Module IV

Compensation: The concept, direct and indirect financial payments, aligning total rewards with
business strategy, equity and its impact on pay rates, establishing strategic pay plans by Job
evaluation method, creating a market-competitive pay plan; Pay for performance & Financial
incentives: the concepts, individual employee incentive and recognition programs (financial
and non- financial); Benefits and Services: pay for time not worked, insurance benefits,
retirement benefits, personal services and family friendly benefits, flexible benefits programs;
employee productivity and quality of work-life.

Compensation: Concept and Importance

Compensation includes all forms of financial returns, tangible services, and benefits employees
receive as part of the employment relationship. According to Dessler & Varkkey, compensation
is vital for attracting, motivating, and retaining talented individuals, while Armstrong
emphasizes it as a strategic tool crucial to achieving organizational effectiveness.
➢ Compensation is what employees receive in exchange for their contribution to the
organisation
➢ Compensation is a comprehensive one including pay, incentives, and benefits offered
by employers for hiring the service of employee.

Definition:

Compensation is a broad term pertaining to financial rewards received by persons through

their employment relationship with an organisation- Terry Leap

Compensation is the total of all rewards provided to employees in return for their services.
The overall purposes of providing compensation are to attract, retain and motivate employees

-R. Waynes Mondy

Direct and Indirect Financial Payments (Types of Compensation)

➢ Direct Payments: Wages, salaries, bonuses, incentives, commissions.
➢ Indirect Payments: Insurance, retirement plans, paid leaves, welfare amenities,
health care benefits, and other employee services.
Aligning Total Rewards with Business Strategy
➢ Strategic Fit: Dessler and Varkkey highlight aligning compensation practices with
broader organizational strategies to attract, retain, and motivate talent.
➢ Total Rewards Framework: Integration of direct pay, incentives, employee benefits,
career growth opportunities, and work-life balance programs.
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Equity and its Impact on Pay Rates
➢ Internal Equity: Fairness within the organization regarding pay scales and roles.
➢ External Equity: Competitiveness of pay compared to industry standards.
➢ Individual Equity: Equitable treatment of employees performing similar roles based
on individual performance.
➢ Impact of Equity: Rao notes that perceived inequities can lead to dissatisfaction,
lower morale, increased turnover, and reduced productivity.
Establishing Strategic Pay Plans by Job Evaluation
Job Evaluation

Definition of Job:
A job is an assignment given to an employee involving a set of duties and responsibilities.
Job Analysis:
A detailed study of a job to determine the tasks, skills, knowledge, abilities, and
responsibilities required for successful performance.
Job Description:
Abstract information derived from the job analysis report, providing facts about the job such
as duties, responsibilities, working conditions, etc.

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Job Specification:
An outcome of job analysis, stating the qualities and capabilities an employee must possess to
perform the job satisfactorily.
Job Evaluation:

Job Evaluation

A systematic process of assessing different jobs within an organization. It measures the skill,
effort, responsibilities, etc., associated with a job and assigns a value to it, which helps in
determining wage rates. Job specification and job description serve as the basis for job
evaluation.

Objectives of Job Evaluation:

1. Provide a sound basis for recruitment, selection, promotion, and transfer of
employees.
2. Eliminate wage inequalities.
3. Clearly define lines of authority and responsibility.
4. Identify training needs for employees to prepare them for future roles.
5. Promote positive employee-employer relationships.

Procedure in Job Evaluation:

1. Identify the job to be evaluated.
2. Describe the job requirements.

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 3. Compare the job with pre-identified jobs to determine its value.
4. Use the gathered information to establish a suitable wage structure.

Methods of Job Evaluation:

Job evaluation methods are categorized into two types: Analytical and Non-analytical.
1. Analytical Methods
Analytical methods break jobs down into individual factors or elements and assign a score to
each. The combined score determines the job's ranking.
Factor Comparison Method
A systematic and scientific method where each job is ranked according to a series of factors
such as mental effort, physical effort, skill, supervisory responsibility, and working
conditions. Pay is assigned by comparing the weights of these factors.
Steps Involved:
1. Select key jobs.
2. Identify evaluation factors (e.g., skill, effort, responsibility).
3. Allocate a portion of the pay rate to each factor.
4. Rank jobs under each factor.
5. Establish pay rates for each factor for each job.
Example of Pay Rate Fixation:

Job Title Skill Effort Responsibility Job Conditions Pay Rate (Rs.)

A 7.8 5.5 8.7 5 27

B 6.6 4.95 4.95 3.5 20

C 5.85 4.55 2.6 3 16

Advantages:
• Job value is expressed in financial terms.
• Applicable to newly created jobs.
Disadvantages:
• Costly and time-consuming.
• Using the same factors for all jobs is not always scientific.
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Points Factor Analysis (Point Rating)
An extension of the factor comparison method where job factors are selected, divided into
degrees, and assigned points. The total points determine the job's value.
Steps in Point Rating:
1. Identify key jobs.
2. Select compensable factors common to all jobs.
3. Divide factors into sub-factors (degrees).
4. Assign point values to degrees.
5. Sum points to determine the job's worth.
6. Convert points into monetary values.

