MAINTENANCE AND

REWARDING OF EMPLOYEES
COMPENSATING HUMAN RESOURCES
⚫Objectives of Compensation
Compensation is the set of rewards that
organizations provide to individual in return for
their willingness to perform various jobs and
tasks within the organization. It includes all forms
of financial returns and tangible services and
benefits employees receive as part of an
employment relationship.
Base wages and salaries are the hourly, weekly, or
monthly pay that employees receive in exchange
forMilkovich
George theiret al.work.
Compensation. 10 Edition (USA: Irvin, 2011)
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The primary objective of any base wage and salary
system is to establish a structure for the equitable
compensation of employees, depending on their jobs
and their level of performance in their jobs.
People are willing to work in exchange for
inducements or rewards they receive from working.
The inducements include both financial
compensation and nonfinancial compensation.
The objective of compensation to create a system of
rewards that is equitable to the employer and
employee alike. The desired outcome is an employee
that is attracted to the work and motivated to do a
good job for the employer.
The following are suggestions to make compensation
policy more effective. Compensation should be:
1. Adequate to meet the needs of the employees and
to acquire and retain qualified personnel.
2. Equitable- Each person should pay fairly, in line
with his/her efforts, abilities, and training.
a. It is fair relative to pay coworkers in the same
organization receive.
b. It is fair relative to pay received by co workers in
other organization who hold similar positions.
3. Balanced- Pay benefits ad other rewards should
provide a reasonable total reward package.
4. Cost-effective- taking into consideration to the
organization.
5. Secure- Pay should be enough to help an employee
feel secure and aid him/her in satisfying basic
needs.
6. Incentive-providing- Pay should motivate effective
and productive work or reward desired behavior.
7. Acceptable to the employee- The employee should
understand the system being followed by the
company and should feel it is reasonable for the
organization and for him/her.
8. Compliant with legal regulation.
Main Components of Compensation
Direct compensation consist of cash directly paid to
the employee in exchange for his/her work.
Included in this category are:
a. Base Pay- the hourly wage or weekly/monthly
salary earned.
b. Premium Pay- Refers to the additional
compensation required by law for work performed
within eight (8) hours on nonworking days, such as
rest days and special days.
c. Base pay progression- movement of base pay
overtime, from year to year.
d. Variable pay- Incentive or bonus pay that does not
fall into base pay; such as earnings may be based on
performance against preset goals (incentives) or pay
at the discretion of the company (bonuses); may be
paid at the individual, team, group or organizational
level.
Wages vs. Salaries
Fundamental to compensation understands the
distinction between wages and salaries. Wages
generally refer to hourly compensation paid to skilled
and unskilled workers or those performing blue-
collar jobs, with time as the basis in computation.
Salary, on the other hand, is income paid to an individual
not on the basis time but the basis of performance.
Base pay, base pay progression and variable pay add up to
total cash compensation paid in any given year.
⚫Benefits and perquisites or perks-In addition to
direct cash, compensation is also paid in the
form of indirect cash or benefits that have
monetary value.
⚫Indirect compensation- quality of work life.
Total rewards also include a broad array of
nonmonetary, but extremely important, rewards
that we place under the general umbrella of
quality of work life. These rewards include:
a. Organizational Culture- the norms and values
defining appropriate behavior in the organization.
One of the singe, most important cultural
expectations we encountered today is employee’s
confidence in the business and its leaders.
b. Intrinsic values-rewards inherent in the work itself.
These rewards come from the act of performing.
c. Career opportunities-the prospects for development
and growth. For organization, careers represent the
most efficient way to grow the talent they will need
to compete; while for employees, careers represent
valued opportunities to grow and achieve
professional and occupational goals.
Determining Pay Rates
Most wage and salary system establish pay ranges for
certain jobs based on the relative worth of the job to
the organization. An employee’s performance on the
same job should then determine where that employee’s
pay falls within the jobs range.
1. Determining the relative worth of the different jobs
to the organization (thereby ensuring internal equity)
2. Pricing the different jobs (thereby ensuring external
equity)
Job evaluation is the primary method used to
determine the relative worth of jobs to the
organization.
Wage surveys represent one of the most
commonly used method for pricing jobs.
The following are some of the basic determinants
to pay.
