Chapter Five: The Rewarding of HR

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Introduction

This chapter is about Compensation

and Benefit Administration
– Job Evaluation
– Method of Job Evaluation
– Compensation such as Salary, Wage
and Incentive Packages

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4.1 Terminologies

 Compensation: Direct (salary/wages) + Indirect

pay (benefits)
 Pay level - average pay for a given job (job as
unit of analysis)
 Pay structure - relationship between jobs and
pay levels
 Key jobs (benchmark jobs) - primary or most
common job within a given job cluster or job
family
Prepared by Dr. Assefa T.
Terminologies
 Job cluster or job family -jobs that are related by
technology or service or social custom
 External equity (or External competitiveness) -pay equity
between similar jobs in different organizations
 Internal equity - pay equity between/among different
jobs within same organization
 Personal equity - equity of individual employee’s
outcomes relative to his/her inputs (compared to that of
referent others) -- see Adams Equity Theory
 Market wage survey - survey of competing organizations
(wage contour) to determine pay levels of jobs similar to
those in own organization (used to determine external
equity)
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4.1 Job Evaluation

 Job Evaluation is the process by which the relative

contribution of various jobs is determined for pay
purpose. That is to rationalize pay structure decision
 Job Evaluation: evaluation of jobs within organization (&
within job cluster) to determine relative “worth” of each
position based on compensable factors (e.g. skill, effort,
responsibility, working conditions)
 Job evaluation is a practical technique, designed to
enable trained and experienced staff to judge the size
of one job relative to others. It does not directly
determine pay levels, but will establish the basis for an
internal ranking of jobs. Prepared by Dr. Assefa T.
Importance of Job Evaluation

 To develop a fair and equitable scale of salary

 To determine the relative value of each job to
the organization
 To provide information for determining the
qualifications needed in decision making
selection, promotion, job change ---
 others

Prepared by Dr. Assefa T.

Methods of Job Evaluation

1. Job Ranking: The simplest method of job

evaluation is ranking. A committee or
evaluators review the job descriptions and rank
each job from the simplest to most challenging
job in the organization. This job-ranking
method is based on subjective evaluation of
relative value. Compensation for each job will
be based on the job hierarchy. The ranking
method is more suitable for small organizations
having a limited number of employees.
Prepared by Dr. Assefa T.
Methods of Job Evaluation

2. Job classification: description of job

families, assign a job to an appropriate
family, each job family has a labor grade .
The job grading or the classification
method works by having each job
assigned to a grade by matching
standard descriptions with each job’s
description, as shown below.
Prepared by Dr. Assefa T.
JOB GRADE STANDARD DESCRIPTION

Work is simple and highly repetitive, done under close supervision,

I requiring minimal training and little responsibility or initiative.
Examples: Janitor, Guard,
Work is simple and repetitive, done under close supervision, requiring some
II training or skill. Employee is expected to assume responsibility or exhibit initiative
only rarely. Examples: Clerk-typist I, machine cleaner, file clerk, library
attendant,e.t.c
Work is simple, with little variation, done under general supervision.
III Training or skill required. Employee has minimum responsibilities and
must take some initiative to perform satisfactorily. Examples: machine-
oiler, clerk typist III, Circulation, Proctor, store keeper e.t.c

Work is moderately complex, with some variation, done under general

IV supervision. High level of skill required. Employee is responsible for

equipment or safety; regularly exhibits initiative. Examples: Machine
operator I, Executive secretary,
Work is complex, varied, done under general

V
supervision. Advanced skill level required. Employee
is responsible for equipment and safety; shows high
degree of initiative. Examples: Machine operator II,
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tool specialist, experts,
Job Classification/Grading Method
 Here jobs are assigned to grades by comparing the job
description with the standard description. The
sample above indicates five grades. Jobs, which might
be classified under grade I, are simple and routine.
Jobs become more difficult as the grade level
increases. For example, jobs under grade IV are
believed to be complex and require high-level skill.
In attaching monetary values to the various jobs, the
rater makes pay-level differentials between jobs, based
on their complexity. More challenging jobs in an
organization are paid more. In this non-analytical
method “complex jobs are difficult to fit into the system;
a job may seem to have the characteristics of two or
more grades (Bratton & Gold, 1995).
Prepared by Dr. Assefa T.
 Methods of Job Evaluation

3.Factor comparison; This method demands a more

quantitative analyses of the jobs involved. In this method,
each job is broken down into factors, which are considered
common to all types of jobs. The compensable factors
used to compare jobs in the organization are skill, mental
requirements, physical requirements, responsibilities and
working conditions. For each job in the organization, the
factors are “ranked according to their relative importance
in each job (Brotton & Gold, 1995) and then the job
evaluator assigns a monetary value to each factor. For
example, a job with worth of Birr1,200 per month may
have its different contributing factors costed as follows:
Prepared by Dr. Assefa T.
Compensable Factors Allotted Birr
Skill Requirements 240

Mental Requirements 360

Responsibility 240

Physical Requirements 192

Working Conditions 168

Total Job Value Birr1,200/=P.M.

