Chapter 9: Compensation and Benefits

• Compensation: Set of rewards that organizations provide to individuals for their willingness to perform tasks

• Benefits: Various items of value beyond wages that employees receive from the organization

 Rewards
 Incentives

Compensation and benefits

- refers to the compensation/salary and other monetary and nonmonetary benefits passed on by a firm to its employees.
Compensation and benefits is an important aspect of HRM as it helps to keep the workforce motivated. It helps give benefits
to employees based on their performance and actions and brings the best out the employees at workplace.
- Companies hire people individual to achieve their organizational goals and people join companies to earn money & build
their career. One of the biggest factors why people join companies in the compensation and benefits, salaries, perks,
incentives etc. which is given to them.
- C & B is a sub-discipline of human resources, focused on employee compensation and benefits policy-making. While
compensation and benefits are tangible, there are intangible rewards such as recognition, work-life and development.
Combined, these are referred to as total rewards[1] . The term "compensation and benefits" refers to the discipline as well
as the rewards themselves.

Compensation and Benefits Components:

There can be several ways where benefits can be given to employees. Mostly it is given in terms of a CTC or gross salary. Employee
compensation and benefits are divided into four basic categories:

1. Fixed (Guaranteed) pay – a fixed monetary (cash) reward paid by an employer to an employee. The most common form of
guaranteed pay is base salary. Guaranteed pay also includes cash allowances (housing allowance, transport allowance, etc.),
differentials (shift differentials, holiday differentials) and premiums (night shift, etc.)

2. Variable pay – a non-fixed monetary (cash) reward paid by an employer to an employee that is contingent on discretion,
performance, or results achieved. The most common forms of variable pay are bonuses and incentives.

3. Benefits – programs an employer uses to supplement employees’ compensation, such as paid time off, medical insurance, company
car, and more.

4. Equity-based compensation – stock or pseudo stock programs an employer uses to provide actual or perceived ownership in the
company which ties an employee's compensation to the long-term success of the company. The most common examples are stock
options.

Employee benefits

- typically refers to retirement plans, health life insurance, life insurance, disability insurance, vacation, employee stock
ownership plans, etc. Benefits are increasingly expensive for businesses to provide to employees, so the range and options of
benefits are changing rapidly to include, for example, flexible benefit plans.
- Benefits are forms of value, other than payment, that are provided to the employee in return for their contribution to the
organization, that is, for doing their job. Some benefits, such as unemployment and worker's compensation, are federally
required. (Worker's compensation is really a worker's right, rather than a benefit.)
- Prominent examples of benefits are insurance (medical, life, dental, disability, unemployment and worker's compensation),
vacation pay, holiday pay, and maternity leave, contribution to retirement (pension pay), profit sharing, stock options, and
bonuses. (Some people would consider profit sharing, stock options and bonuses as forms of compensation.)

Tangible benefits – are those listed by the company in a quantifiable form. Such benefits usually are contractual items, such as paid
time off, insurance costs, salary and profit sharing. Calculating the tangible benefits and comparing them to tangibles that another
company offers is a straightforward measurement. When people first start looking for a job, they usually have

Intangible Benefits

- An employee may receive intangible benefits, such as a desirable work schedule. That could be a schedule that is controlled
by the employee and can be adjusted to accommodate occasional non-work activities, or one that is highly predictable, which
makes it easier for the employee to arrange childcare or transportation to work.
- Access to training programs, mentorship, opportunities to travel or to meet other people in the same field, and similar
experiences are all intangible benefits that may appeal to some employees. a better idea of these tangible benefits than they
do of the work’s intangible benefits.

Basic Purposes of Compensation

• Provide appropriate and equitable rewards to employees

• Help employees focus on activities that the organization considers important

• Increase employee efforts along desired lines

Internal equity: Comparisons made by employees to other employees within the same organization

External equity: Comparisons made by employees to others employed by different organizations performing similar jobs
  Pay surveys: Surveys of compensation paid to employees by other employers in a particular geographic area, industry, or
occupational group

Wages: Hourly compensation paid to operating employees

• Time acts as the basis for determining wages

- are usually associated with employee compensation that is based on the number of hours worked multiplied by an hourly rate
of pay. Generally, the employees earning hourly wages will be paid in the week that follows the hours worked. Are generally
paid per hour (daily or weekly basis)
- Usually not include paid vacations or paid sick days.
- Wage earners often have to give up pay for leaving early, coming in late, missing a day, or taking a vacation.