I. External Factors
A. Market Factors
1. Supply and demand labor
2. Economic conditions and unemployment
B. Existing pay level in the community
C. Government regulations and laws i,e.,
minimum wage law
II. Organizational Factor
A. Type of Industry
B. Profitability and company’s ability to pay
C. Unionized or nonunionized
D. Size of the company
E. Capital or Labor intensive
F. Value of the job- Contribution to the company
III. Job Factors
A. Skills
1. Mental Requirements
2. Complexity of Duties
 3. Personal qualification needed
4. Ability to make decisions, judgments
5. Preparation for the job- education, training,
and knowledge
B. Responsibility
1. money, commitments
2. Decision Making
3. Supervision
4. Quality of work
5.Materials and Equipment, property
6. Confidential information
 C. Effort
1. Physical and mental effort required
2. Attention to details
3. Pressure of work
D. Working conditions
1. Job conditions
2. Physical hazards
IV. Individual Factors
A. Performance, productivity
B. Experience
C. Seniority, length of Service
D. Potential, promotability
Establishing Pay Rates
1. Conduct the salary survey (aimed at the
determining prevailing wage rates) for the
following reasons:
a. Price benchmark jobs
b. Majority of the positions found in the company
are usually priced directly in the marketplace.
c. To collect data on benefits so as to provide a
basis on which to make decisions regarding
employee benefits
2. Determining the worth of each job trough job
evaluation
 Job evaluation refers to a systematic comparison
done in order to determine the worth of one job
relative to another. The basic procedure is to
compare the content of jobs in relation to another,
like in terms of their effort, responsibility, and skills.
Job Evaluation Method
A. Ranking Method
This is the simplest and oldest method and the least
often used job evaluation technique. It involves
ranking each job relative to all other jobs, usually
based on overall difficulty rather than on a number
of compensable factors.
Advantages:
⚫Simplest and easiest to explain
⚫Take less time to accomplish than other methods.
Disadvantages:
⚫Provide no yardstick for measuring the value of
one job relative to another
⚫It is limited to smaller organizations where
employees are very familiar with various jobs
⚫The method is highly subjective
B. Job Classification or Job Evaluation Method
This is a simple, widely used method in which
jobs are categorized into groups. The groups are
called classes if they contain similar jobs, or
grades if they contain jobs that are similar in
difficulty but otherwise different.
Advantages:
⚫Provides specific standards for compensation and
accommodation changes in the value of individual
jobs.
⚫Can be constructed simply, quickly, and cheaply
⚫Easy to understand and explain to employees
 Disadvantages:
⚫Jobs are force to fit into categories that are not
entirely appropriate and feelings of inequity can
result
⚫Problems may arise in deciding how many
classifications there should be because too few
classes will make it difficult to differentiate job
value while too many classes make writing
definitions almost impossible.
 Class I Simple work, no supervisory
responsibility, no public contact
Class II Simple work, no supervisory
responsibly with public contact
Class III Work of medium complexity, no
supervisory responsibility, with public contact
Class IV Work of medium complexity, with
supervisory responsibility, and with public
contact
Class V Complex work, with supervisory
responsibility, and with public contacts
Marc J. Wallace Jr. and Charles H. Fay, Compensation Theory and Practice (Boston; Kent Publishing.1988).
C. Point System
Point system requires evaluators to quantify the
value of the element of a job. On the basis of the job
description or interviews with job occupants, points
are assigned to the degree of various compensable
factors to do the job.
1. Selection of key jobs. This represents jobs that are
common throughout the industry. The goal here is to
select enough key jobs to represents each major and
detailed job description is necessary for each job.
2. Selecting compensable factors. Compensable
factors or characteristics of the job that are deemed
important by the organization to the extent that it is
willing to pay for them.
For companies with recognized labor union,
compensable factors selected must be acceptable to
both management and the union. In this method, job
subfactors are used to describe compensable factors
in more detail.
Degree statements describe the specific requirements
of each subfactor. Table 5 presents possible degrees
and subfactors for compensable factor of knowledge.
Breaking compensable factor into subfactors and
degrees allow for a more precise definition of the job
and facilitate the evaluation process.
