© Kamal Subedi, 2016

Human Resource
Management
Compensation Management
 © Kamal Subedi, 2016

Concept of Compensation
◼ Compensation refers to the extrinsic rewards that
employees receive in exchange for their work. It is
composed of the base wage or salary and incentives or
bonus and any benefits. – Bayers and Rue
◼ From the above definition it can be concluded that the
organization mainly consist of two types of compensation
scheme:
◼ Direct compensation

◼ Indirect Compensation

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 © Kamal Subedi, 2016

Direct-Indirect Compensation

Direct Compensation
◼ Money is included under the direct compensation
popularly known as wages/gross pay. There are
direct financial payments in the form of the wages,
salaries, incentives, commission and bonuses.
Indirect Compensation
◼ Benefits come under indirect compensation. It may
consist of insurance (life and death insurance), the
employer’s contribution to retirement, pay for illness
and vacation, and employer’s required payments for
employment welfare as a social security.

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 © Kamal Subedi, 2016

Purposes and Uses of Compensation

Total compensation is important because of the several
purposes it can serve including.
◼ To attract potential job applicants: In relation with
the organizational recruitment and selection efforts
the compensation program can help assure that pay
is sufficient to attract the right people at right time for
the right jobs.
◼ To retain good employee: internally equitable and
externally competitive compensation scheme help to
retain the employee.
◼ To motivate employee: it acts as a tool of motivation
to increase the productivity or potential of the
employees.
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 © Kamal Subedi, 2016

Purpose and use of Compensation

◼ To administer pay within legal requirements: there
are many organizations to monitor the compensation
payment according to the law so to avoid the
violation of the law the compensation should be
provided to the employees.
◼ To facilitate organizational strategic objectives:
the organizational may want to create a very
rewarding and supportive climate. And to attract the
potential candidate for the job the proper
compensation scheme could be the effective tool to
attain the strategic objectives like rapid growth,
survival and innovation.

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 © Kamal Subedi, 2016

Structure and components of compensation

◼ Wages and salary:

◼ wage is the remuneration paid periodically to an

employee or worker (blue-collar workers).

◼ On the other hand salary refers to the weekly or the

monthly rates paid to clerical, administrative and

professional employee (white-collar employee)
◼ Incentives:
◼ it refers to all the plans that provide extra pay for

extra performance in addition to regular salary and

wages. They acts as the extra financial motivation.

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 © Kamal Subedi, 2016

Structure and components of compensation

◼ Benefits:
◼ They are usually known as fringe benefits because
they are offered by employer to the employee as a
fringe (free of cost). They are supplements to wages
received by employee at a cost to employer.
◼ Pay for time not worked (holidays, leaves, paid
vacations)
◼ Protection programs (insurance, pension, or
gratuity)
◼ Executive benefits (telephone, security guards,
newspapers)

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 © Kamal Subedi, 2016

Structure and components of compensation

◼ Service perquisites
◼ Org. also provide a number of services that
employees find desirable. These service are usually
provided by the organization at no cost to the
employee at a significant reduction from what might
have to be paid without the organization support.
◼ Free or subsidized housing, flooding, work clothing,
transportation etc.
◼ Child care facilities (day care, nurseries)
◼ Financial and legal services
◼ Purchasing services
◼ Educational, medicinal, outplacement services.

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 EXTERNAL ENVIRONMENT
INTERNAL
Composition o©fKamTal SoENVIRONMENT
tal Compensation
ubedi, 2016

COMPENSATION

FINANCIAL NON-FINANCIAL

DIRECT INDIRECT THE JOB THE ENV.

Methods of Employee Compensation in the
Philippines

1. Basic Wage / Salary

The regular amount paid to an employee for services
rendered.

Forms:
•Daily Wage – common for blue-collar or contractual
workers.
•Monthly Salary – for regular, rank-and-file, and
managerial employees.
•Piece-rate Pay – based on units completed (e.g.,
garments, electronics, manufacturing).
2. Overtime Pay (OT)

Given when employees work beyond 8 hours a day.