Prepared by Dr. Assefa T.
Methods of Job Evaluation

4. Point Method; The point rating system is the

most accurate and widely used method of job
evaluation. This system resembles the factor
comparison method in that, in both cases, jobs
are broken down into factors like skill, mental
effort, responsibility, physical effort and working
conditions. However, unlike the factor
comparison where monetary value is assigned
to each job, here points are used to determine
the worth of jobs in the organization.
Prepared by Dr. Assefa T.
Point Method

 In allocating range of points to each job factor,

the following steps may be followed.
– Assign a number (between 1 and 100) to each
factor.
– Closely examine each factor in terms of its
importance in relation to the other. For example, as
shown in the figure below, the physical effort
requirements for the job of labour is thrice as
important as skill requirements.
– Finally, each factor point value is added, to place job
in order of importance.
Prepared by Dr. Assefa T.
 Factor
Job Title Skill Mental Respons- Physical Working Total
effort ibility effort conditi
ons

Inspector 20 20 40 5 5 90
Secretary 20 20 35 5 5 85
File clerk 10 5 5 5 5 30
Laborer 5 2 2 17 9 35

Prepared by Dr. Assefa T.

4.2 Compensation

 Compensation: is defined as the adequate and equitable

remuneration of employees for their contribution to
organizational goal.
 Objective of Compensation
A. Attract Capable Employees to Organizations; every
organization looks for retaining capable employee with the
organization. Infract, retaining an employee is the most difficult
function of HR Department. So for retaining an efficient
employee with the organization, he has to be provided with
better compensation. That compensation that he is going to be
provided should include better salary perks, increments,
promotions etc. So, a better compensation package is going to
attract the efficient employee who is very useful to an
organization. Prepared by Dr. Assefa T.
Objective of Compensation
 Motivate them toward Superior Performance, For any
employee, money is the main motivator. If every employee of an
organization is provided with better compensation, every body will
be motivated to exhibit superior performance. The better the pay,
the better the performance. The compensation that is going to be
provided to the employees should include better salary, perks,
increments, bonus etc. Even though the remaining components
like promotion are going to motivate the employees, but the basic
motivator is better compensation.
 Retainment of their service over an extended period of time:
Retainment of the services of an employee with an organization is
the most difficult job of HR. So, the retainment of the employee’s
service over a long period of time is possible only by providing
them with better compensation.
Prepared by Dr. Assefa T.
 Factors that affect Compensation
 Supply and Demand: Though the commodity approach to labor is
not completely correct, it is nevertheless true that a wage is a price
for the services of a human being. The firm desires these services
and it must pay a price that will bring forth the supply, which is
controlled by the individual worker or by a group of workers acting in
concert.
 Labor Union: In the structure of economic relationships, the labor
union attempts to work primarily on the supply side. In a strike for
higher wages, the employer’s demand for labor to meet a market
need is pitted against a supply withheld by the union. Union leaders
are often very adroit in selecting the appropriate time to strike as
judged by the markets for the employer’s products. To strengthen
their control over the supply of labor, unions seek such goals as
union or closed shops, regulated or restricted substitution of capital
for labor through technology and controlled entry into apprenticeship
programs.
Prepared by Dr. Assefa T.
 Factors that affect Compensation
 Ability to Pay: Labor unions have often demanded an increase in compensation on the
basis that the firm is prosperous and able to pay. However, the fundamental
determinants of the wage rate for the individual firm issue from supply and demand. If
the firm is marginal and cannot afford to pay competitive rates, its employees will
generally leave it for better-paying jobs. Admittedly, this adjustment is neither immediate
nor perfect because of problems of labor immobility and lack of perfect knowledge of
alternatives.
 Cost of Living: Cost of living adjustment of compensation constitutes no fundamental
solution to equitable compensation to employees. It is useful as a stopgap device in
times of inflation when labor is pressed to keep up with the rise in prices. It is an
essential ingredient of long-term contracts unless provision is made to reopen the wage
clause periodically.
 Government: Our varying levels of government often have very specific things to say
about wages and salaries despite the theoretical and nebulous nature of equitable
compensation. There are at least three major federal laws that deal directly with the
subject of compensation. The Equal Pay Act is an amendment to the fair Labor
Standards Act specifies that equal work requiring equal skill, effort, and responsibility
under equal working conditions shall be accorded equal pay, regardless of sex of
employee.