Salary: Income paid to an individual on the basis of performance, not on the basis of time

- is associated with employee compensation quoted on an annual basis, such as $50,000 per year. Many employees working in
a company's general office will be paid a salary. Often the salaries are paid semi-monthly. That is, one pay date will be the
15th day of the month for working from the 1st to the 15th, and the other pay date will be the last day of the month for
working from the 16th to the last day of the month.
- Salary earners get paid for performance rather than by the hour.
- Salaried workers are much more likely to have paid sick days and paid vacations
- Medical insurance
- Education

Determinants of Compensation Strategy

• Overall organizational strategy • Ability to attract and retain employees

• Ability to pay • Ability to bargain with the unions

The compensation strategy sets a clear guidance for the key remuneration principles in the company. The strategy defines key
strategic behaviors and values, which are remunerated. It defines the values and behavior, which are valued and rewarded. The
compensation strategy makes the difference between the focused strategic compensation and a bunch of different non connected
compensation components.
How to develop an effective compensation strategy?

Designation of collar jobs

Blue collar jobs are a kind of job that

needs a worker to perform physical
labor in the workplace.

- Blue collar workers wear

blue attire so that dirt and
dust are not shown.

White Collar jobs in which a person

has to perform administrative or
professional work.

Job-Evaluation Methods

• Classification system: Attempts to group sets of jobs together into clusters

• Point system: Requires managers to quantify value of various elements of specific jobs in objective terms

 Point manual: Carefully and specifically defines the degrees of points from first to fifth
 Factor-comparison method: Assesses jobs on a factor-by-factor basis using a factor-comparison scale as a benchmark

Job evaluation

- is a systematic way of determining the value/worth of a job in relation to other jobs in an organization. It tries to make a
systematic comparison between jobs to assess their relative worth for the purpose of establishing a rational pay structure.
- is the process of assessing the relative worth of the jobs in an organization. The jobs are evaluated on the basis of its content
and the complexity involved in its operations and thus, positioned according to its importance.

Job evaluations may be carried out in order to help businesses:

• Produce a fair pay framework

• Reduce inefficiencies in remuneration e.g. two people on the same ‘level’

with different salaries

• Compare remuneration with other companies

• Design new jobs, departments and functions

• Rework their pay framework after a company re-organization

Non Analytical Job Evaluation Methods

1. Ranking Method: This is the simplest and an inexpensive job evaluation method, wherein the jobs are ranked from the highest to
the lowest on the basis of their importance in the organization. In this method, the overall job is compared with the other set of jobs
and then is given a rank on the basis of its content and complexity in performing it.

2. Job Grading Method: Also known as Job Classification Method. Under this method the job grades or classes are predetermined
and then each job is assigned to these and is evaluated accordingly.
Analytical Job Evaluation Methods

1. Factor-Comparison Method: Under this method, the job is evaluated, and the ranks are given on the basis of a series of factors
Viz. Mental effort, physical effort, skills required supervisory responsibilities, working conditions, and other relevant factors. These
factors are assumed to be constant for each set of jobs. Thus, each job is compared against each other on this basis and is ranked
accordingly.

2. Point-Ranking Method: Under this method, each job’s key factor is identified and then the sub factors are determined. These sub-
factors are then assigned the points by its importance. For example, the key factor to perform a job is skills, and then it can be further
classified into subfactors such as training required, communication skills, social skills, persuasion skills, etc.

Pay for knowledge: Involves compensating employees for learning specific information

- The concept of knowledge-based pay focuses on an individual employee's ability to improve their education to increase
salary or other compensation. As the employee increases their scope of knowledge earned, the employee can generally take
on more complicated and lucrative projects on behalf of the company.
- Knowledge-based pay is a system in which workers’ salaries relate closely to their academic attainments and levels of skills.
In other words, the more you know and can do, the more your employer will pay you. Knowledge-based pay focuses on
employees’ ability to improve their education to increase their income. It is a system in which employers reward their
workers for reaching specific goals in training and education. The employer also rewards them for improving their skills.

Skill-based pay: Rewards employees for acquiring new skills

- is a compensation system that rewards employees with additional pay in exchange

for formal certification of the employee's mastery of skills, knowledge, and/or
competencies. Skill is acquired and observable expertise in performing tasks.
Knowledge is acquired information used in performing tasks.
- refers to a pay system in which pay increases are linked to the number or depth of
skills an employee acquires and applies and it is a means of developing broader
and deeper skills among the workforce. Such increases are in addition to, and not
in lieu of, general pay increases employees may receive. The pay increases are
usually tied to three types of skills:

Wage and Salary Administration

- Ongoing process of managing a wage and salary structure

- is a collection of practices and procedures used for planning and distributing company-wide compensation programs for
employees. These practices include employees at all levels and are usually handled by the accounting department of a
company. Wage and salary administration procedures usually involve activities such as calculating the number of hours
worked in order to determine compensation, administering employment benefits, and answering payroll questions from
employees. At the majority of companies and organizations, wages are usually dispersed to all employees on a specific date.
The workers in charge of salary administration may also be charged with ensuring that the company adheres to local
compensation laws.