Rate: At least 25% of hourly rate on regular days; 30%
on rest days/holidays.
Example:
If hourly rate = ₱100 → OT rate = ₱125 (regular day
OT).
3. Premium Pay

Additional compensation for work done on:

•Rest days
•Special non-working days
•Regular holidays
Standard rates:
•Special day: +30% of daily rate
•Regular holiday: 200% of daily wage
4. Night Shift Differential

Additional 10% of hourly rate for work done between

10:00 PM – 6:00 AM.
5. Service Charge Distribution (for Hospitality
Industry)

10% service charge from customers is pooled and 85%

distributed to employees, 15% to management.
6. Commissions

A percentage of sales or revenue generated by the

employee.
Common for: sales agents, real estate brokers,
insurance agents.
7. Incentive Pay

Reward for achieving goals, improving performance, or

meeting productivity targets.
Examples:
•Performance incentives
•Productivity bonuses
•Attendance incentives
•Quality or efficiency bonuses
8. Allowances

Extra monetary support for job-related expenses.

Common types:
•Transportation allowance
•Meal allowance
•Communication allowance
•Cost of living allowance (COLA) – required in some
wage orders
•Hardship or hazard allowance – for dangerous work
conditions
9. Bonuses

Not usually required by law (except 13th month pay),

but commonly given.

Types:
•13th Month Pay – mandatory; equivalent to 1/12 of
annual basic salary
•Christmas bonus – optional, employer-provided
•Mid-year bonus
•Company anniversary bonus
10. Profit Sharing

Some companies distribute a portion of profits to

employees at year-end.
11. Stock Options / Stock Grants

Given by large companies or corporations as long-term

incentives.
Allows employees to buy shares at a lower price or
receive shares for free.
12. Hazard Pay

For employees exposed to risks (e.g., healthcare

workers, construction, mining).
Rates set by company policy or law (e.g., Magna Carta
for Public Health Workers).
13. Leave Benefits (Monetary Value)

Paid time off forms part of compensation.

Includes:
•Service incentive leave (SIL) – 5 days with pay
(Labor Code)
•Vacation & sick leave (company-given)
•Maternity and paternity benefits (SSS)
•Solo parent leave, special leaves for women
Unused leave credits can often be converted to cash.
Non-Monetary Compensation (Fringe
Benefits)

•Health insurance / HMO

•Free meals or transportation
•Company housing
•Discounts or company perks
•Wellness programs
•Retirement benefits (SSS, Pag-IBIG, private retirement
plans)
15. Retirement Benefits
Mandatory government programs:

•SSS pension
•Pag-IBIG provident fund
•Retirement pay (RA 7641: ½ month pay per year of
service for employers not covered by SSS/GSIS plans)
 © Kamal Subedi, 2016

Process of Compensation Management

◼ Preparation of Pay Structure: it is the joint outcome of
above three steps. For the purpose of determining pay
structure a lot of decisions need to be taken. For example.
◼ Weather to pay amounts equal, above or below

industry level?
◼ The number of width of pay grades and the extent of

overlap.
◼ Farming pay administration rules: as the rates ranges
have been determined, the development of rules/policies
of pay system has to be fixed. A lot of the policies and
rules required to answer:
◼ A trade of between seniority and merit basis

◼ The frequency of pay increases

◼ How to control salary and wage costs

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 © Kamal Subedi, 2016

Process of Compensation Management

◼ Implementation of wages and salaries: finally, it
should be implemented and controlled by authorized
executives. Due to the seniority of pay system, it is
usually assigned to a committee composed of high-
ranking officers. This committee may require frequent
advise and help from technical HR staff.

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 © Kamal Subedi, 2016

Methods of Employee Compensation

There are various method of compensation available in

HRM. A single organization can use single or two or
more methods at a time.
◼ Base plus cost of living allowance (BCOLA)

◼ Scale plus cost of living allowance (SCOLA)

◼ Cash incentives

◼ Bonus or variable pay

◼ Broad banding method

◼ Job or skill based pay method

◼ Merit pay method

◼ Other forms of compensations.