 Table 5
Possible Subfactors and the Degrees for knowledge as Compensable Factor

Subfactor 1st degree 2nd degree 3rd degree 4th degree

Education College College With With PH.D.
level graduate MA/MS
Experienc Less than 1 year and 2 years 3 years or
e 1 year more and more more
Job Diversified Difficult or Difficult or Unusual
complexity work of a involves involves work of
routine work not work complex
nature necessaril comprising nature
requiring y new new requiring
considerab requiring problems the use of
le care and considerab requiring judgement
attention le care and the use of
attention judgment
Manual Able to Able to Able to set Able to
skills operate operate or up manipulate
simple apply operate, and tend
office various drive and office
equipment kinds of handle machinery
like managem office (including
telephone, ent and machinery tools,
fax systems in needed in company
machine, the performing vehicles,
typewriter, effective job and
calculator, performan whenever laboratory
and ce of job necessary equipment
computer ) needed
in
performing
the use of
judgment
Assigning Weights to Factors
Weights are assigned to each of the factors,
subfactors, and degrees to reflect their relative
importance. Naturally, the weight assigned varies
from job to job. For example, skill might be the
most important factor used in evaluating a
machinist job, while responsibility might be more
critical to a supervisors job. Table 6 presents a
possible point breakdown that totals 1,000 points.
In this example the compensable factor of
responsibility was deemed to be the most
important factor and was awarded 360 points.
Assigning Points to Specific Jobs
After the point scale gas been agreed on, points values
are derived for key jobs using the following steps:
1. Examine the Job description
2. Determine the degree statement that best describes
each subfactor for each compensable factor
3. Add the total number of points.
The point totals should present the same general
relationship that the actual pay scales show for the key
jobs. That is, a rank ordering of the key job according
to point totals should be approximately equivalent to a
rank ordering of key jobs according to pay.
Advantages:
⚫Can be easily interpreted and explained to employees
because of its mathematical nature
⚫Detailed and specific- Jobs are evaluated on a
component basis and compared against a
predetermined scale.
⚫The system is easy to keep current as jobs change.
⚫Because of its quantitative nature, it is easy to assign
monetary values to jobs.
Disadvantages:
⚫Time consuming and costly to develop
⚫Requires significant interaction and decision-making
by the different parties involved in conducting job
evaluation.
D. Factor Comparison Method
This method is similar to the point method but
slightly more complex, and it involves a
monetary scale instead of a point scale, thus, not
as popular as the point method. Examples of
compensable factors are:
1. Skills
2. Responsibilities
3. Effort
4. Working condition
Unlike the point system, however, the factor
comparison method does not break down the
compensable factors into subfactors and degrees. It
requires that each job be compared and ranked with
their jobs under each separate factor.
Steps:
1. Identify key (benchmarks) jobs
2. Identify job factors
3. Rank jobs with respect to each of the factors
independently
4. Assign monetary amounts to each job on each factor
5. Compare unique jobs with key jobs. This should be
done factor by factor determine how much each unique
job should be paid.
⚫Can be applied to a wide range of jobs
⚫Can be applied to newly created jobs
Disadvantages:
⚫Relatively difficult to explain to employee since the pay
for each factor based on judgments that are subjective
⚫The standards used to determine the pay for each factor
may have built in biases that would affect certain groups
of employees like females or minorities.
In conducting job evaluation, the following must be
taken into consideration:
1. Consistency- This is to establish reliability. It is
achieved when two people evaluating the same jobs
provide similar
6. Group similar jobs into pay grades. A pay grade is
comprised of jobs of approximately equal difficulty
or importance a determined by job evaluation.
7. Price each pay grade. The jobs are then priced and
the total pay for each job is divided into pay each
factor.
This process establishes the rate of pa for each factor
of each benchmark job.
Advantages:
⚫Relatively detailed and specific-jobs are evaluated on
a component basis and compared against other jobs.
⚫Usually easier to develop than the point method.
⚫Value of the job is expressed in monetary terms
ratings made by one person on two different occasions.
2. Freedom from the bias- the process should be free
from political considerations or personal biases. Those
making the evaluations should be objective.
3. Correctability-Firms should provide mechanism to
modify inaccurate or out-of-date- evaluations thus, the
need to periodically review and update job evaluation
results.
4. Representativeness- All employees affected by the
process should have their concerns represented.