Objectives of Wage and Salary Administration

• To establish a fair and equitable remuneration • To control costs

• To attract competent personnel • To improve union management relations

• To retain the present employees • To improve the public image of the company

• To improve productivity

Wage policy refers to all systematic efforts of the government in relation to the national wage and salary system. It includes
notifications, orders, legislations etc. to regulate the levels or structures of wages and salaries with a view to achieve the economic and
social objectives of the government.

• Issues related to compensation

 Pay secrecy: Extent to which the compensation of any individual in an organization is secret
 refers to a common workplace policy that prohibits employees from discussing their pay. Many employee
handbooks may impose some such policy, implied or explicitly. The Order put two executive actions in
place to promote the idea of equal pay for equal work and to create salary transparency in the workplace.
 Employee Payroll Confidentiality
Confidentiality of employee payroll data is critical because a leak can result in discord among employees
and compromise the employer or employee’s financial situation. For example, two employees perform the
same job; however, you decided to pay one of them at a slightly higher rate because she has more
experience than the other worker. If the lower paid employee discovers that she’s being paid less, it can
result in her feeling resentful. In such a situation, there’s not much the employee can do provided she’s
being paid at least the federal or state minimum wage. Still, she’s likely to feel under-appreciated. Further,
a leak of an employee’s direct deposit information or the employer’s financial data can cause the respective
bank account to be compromised by fraudulent activity.
 Pay compression: Equal pay granted to employees with different levels of experience, or performance abilities, or
both.
  is the situation that occurs when there is only a small difference in pay between employees regardless of
their skills or experience. It is also referred to as salary compression.
 For example, it’s a common practice for firms to offer a higher starting salary to sought after employees
who may be seen as “rock stars” or as someone who has a great deal to offer the company. Higher pay is
used as an incentive to lure the candidate. It is also seen when viewing fixed salaried professionals like
managers and supervisors versus hourly employees who are eligible for perks like shift differentials and
overtime pay. Sometimes pay inequities are seen after a merger of two companies that were run very
differently from one another previously. Wage compression can also occur in a company with a large
percentage of minimum wage earners when the minimum wage rate is increased; as new hires come on,
they are earning the same amount as those who may have been with the organization for years.

- Pay inversion: New employees are paid more than experienced employees

o refers to situations in which the starting salaries for new recruits to an organization increase faster than
those for existing employees. It typically happens in areas where the demand for suitably qualified
professionals exceeds the supply of such professionals in the market. For example, the information
technology (IT) industry in recent years has experienced this phenomenon. Salary inversion is also
common amongst university faculty in certain fields in which the global demand for qualified academics is
increasing rapidly. Salary inversion occurs in this situation when universities lack the resources to raise
existing professors' salaries while continuing to hire new faculty.
o Consider the employee who has worked hard for 20 years in an organization , received high evaluations
and suddenly the company hires a new, less experienced, less qualified worker and pays him a higher
salary. This unfortunate phenomenon happening in many organizations (especially during recessionary
times) is called pay inversion.

Nature of Benefits Programs

• Most organizations provide their employees with an array of benefits

• Cost of benefits programs

o Organizations spend huge amounts on benefits

o Employees are asked to bear costs of benefits

• Purposes of benefits programs

o Attracts better-qualified people

o Affects job satisfaction and subsequent turnover

Mandated Benefits

• Unemployment insurance: Provides a basic subsistence payment to employees who are between jobs

• Social security: Designed to provide limited income to retired individuals

• Workers’ compensation: Insurance cover for individuals who suffer a job-related illness or accident

Mandated Healthcare

• Patient Protection and Affordable Health Care Act, 2010

o Aim is to: - Increase the quality and affordability of health-care insurance

- Lower the number of uninsured employees
- Reduce the cost of insurance for all involved

Compensation and Benefits in the Philippines

The Labor Code of the Philippines, otherwise known as Presidential Decree No. 442., governs all employee-employer relations,
their rights and obligations.