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 © Kamal Subedi, 2016

Base plus cost of living allowance (BCOLA)

◼ This method is based on two factors viz, base and

allowance. Every organization has their base salary
for all the types of jobs. On and above that
employees are provided with cost of living allowance.
COLA Is an adjustment to the base salary by a
percentage that is assumed to match increases in
cost for good and services on a national regional or
local level or account for change in the market.

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 © Kamal Subedi, 2016

Scale plus cost of living allowance (SCOLA)

◼ This is the second method of compensation used by

many organizations. It also has two components viz.
scale level for a particular level of job plus the COLA
given. Many companies set a range of pay rates from
minimum to maximum, designed for specific pay
grades.
◼ On and above that a cost of living
adjustment/allowance is given to the employees as
discussed in first method.

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 © Kamal Subedi, 2016

◼ Cash incentives: this is the third method in

compensation. This method takes one of the two
method explained above. Again the employee is
given, additional compensation to motivate and
reward him/her for exceeding performance goals in
the form of cash incentives.
◼ Bonus or Variable Pay: it is another method that is
used by many organizations to compensate their
employee according to their contributions. Bonus or
variable pay plan method is an incentive pay plan
which awards employee compensation in addition to
their basic salary. It is given for achieving, individual
or group performance and productivity goals.
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 © Kamal Subedi, 2016

◼ Broad Banding method: Broad banding means

collapsing salary grades and ranges into just a few
wide levels each of which contains a wide range of
jobs and salary levels. It creates vertical pay rates
ranges.
◼ Job or Skill based pay method: it is another type of
compensation method which is becoming vey
popular in recent years. It may be due to high
demand for skills experience, and education trend in
the market. In a real sense it is salary differentiation
system that bases compensation on an individual
education experience, knowledge, skills or
specialized traning.
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 © Kamal Subedi, 2016

◼ Merit pay method: it is also a very popular method

of compensation used by majority of organizations in
recent days. Merit pay is a compensation system
where by base pay increase are determined by
individual performance.
◼ Other forms of compensation: these techniques
are only supplementary in nature than an established
method. Some examples are: award programs,
sabbaticals team based pay and so on.

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 © Kamal Subedi, 2016

Compensation and incentive for management

employees
◼ Concept and needs: the executives of the company
plays an important role for looking the economic
health of the company. As they are important for the
success, growth and profitability of an organization
they have to be compensated properly. To make the
executive happy as far as possible, companies have
been giving in recent years bigger and more frequent
rise in salaries.
◼ The executive compensation cost a sizeable cost

and rising cost.

◼ The payment can be in form of, medical care,

professional services in legal and financial matters,

facilitates for entertaining customers and for dining,
customer recreational services. Page 21
 © Kamal Subedi, 2016

Why organization needs separate plan for managers?

Components of executives compensations and incentives
◼ The executives total compensation package consists of four
package for short term and long term incentive perquisites.
◼ Basic Salaries: fixed element of pay and it does not

normally vary in relation to company performance.

◼ Short term incentives: they are awarded annually.
Award incentives reflect hierarchical position relationship
in most cases with higher opportunities relative to higher
position and vice versa.
◼ Long term incentives; the payments is based on the

performance for the period beyond one year

◼ Benefits/perquisites: it is not based on the quantity

benefits, this consists of company cars, club membership,

housing etc.

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 © Kamal Subedi, 2016

Issues in management compensation

◼ Executives compensation has assumed importance in recent
years. They are increasing ever years and has become
public comment. The issue covers three major aspects.
◼ What and how much are the executives paid?

◼ Why are they paid heavy remuneration?

◼ What issues are involved in payment of higher

remuneration?
◼ The reasons are:
◼ First, the management compensation differs country to

country and they are kept confidential.

◼ Second, they are paid for the talents, and to satisfy their

GREED honest business practices must be adopted.

◼ Third, higher salaries and benefit do not guarantee
motivation
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