Human Resource Management, Unit 1- SY BBA (Sem 3), VNSGU-Surat
UNIT 4
COMPENSATION
TOPICS TO STUDY
1. Meaning and Definition of Compensation
2. Steps in determining compensation
3. Job Evaluation
4. Components of Pay structure
5. Factors influencing compensation levels
6. Wage Differentials and Incentives
7. Profit Sharing
8. Gain sharing
9. Employees stock option plans
10. Social security – Health, retirement and other benefits
DEFINITION & MEANING OF COMPENSATION
MEANING
Compensation is the money received by employees for the services they provide to the
organisations.
When the employee receives money in terms of salary or wage, it is known as direct
compensation.
When the employee receives benefits such as – health insurance, medical benefits, travel
allowances, etc., these are known as indirect compensations.
An organization always wants to design an effective compensation plan to make their
employees satisfied and motivated.
An effective compensation plan fulfils the expectations of the employees and satisfies them.
DEFINITIONS
Flippo defined compensation as “the adequate and equitable remuneration of personnel for
their contributions to the organizational objectives”.
Foulkes and Livernash defined compensation as “the payment of wages and salaries
including incentive, bonus payments, and benefits to employees in exchange of work”.
Page1
Dr. Zakir A. Patel, Prof, Naran Lala College of Commerce and Management, Navsari
Mobile; 9586075954
, Human Resource Management, Unit 1- SY BBA (Sem 3), VNSGU-Surat
STEPS IN DETERMINING COMPENSATION PLAN
Students must first attempt to write the meaning of compensation here.
Following are the steps involved in determining a good compensation plan;
1. Focusing on the Strategy Objectives:
A good compensation plan will always try to match the organisational objectives. Hence,
while deciding the compensation plan, it is important to focus on strategic objectives of the
organisation.
There are various questions which should be focused before designing compensation strategy
such as:
What is the mission of the organization?
Why does it exist?
What are the strategic goals and objectives for the next five years?
Whether current employees have the skills to meet these objectives? If so, will they be
rewarded for having them? If not, will internal candidates be trained to gain skills or
will the organization recruit externally to fill the goals?
What is the organization’s strategy?
Do employees work individually or in teams?
Are employees seen as costs or investments?
What is the cost to replace employees?
What is the desired turnover rate?
What should the organization’s compensation plan accomplish?
Once the answers to the above questions are clear, the compensation can be developed.
2. Commitment through Communication and Participation:
An organization must plan for making change to its compensation system.
In the very beginning, it is important that top management is committed to the process, the
implementation and the result.
Important techniques for participation and communication must be decided by the advisory
or steering committee.
A compensation review committee could help in identifying current issues with
compensation or salary administration.
3. Analysing Job Functions:
A job analyst develops a clear understanding of the work done by the employees.
It is important to do a job analysis before making changes to the compensation plan as job
analysis provides a collection of relevant information on the type, scope and responsibility of
each job.
Job analysis is the foundation for job description. It enables the organization to understand
the responsibility and qualification required for the job, and to compare it to the market
place.
4. Writing Job Description:
Once the information is collected through the job analysis process, it can be used for
preparation of job description.
A job description summarises the important components like the general nature of the work,
specific tasks, responsibilities and outcome competence required to perform the job.
Page2
A written job description should be considered a final document. Before it is finalized, it
should be received and accepted by both the employee and the supervisor.
Dr. Zakir A. Patel, Prof, Naran Lala College of Commerce and Management, Navsari
Mobile; 9586075954
, Human Resource Management, Unit 1- SY BBA (Sem 3), VNSGU-Surat
5. Determining Internal Pay Equity:
It determines fairness within the organization. Fair pay is a pay that employees generally
view as equitable. Internal equity is determined by job evaluation techniques such as whole
job ranking method and factor comparison technique.
6. Determining External Pay Equity:
It is the perceived fairness in pay relative to what other organisations are paying for the same
type of labour.
To gather information related to competitor’s pay rates, a survey method is developed which
includes the following steps:
i. Establish a timeline
ii. Select bench-mark positions to survey
iii. Target survey participants
iv. Design questionnaire
v. Use other available market data sources
vi. Follow up and verify answers with participants.
7. Designing Salary Structure:
Once collection of market data and determination of a hierarchical ordering of position, is
done, a salary structure can be designed.
Salary structure consists of jobs of equal value that are grouped into grades with competitive
salary ranges. Pay ranges are the rates from the minimum to maximum of each grade.
Positions are assigned to grades and pay ranges based on job content, marketing or external
equity and internal equity.
Each salary range includes minimum, midpoint and maximum salaries, with the midpoint
representing the market rate for the job.
JOB EVALUATION
DEFINITION & MEANING
Wendell French defines Job evaluation as “a process of determining the relative worth of the
various jobs within the organisation so that differential wages may be paid to jobs of different
worth”.
Kimball and Kimball define job evaluation “as an effort to determine the relative value of every
job in a plant to determine what the fair basic wage for such a job should be.”
Job evaluation is the systematic process of assessing the value of each job in relation to other
jobs in an organisation.
It provides a logical hierarchy of jobs based on their worth to the company. The hierarchy of
jobs are decided by analysing the difficulty of the work performed and the importance of the
work to the organisation.