Prepared by Dr. Assefa T.

 Components of Compensation

 Financial Compensation
– Direct Financial Compensation
 Salary
 Wage
 Bonus
 Commission

– Indirect Compensation
– Employee Benefits such as insurance, time off, …
– Employee Services such as education, recreation, …

Prepared by Dr. Assefa T.

 Components of Compensation
 Non-Financial Compensation
– The Job itself
 Interesting duties and responsibilities
 Challenging
 Opportunity for growth
 Opportunity for recognition
 Opportunity for achievement
– The Job Environment
 Sound policies
 Comfortable working condition
 Job sharing
 Competent supervision
 Trust, respect and cooperation
 others

Prepared by Dr. Assefa T.

 Compensation
Financial Non financial

Direct Indirect The Job Job Environment

Wages Insurance Plans: Interesting Duties Sound Policies
Salaries Life, Health, Challenge Competent Supervision
Commission Social Assistance Responsibility Congenial Co-Workers
Bonus Benefits: Opportunity Appropriate Status
Retirement For Recognition Symbols
Educational
Assistant, Feeling of Comfortable Working

Employee Services Achievement Conditions

Paid Absences:
Vacations, Advancement Job Sharing
Holidays, Opportunities
Sick Leave, etc.
Components of Compensation

Prepared by Dr. Assefa T.

Direct Compensation

A. Wages are payments based on the number of units

(hours, days) that a person works for the organization
or the number of units produced. It is a payment to
manual workers.
B. Salaries are money paid on monthly or annual basis to
employees whose output can not be easily quantified.
Clerical and administrative staff receives salary.
C. commission is a special form of incentive in which
payments to sales representatives are made on the
basis of a percentage of the sales value they generate.
D. Bonus: Payment offered to employees in recognition of
successful performance
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 Indirect Compensation/Fringe Benefits

 Insurance Benefits: The financial risks encountered by employees and their

families can be spread by insurance. These risks are shared when funds are
pooled in the form of premiums. Then, when insured risks occur, the covered
employees or their families are compensated. Here organizations can
purchase life, health and work related accident insurance.
 Security Benefits: These are non-insurance benefits that provide income
protection to employees before and after retirement. Provision of such
benefits is based on earnings and years of services in the organization. The
benefits are effective during separation, retirement, death, and disability.
 Time-off Benefits: In this type of benefit employees are paid for time not
involved in performance. Time-off benefits include sick leave, holidays,
vocations, maternity leave, education leave and other related leave of
absence. Here employees are provided with an opportunity to rest and
refresh their minds.
 Employee Services: These services include educational assistance,
subsidized food services, financial and social services and the like.

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Non-Financial Compensation

 The Job itself

– Interesting Duties and responsibilities
– Challenges
– Opportunity for Recognition
– Opportunity for Advancement
 The Job Environment
– Sound Policy
– Job Sharing
– Team Work
– Competent Supervision
– Comfortable working Condition
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Compensation Policies & Pay Systems

 Should reveal basis of organization’s

decisions/values (e.g. pay for performance (merit)
versus pay for employee inputs such as education,
experience, etc)
 Explains way pay system works -- e.g. salary
ranges, salary steps, etc.
 May describe ways to monitor internal & external
equity of system; methods & timelines for
modification, etc
 Includes benefits package information
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 Compensation and Performance
 As Armstrong (1996) put it, paying for performance is the process of
providing a financial reward to an individual, which is linked directly to
his/ her performance.
 Nothing is more demotivating to productive employees than to be paid
equal salary as less productive employees. If this is the case,
organizations need to practice varies method to improve job
performance. The most common once are piecework, bonus schemes
and commission.
– Piecework (Payment-by-Results) is a reward system in which rewards are
related to the pace of work / effort. That is, the faster an employee works, the
higher the output and the greater the reward.
– Bonuses are rewards for successful performance and are paid to employees
as lump sum.
– Commission, on the other hand, is a reward paid on the performance of
individual, typically salaried/sales
– Seniority and Experience: Employees are more likely to be committed to the
achievement of organizational objectives, if their long services are
considered as a basis for pay increases or have some value during
promotion
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Assignment

 How does effective compensation

administration helps an organization accomplish
its objectives?
 How does Pay dissatisfaction affect work
performance in an organization?
 Distinguish between internal equity and external
equity.
 Identify and briefly describe the major
determinants of financial compensation.
Prepared by Dr. Assefa T.