Wage and Wage-Related Benefits Overview

• At least the minimum wage per region and/or sector • Parental leaves (Maternity, Paternity and Solo parent leaves)

• Holiday wage and overtime pay for work during holidays or • Other Leaves
rest days
• 13th month
• Overtime pay when working in excess of 8 hours
• Separation pay
• Service Incentive Leave: 5 days of vacation per year of
service

1) MINIMUM WAGE
The Wage Rationalization Act, Republic Act No. 6727, sets the minimum wage rates applicable per region, province and
industry sector. The industry sectors are: non-agricultural, agriculture (plantation and non-plantation), cottage and handicraft,
retail and service sectors. Minimum wage may vary depending on the number of employees and gross-sales of an enterprise
and its industry sector.
- As of April 2015 the minimum wage of non-agricultural workers in Metro Manila is PHP 481 and PHP 444 for agricultural
workers. Outside of Metro Manila, the minimum daily wage varies from PHP 279 to PHP 337 for non-agricultural workers,
depending on the region
2) OVERTIME
Minimum wage is based on a work week of 40 hours or 8 hours per day. The daily 60 minute mandatory lunch break is not
included in the 8 hour work day and is not compensated. Overtime pay rates vary depending on when the overtime work
takes place: regular work day, holiday, rest day, or night (between the hours of 10pm to 6am).
- Overtime Rates: – Regular work day: plus 25% of the hourly pay rate. – Rest day, regular/special holiday: plus 30% of the
hourly rate on said day.
3) PREMIUM PAY
Premium pay is given on non-working days (rest days/special holidays) There are 3 special holidays: – Ninoy Aquino Day –
All Saints Day – Last Day of the Year
- Premium Pay Rates: – On a rest day or special holiday, an employee is entitled to an additional 30% of his daily basic rate, or
a total of 130%. – On a rest day which is also a special holiday, an employee is entitled to an additional 50% of his daily
basic rate, or a total of 150%. – On a regular holiday which is also an employee’s rest day, an employee is entitled to an
additional 30% of the regular holiday rate of 200%, or a total of 260%. Note that it is only applicable to employees covered
by the holiday-pay rule.
- The “no work, no pay” principle applies during special non-working days and such other special days as may be
proclaimed by the President of the Philippines. Workers who are not required or permitted to work on these days are,
therefore, not entitled to any compensation. This, however, is without prejudice to any voluntary practice or CBA providing
for payment of wages and benefits for declared special days even if unworked.
4) HOLIDAY PAY
The Labor Code requires the payment of an employee’s daily basic wage for all non working regular holidays. There are 12
regular and 3 special non working holidays (see above) in the Philippines. 12 regular holidays are (Republic Act No. 9849): •
New Year’s day • Maundy Thursday • Good Friday • Araw ng Kagitingan • Labour Day • Independence Day • National
Heroes’ Day • Eidl Fitr • Eidl Adha • Bonifacio Day • Christmas Day • Rizal Day
- If work is accomplished on a regular holiday (up to 8 hours), an employee is entitled to at least twice (200%) of his basic
wage. If the holiday corresponds to a scheduled rest day, the employee is entitled to an additional 30% based on his regular
holiday rate of 200%, which comes to a total of at least 260%.
5) NIGHT SHIFT DIFFERENTIAL
For work done between the hours of 10pm to 6am, employees are entitled to Night Shift Differential (NSD), which represents
an additional 10% to the regular wage for each hour of work performed
6) PARENTAL LEAVES
The Labor Code of the Philippines covers three different types of parental leaves: maternity leave, paternity leave and solo-
parent leave.
A. Maternity Leave Whether married or not, each pregnant employee is entitled to a maternity leave benefit of 60 days for a
normal delivery or miscarriage, or 78 days for a caesarean delivery, for up to four pregnancies. For the duration of the
maternity leave, the employee receives a fraction of his regular monthly salary from the company which is in turn reimbursed
by the SSS. It is common for companies to give the whole regular pay and shoulder what is not covered by the SSS.
B. Paternity Leave All married male employees are entitled to a 7 day paternity leave for the delivery or miscarriage of his
legitimate spouse with whom he must live, for up to four pregnancies. The paternity leave is at the cost of the employer and is
not reimbursed by the SSS.
C. Solo-Parent Leave In addition to parental leaves at the time of a child’s birth, the Filipino labor code drew a special leave
for solo-parent employees as described in the Solo Parents Welfare, Republic Act No. 8972. The employee must have been
working for at least a year to be entitled to a solo-parent leave, which allows him to 7 working days of leave in a year.
7) 13th MONTH PAY
Each year, a 13th month pay is given to all rank-and-file employees. By law, this benefit must be paid before December 24th
and is mandatory. Employees who have resigned or have been severed from the company before the payment of the 13th
month pay are still entitled to it in proportion to the length of time they worked for during that year.
- The 13th month pay must be at least 1/12th of the total basic salary of each employee earned during that calendar year.
8) SEPARATION PAY
Following the labor code of the Philippines, articles 283 and 284 state that an employee can claim separation pay if his
contract is ended under authorized causes. According to article 282 an employee terminated for just cause (neglect of duties,
fraud, crime…) is generally not entitled to separation pay.
- A separation pay of ½ month pay for every year of service can be claimed under the following authorized causes: –
Retrenchment of person for loss prevention. – Cessation of operation of a branch not due to serious losses or financial
difficulties. – If the employee has contracted a disease not curable within 6 months and that his presence at work can be
harmful to himself or his co-workers.
- A separation pay of 1 month pay for every year of service can be claimed under the following authorized causes: – Labor-
saving devices installed by the employer. – Redundancy of the employee’s services for the company. – Impossibility to
reinstate the employee to his former position or to an equivalent position, for reasons outside of the employer’s power.
9) RETIREMENT PAY
All employees from the private-sector may retire from age 60 up to age 65, at which retirement becomes compulsory, and
must have served the establishment for at least 5 years.
Retirement pay must at least be equivalent to half of a month’s salary for each year of service and a fraction of at least 6
months is therefore considered as one whole year.
- One “half month salary” must include the following: a) 15 days salary based on the last salary pay, b) the pay equivalent of a
five days of incentive leave, c) 1/12 of the 13th month pay. Therefore, one ½ month salary is equivalent to 22.5 days.
Minimum Retirement pay = Latest daily pay rate x 22.5 days per month x number of years of service
 - Depending on the agreements between the employer and employee other benefits can be included in the retirement pay such
as a Collective Bargaining Agreement (CBA).
10) SOCIAL SECURITY SYSTEM
By law, private sector employees must be covered under the Social Security System (SSS). Based on each employee’s gross
monthly pay, both the employer and employee remit monthly contributions to the SSS. In turn, the SSS benefits cover
maternity, retirement, sickness, disability, death and pension benefits
11) PHILHEALTH
For all employees covered by the SSS medical coverage is mandatory and automatic. Both the employer and employee
contribute equal monthly amounts to the PhilHealth Insurance Corporation.
12) HOME DEVELOPMENT MUTUAL FUND
The Home Development Mutual Fund (HDMF), also known as the Pag-IBIG Fund, is mandatory to all employees who are
compulsorily covered by the Government Service Insurance System (GSIS, for Filipino Government employees) or the SSS.
Through the Republic Act No. 9679, the HDMF answers two important needs for Filipino workers by establishing a national
savings program and an affordable house financing system. HDMF members benefit of 1. savings, 2. short term loans and 3.
access to low cost housing programs. Both the employee and the employer contribute to the fund.
- For a monthly compensation of PHP 1,500 and less the employee contributes 1% and above PHP 1500 monthly
compensation it is 2%. The employer’s contribution always remains at 2%. Contributions are deducted from gross income
before computation of the income tax. Note that the maximum employee contribution is set at PHP 5,000. Hence the
minimum contribution for employees and employers is now set at PHP 100.