Example of Point Assignment:

Compensable Factors Degree 1 Degree 2 Degree 3 Degree 4 Degree 5 Total Points

Skill 10 20 30 40 50 150

Physical Effort 8 16 24 32 40 120

Mental Effort 5 10 15 20 25 75

Responsibility 7 14 21 28 35 105

Job Condition 6 12 18 24 30 90

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Compensable Factors Degree 1 Degree 2 Degree 3 Degree 4 Degree 5 Total Points

Total Points 540

Example of Conversion to Money Value:

Point Range Daily Wage Rate (Rs.) Job Grade Designation

500–600 300–400 1 Officer

600–700 400–500 2 Accountant

700–800 500–600 3 Manager I Scale

800–900 600–700 4 Manager II Scale

900–1000 700–800 5 Manager III Scale

Advantages:
• Applicable to a wide range of jobs.
• Facilitates job classification and grading.
Disadvantages:
• Time-consuming and complex to develop.

2. Non-Analytical Methods
Non-analytical methods evaluate jobs as a whole without detailed factor analysis.
1. Ranking Method
Jobs are arranged from highest to lowest based on their value or difficulty.
Advantages:
• Simple and fast.
• Suitable for small organizations.
Disadvantages:
• Less accurate for larger organizations.
2. Job Classification Method

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Jobs are grouped into predefined classes or grades (e.g., executives, skilled workers).
Example of Job Classification:

Class Description

Class I – Executives Office Manager, Deputy Office Manager, etc.

Class II – Skilled Workers Purchasing Assistant, Cashier, etc.

Class III – Semi-skilled Workers Typists, Machine Operators, etc.

Class IV – Unskilled Workers File Clerks, Office Boys, etc.

Advantages:

• Easy to understand.

• Standards are explicit.

Disadvantages:

• Some jobs may not fit neatly into categories.

• Creates status hierarchies.

3. Paired Comparison

Each job is compared with every other job using the formula n(n−1)22n(n−1) for
comparisons.
Example:

Compared To A B C D

A A C A

B C D

C C

Results:

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Job Total Selections

A 2

B 0

C 3

D 1

Advantages:
• Simple and consistent.
Disadvantages:
• Time-consuming for many jobs.

Disadvantages of Job Evaluation:

1. Time-consuming and expensive.
2. Does not account for employee performance.
3. Wage fixation may be challenging if candidate availability is low.
4. Over-reliance on scientific methods may cause labour dissatisfaction.

Creating a Market-Competitive Pay Plan

• Market Surveys: Conducting regular compensation surveys to benchmark pay
against industry standards.
• Pay Structure Design: Integrating market data to formulate compensation structures
that attract and retain skilled talent, as highlighted by Snell & Bohlander and
Aswathappa & Dash.
Pay for Performance & Financial Incentives
• Concept: Linking employee pay directly to performance outcomes to improve
motivation, productivity, and organizational alignment.
• Individual Incentive and Recognition Programs:
o Financial Incentives: Piece-rate, bonuses, merit pay increases, commissions.
o Non-Financial Recognition: Awards, public recognition, certificates,
employee appreciation events.

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Mathis et al. highlight the importance of clearly defined performance criteria and fair
evaluation processes to maintain employee trust and motivation.
Overall, strategically designed compensation and incentive systems are essential for fostering
a motivated, productive, and satisfied workforce, significantly contributing to organizational
success.
Benefits and Services
• Pay for Time Not Worked: Paid holidays, vacations, sick leave, maternity and
paternity leave.
• Insurance Benefits: Health insurance, life insurance, disability insurance.
• Retirement Benefits: Pension schemes, provident fund, gratuity.
• Personal Services and Family-Friendly Benefits: Childcare support, counseling
services, flexible working arrangements, wellness programs.
• Flexible Benefits Programs: Allowing employees to select benefits based on
personal needs, enhancing satisfaction and retention.
Employee Productivity and Quality of Work-Life (QWL)
Quality of Work-Life (QWL) is a general concept that refers to several aspects of job,
including:
➢ Management and supervisory style
➢ Freedom and autonomy to make decisions on the job
➢ Satisfactory physical surroundings
➢ Job safety
➢ Satisfactory working hours
➢ Meaningful tasks

• Quality of Work-Life Initiatives: Programs aimed at improving job satisfaction,

employee engagement, and overall productivity.
• Strategies: Flexible work arrangements, participative management, career
development opportunities, supportive and inclusive organizational culture, and safe
working conditions.
Strategically structured compensation, benefits, and QWL initiatives significantly contribute
to organizational effectiveness, employee satisfaction, and long-term success.

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