5. Accuracy of the information- Ratings must be based
on accurate information, that is, those making the
evaluations should be quite knowledgeable of the jobs
being rated.
Different form of Compensation
Employees can be paid for the time they work, the
output they produce, or a combination of these two
factors.
1. Payment for Time Worked
Pay surveys are used to establish competitive pay
for the industry and job evaluation is the principal
method for setting time-pay schedules. This method
has no direct relation to the worker’s output.
Pay is usually adjusted upward through six types of
increase.
a. General-across the board increase for all
employees
 b. Merit Increases-paid to employees based on
some indicator of job performance
c. Cost of living adjustment
d. Reclassification increase’
e. Level adjustment
f. Promotional Increase
2. Incentive forms of Compensation
This is a method of compensation
employees on the basis of output which means,
more production, more earnings. The
organization first establishes performance
standards to determine the quantity
 a person can be expected to produce in a given
period of time.
Classification
a. Piecework or payment by results- This is a
system of pay based on the number of items
produced or processed by each individual worker
in a unit of time such as items per hour or items
per day.
b. Individual Incentive Plans- This rewards
individual performance on a real-time basis for
measuring a goal or hitting a target rather than
increasing a person’s base salary at the end of the
year.
c. Group Incentives- these are given when it is
difficult to measure individual output or when
cooperation is needed to complete a task or project.
The Japanese used group cohesiveness to reduce
jealousy. They assume that rewarding only an
individual or a few workers will discourage a sense
of teamwork.
3. Performance-based Rewards
Organization want employees to perform at
relatively high levels and need to make it worth their
efforts to do so. It is believed that when rewards are
associated with higher levels of performance, it will
presumably motivate the employees to work hard to
achieve awards.
4. Spot Bonuses
These are spontaneous incentive awarded to
individuals for accomplishments not readily
measured by a standard. An example is to
“recognize exemplary customers service each month
to identify employee of the month awardee”.
5. Skill and Knowledge-based
This sets pay level on the basis of how many skills
an employee has or how many jobs he/she can do.
This emphasizes the importance of an employee’s
ideas, growth, and development. Rewards are based
on acquisition of and proficiency in new skills and
knowledge regardless of the employee’s length od
service.
6. Merit Pay Plans
Merit pay is usually awarded to employees on
the basis of the relative value of their
contributions to the organization.
7. Profit Sharing
At the end of the year, some portion of the
company ‘s profit is paid into a profit sharing
pool, which is then distributed to all employees.
8. Stock Ownership Plans
Employees are gradually given a minor stake in
the ownership of a corporation.
9. Executive Compensation
a. Base pay-guaranteed amount of money that
the executive will get from the company.
b. Incentive pay/executive perquisites or perks
e.g., stock option plan-an incentive plan
established to give company executives the
option to buy company stocks in the future at a
predetermined fixed price.

Edward Lawler III et al. “Who uses Skill-Based Pay and Why? Compensation and Benefits Review (March-
April 1993)
Seatwork
I. Identification
___________1. Refers to the set of rewards that
organizations provide to individuals in return for their
willingness to perform various tasks within the
organization.
___________2. Consists of cash directly paid to employees
in exchange for their work.
___________3. The hourly wage or weekly/monthly salary
earned by employees.
___________4. Additional compensation requires by law
for work performed within 8 hours on nonworking days
such as rest days and holidays.
________5. Systematic comparison done in order to
determine the worth of one job relative to another.
________6. Job evaluation method which is considered
the simplest but provides no yardstick for measuring
the value of one job relative to another.
________,_________,__________7. Possible
subfactors for knowledge as compensable factor
using point system method.
________,_________,___________,___________8.
Compensable factors using factor comparison
method.
__________,_________9. Type of wage and salary
adjustment given to employees to increase their pay.
_________10. System of pay based on the number of items
produced.
II. Essay
1. What are the bases of pay differentials when employers
decide to pay individual doing the same jobs with different
rates of pay?
2. Compare and contrast individual incentive pay to a group
incentive pay system.
3. What are the major factors influencing pay? What sort of
advice would you give to someone whose goal is to earn a
great deal of money?
4. Assume you are the head of the public relations office of
GSIS that just gave its CEO a huge bonus. Outline a plan to
be presented to the press justifying the bonus given to the
CEO.
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