Nonmandated Benefits

• Private pension plans: Provide income at retirement

o Defined benefit plans and defined contribution plans

• Paid time off

• Other benefits

o Wellness programs
o Life-cycle benefits
o Employee assistance plans and perquisites

Executive Compensation

• Provided in two forms:

o Base salary
o Some form of incentive pay - Bonus - Stock-option plan

• Higher in the United States than in other countries

Legal Issues in Compensation and Benefits

• Fair Labor Standards Act includes provisions for minimum wage, overtime, and child labor

Comp time - Time off that is offered to nonexempt workers in exchange for working more than 40 hours with no
overtime pay
 Overtime rules may change
• Employee Retirement Income Security Act (ERISA)
 Protects employees who contributed to their pensions but were unable to collect those benefits later
 Provides protection for the funding underlying the pension plan

• Same-sex partners are eligible to share benefits

Evaluating Compensation and Benefit Programs

• Organizations that do not offer competitive pay and benefit packages find it difficult to attract employees

 Also leads to high rates of voluntary turnover

• Efficiency of benefit programs depend on effective communication with employees

SUMMARY • Three contemporary issues in compensation and benefits

include:
• To develop compensation strategies, firms must first
recognize the basic purposes of compensation o Executive compensation
o Growing legal issues
• Both traditional and strategic approaches can be used to o Evaluating compensation and benefit programs
determine how an employee must be compensated

• Pay secrecy and pay compression affect wage and salary

administration

• Most organizations provide mandated and nonmandated

benefits to the employees