Human Resource Management

Chapter 8
Compensation
Wike Agustin Prima Dania, STP, M.Eng, PhD

AGROINDUSTRIAL TECHNOLOGY DEPARTMENT, UNIVERSITY OF BRAWIJAYA Wike Dania

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✓ Most of us, no matter how much we like our jobs, would not do them
without a compensation package.
✓ A compensation package can include salary, bonuses, health-care plans, and
a variety of other types of compensation.
✓ Employees who are fairly compensated tend to provide better customer
service, which can result in organizational growth and development.
✓ Compensation/Remuneration is what employees receive in exchange for
their work → reward
✓ Remuneration thus can be an important tool for promoting greater job
satisfaction, employee commitment, motivating higher levels of job
performance and enhancing organisational effectiveness
✓ Remuneration related to pay for performance

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Designing compensation/remuneration program

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A formal compensation policy should:
• reflect the organisation’s strategic business objectives and culture
• articulate the objectives that the organisation wants to achieve via its
remuneration programs
• be communicated to all employees
• provide the foundation for designing and implementing compensation
programs.

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 Compensation program objectives
For the organisation
✓ Attract and keep the desired quality and mix of employees.
✓ Ensure equitable treatment.
✓ Motivate employees to improve their performance and to strive to achieve the organisation’s
strategic business objectives
✓ Reinforce the organisation’s key values and the desired organisational culture.
✓ Drive and reinforce desired employee attitudes and behaviour.
✓ Ensure remuneration is maintained at the desired competitive level.
✓ Control remuneration costs.
✓ Ensure optimum value for each remuneration dollar spent.
✓ Comply with legal requirements.
For the employee
✓ Ensure equitable treatment.
✓ Accurately measure and appropriately reward performance and contribution to the achievement
of the organisation’s strategic business objectives.
✓ Provide appropriate remuneration changes based on performance, promotion, transfer or
changing conditions.
✓ Provide regular remuneration and performance reviews.
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 Job Evaluation System
• A systematic method of determining the worth to the organisation of a job in
relation to the worth of other jobs.
• The aim is to ensure that jobs of different sizes or relative worth attract the
appropriate pay differentials

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❑ Job Ranking
• A job evaluation method that sizes jobs by placing them in rank order
• The quickest, the simplest, the most user-friendly, and the oldest job evaluation method
• The evaluator ranks the jobs from ‘biggest’ to ‘smallest’ on a scale
• Too subject to bias and too clumsy to be used, does not measure the magnitude of difference
between jobs

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❑ Job Grading/Classification
• A job evaluation method that sizes jobs using a series of written classification
• Step:
• use a number of job-related factors, such as education, experience and responsibilities, to
determine classes or grades of job.
• create generic or ‘benchmark’ job descriptions for each grade or class
• Compare the job with the benchmark description for each of the grades or classes, then
assigned to the appropriate one
• A major problem with this method is that satisfactory descriptions have to be written for each
of the grades or classes, does not provide a precise classification
• It is inexpensive, best suited to organisations with benchmark jobs that have well-known and
understood standardised characteristics and thus are a valid and reliable guide to grading or
classification.
• It is often used in the public sector, in industrial awards, and for engineering and scientific jobs.

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❑ The Point System
• An approach to job evaluation in which numerical values are assigned to specific job factors
and the sum of those values provides a quantitative assessment of a job’s relative worth
• Step:
• Each factor is divided into a number of levels, each with a specific definition
• The points allocated for individual factors
• The points are totalled to determine the job’s relative worth to the organisation.
• A major problem with this method is subjectives in choosing the relative weight for each factor,
time-consuming, expensive and difficult

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❑ The Factor Comparison System
• A job evaluation technique that involves comparing jobs on a range of factors.
• Like the point system, it uses job factors such as education, experience, responsibility and
working conditions, and allocates points to quantify these factors.
• The basic principle is that all jobs should be compared and evaluated independently against
each of the job factors.
• Step:
• Jobs are ranked by one factor at a time under this system, so all jobs are compared
independently
• The separate rankings are assigned point values
• The points for each factor are totalled to give the overall point value of the job.
• The method is complex, not easily understood by employees, expensive to introduce and
maintain.

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Which System Should Be Used?
Should consider:
1. Objectives
2. The size of organisation
3. Organisation resources
4. Plan users
5. Corporate culture
6. Employee attitudes

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 Types of Pay System
• Seniority-based pay
• Pay levels and increases are determined by length of time on the job and not performance
• The most effective in keeping employees within the organisation

• Performance-based remuneration
• Pay increase awarded to an employee based on their individual performance
• To develop a productive, efficient, effective organization that enhances employee motivation
and performance

• Skill-based pay
• Compensates employees on the basis of job-related skills and the knowledge they possess
• To motivate employees to gain additional knowledge, skills and abilities that will increase
their personal satisfaction and value to the organisation.

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 Types of Pay
Pay Attributes
Salary Fixed compensation calculated on a weekly, biweekly, or monthly basis. No extra pay for overtime work.

Hourly Wage Employees are paid on the basis of number of hours worked.

Piecework System Employees are paid based on the number of items that are produced.

Types of Incentive Attributes

Bonus Plans Extra pay for meeting or beating some goal previously determined. Bonus plans can consist of monetary
compensation, but also other forms such as time off or gift certificates.
Profit-Sharing Plans Annual bonuses paid to employees based on the amount of profit the organization earned.
Stock Options When an employee is given the right to purchase company stock at a particular rate in time.
Other Types of Attributes
Compensation
Fringe Benefits This can include a variety of options. Sick leave, paid vacation time, health club memberships, day care
services.
Health Benefits Most organizations provide health and dental care benefits for employees. In addition, disability and life
insurance benefits are offered.
401(k) Plans Some organizations provide a retirement plan for employees. Wike Dania
Thank you.....
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