pay purposes. Essentially, job evaluation relates the
amount of pay for each job to the extent to which that job
contributes to organizational effectiveness.
Compensation Decisions
3. The Individual Pay Decision
To the individual employee, the most important
compensation decision is how much he or she will earn.
Most employers do pay different rates to employees
performing the same job.

Pay differentials are based on:

1) Individual differences in experiences, skills, and
performance.
2) Expectations that seniority, higher performance, or
both deserve higher pay.