The factors used to assess the importance of a job are identified, defined, and weighted in the
company’s job evaluation plan
Page3
Dr. Zakir A. Patel, Prof, Naran Lala College of Commerce and Management, Navsari
Mobile; 9586075954
UNIT 4
COMPENSATION
TOPICS TO STUDY
1. Meaning and Definition of Compensation
2. Steps in determining compensation
3. Job Evaluation
4. Components of Pay structure
5. Factors influencing compensation levels
6. Wage Differentials and Incentives
7. Profit Sharing
8. Gain sharing
9. Employees stock option plans
10. Social security – Health, retirement and other benefits
DEFINITION & MEANING OF COMPENSATION
MEANING
Compensation is the money received by employees for the services they provide to the
organisations.
When the employee receives money in terms of salary or wage, it is known as direct
compensation.
When the employee receives benefits such as – health insurance, medical benefits, travel
allowances, etc., these are known as indirect compensations.
An organization always wants to design an effective compensation plan to make their
employees satisfied and motivated.
An effective compensation plan fulfils the expectations of the employees and satisfies them.
DEFINITIONS
Flippo defined compensation as “the adequate and equitable remuneration of personnel for
their contributions to the organizational objectives”.
Foulkes and Livernash defined compensation as “the payment of wages and salaries
including incentive, bonus payments, and benefits to employees in exchange of work”.
Page1
Dr. Zakir A. Patel, Prof, Naran Lala College of Commerce and Management, Navsari
Mobile; 9586075954
, Human Resource Management, Unit 1- SY BBA (Sem 3), VNSGU-Surat
STEPS IN DETERMINING COMPENSATION PLAN
Students must first attempt to write the meaning of compensation here.
Following are the steps involved in determining a good compensation plan;
1. Focusing on the Strategy Objectives:
A good compensation plan will always try to match the organisational objectives. Hence,
while deciding the compensation plan, it is important to focus on strategic objectives of the
organisation.
There are various questions which should be focused before designing compensation strategy
such as:
What is the mission of the organization?
Why does it exist?
What are the strategic goals and objectives for the next five years?
Whether current employees have the skills to meet these objectives? If so, will they be
rewarded for having them? If not, will internal candidates be trained to gain skills or
will the organization recruit externally to fill the goals?
What is the organization’s strategy?
Do employees work individually or in teams?
Are employees seen as costs or investments?
What is the cost to replace employees?
What is the desired turnover rate?
What should the organization’s compensation plan accomplish?
Once the answers to the above questions are clear, the compensation can be developed.
2. Commitment through Communication and Participation:
An organization must plan for making change to its compensation system.
In the very beginning, it is important that top management is committed to the process, the
implementation and the result.
Important techniques for participation and communication must be decided by the advisory
or steering committee.
A compensation review committee could help in identifying current issues with
compensation or salary administration.
3. Analysing Job Functions:
A job analyst develops a clear understanding of the work done by the employees.
It is important to do a job analysis before making changes to the compensation plan as job
analysis provides a collection of relevant information on the type, scope and responsibility of
each job.
Job analysis is the foundation for job description. It enables the organization to understand
the responsibility and qualification required for the job, and to compare it to the market
place.
4. Writing Job Description:
Once the information is collected through the job analysis process, it can be used for
preparation of job description.
A job description summarises the important components like the general nature of the work,
specific tasks, responsibilities and outcome competence required to perform the job.
Page2
A written job description should be considered a final document. Before it is finalized, it
should be received and accepted by both the employee and the supervisor.
Dr. Zakir A. Patel, Prof, Naran Lala College of Commerce and Management, Navsari
Mobile; 9586075954
, Human Resource Management, Unit 1- SY BBA (Sem 3), VNSGU-Surat
5. Determining Internal Pay Equity:
It determines fairness within the organization. Fair pay is a pay that employees generally
view as equitable. Internal equity is determined by job evaluation techniques such as whole
job ranking method and factor comparison technique.
6. Determining External Pay Equity:
It is the perceived fairness in pay relative to what other organisations are paying for the same
type of labour.
To gather information related to competitor’s pay rates, a survey method is developed which
includes the following steps:
i. Establish a timeline
ii. Select bench-mark positions to survey
iii. Target survey participants
iv. Design questionnaire
v. Use other available market data sources
vi. Follow up and verify answers with participants.
7. Designing Salary Structure:
Once collection of market data and determination of a hierarchical ordering of position, is
done, a salary structure can be designed.
Salary structure consists of jobs of equal value that are grouped into grades with competitive
salary ranges. Pay ranges are the rates from the minimum to maximum of each grade.
Positions are assigned to grades and pay ranges based on job content, marketing or external
equity and internal equity.
Each salary range includes minimum, midpoint and maximum salaries, with the midpoint
representing the market rate for the job.
JOB EVALUATION
DEFINITION & MEANING
Wendell French defines Job evaluation as “a process of determining the relative worth of the
various jobs within the organisation so that differential wages may be paid to jobs of different
worth”.
Kimball and Kimball define job evaluation “as an effort to determine the relative value of every
job in a plant to determine what the fair basic wage for such a job should be.”
Job evaluation is the systematic process of assessing the value of each job in relation to other
jobs in an organisation.
It provides a logical hierarchy of jobs based on their worth to the company. The hierarchy of
jobs are decided by analysing the difficulty of the work performed and the importance of the
work to the organisation.
The factors used to assess the importance of a job are identified, defined, and weighted in the
company’s job evaluation plan
Page3
Dr. Zakir A. Patel, Prof, Naran Lala College of Commerce and Management, Navsari
Mobile; 9586075954
