Chapter 1 Compensation

FOUNDATION OF
COMPENSATION
ADMINISTRATION
COMPENSATION ADMINISTRATION
CHAPTER I
Laura A. Dator, MPA

Instructor
Learning Outcomes
At the end of the chapter, the students will be able to:
• Discuss the nature and objectives of compensation;
• Determine the classification of compensation;
• Explain the policies affecting compensation;
• Identify the components of a compensation system;
• Discuss the different theories of wages;
• Differentiate between salary and wage as a concept;
• Explain the different compensation concepts; and
• Identify and discuss labor market theories.

CHAPTER OVERVIEW
 Compensation administration of Human Resource Management is considered as the heart of the

Human Resource function.
 The heart pumps blood and compensation denotes the lifeblood of the employees in terms of
satisfying and fulfilling many of their basic needs.
 Compensation in the form of money is primary motivator and a ticket to survival.
 There are three basic types and compensation: base pay, variable pay, and benefits.
CHAPTER OVERVIEW
 Compensation can be classified into direct and indirect compensation.
 The four policies that affect compensation systems are the following: internal alignment,
external competitiveness, employee contribution, and management of the pay system.
 The establishment of fair compensation systems needs the following components to make
them more credible and satisfying to employees. They are the following: job analysis, job
description, job evaluation, pay structures, salary surveys, and policies and regulations.
 Economists have developed theories that explain the different factors that affect wages. These
theories are the following: subsistence theory, just price theory wage fund theory, residual
claimant theory, standard of living theory, and bargaining theory.
NATURE OF COMPENSATION
Compensation means the whole package Of basic salary and benefits that the company provides.
Compensation is defined as the means of giving a monetary value equivalent to any work performed by
an employee. It is also referred to as all financial rewards and nonfinancial rewards which an employee
may receive out of a work rendered for the employer.
Basic Types of Compensation
It is the basic pay given to the employee for the actual work
rendered usually in the form of salary or wage.
It is the pay linked to actual accomplishments in performance such

as bonuses or incentives based on a target sales Quota or target
productivity.
These are indirect rewards which may either be government-

mandated or voluntarily given by the employer
Objectives of Compensation
Organization provide their employees with a compensation package to achieve these three-fold objectives:
To retain high performance employees and reduce employee turnover ;
To achieve high productivity and efficiency by providing fair compensation

among employees commensurate to their position; and
To satisfy pay requirements in accordance with the law.

CLASSIFICATION OF COMPENSATION
Direct Compensation refers to an actual monetary value that entitles an

employee. It can be in the form of a salary or wage. It can also be in the form
of variable pay, such as bonuses, incentives, commissions, and other
performances-based pay. Money is usually attached to direct compensation.
Indirect Compensation refers to nonmonetary aspects of compensation,

such as benefits packages that include hospitalization and life insurance
plans, sick and vacation leaves, car plans, and educational grants among
others. It is usually referred to as the “add-on” or the extra components of base pay
(Armstrong, 2015).
How is compensation used?
o recruit and retain qualified employees.

o increase or maintain morale/satisfaction.
o reward and encourage peak performance.
o achieve internal and external equity.
o reduce turnover and encourage company loyalty.
o modify (through negotiations) practices of unions
POLICIES AFFECTING COMPENSATION
INTERNAL ALIGNMENT
EXTERNAL COMPETITIVENESS
Aligning pay with
the contributions of EMPLOYEE CONTRIBUTION
employees in Aligning pay with MANAGEMENT OF THE
achieving competitors Considers PAY SYSTEM
organizational calculate the risk contribution to
objectives being competitive performance as a Putting a system to
factor of pay; putting giving of
a high premium on compensation;
employee contribution considers
timeliness of pay
COMPONENTS OF A COMPENSATION SYSTEM
THEORIES ON WAGES
a. Subsistence Theory
According to the subsistence theory, an

increase in wages above the minimum or
Thomas Malthus
subsistence level will only lead to an
increase in population at a faster rate.
Once the population rises, the labor
supply will also increase which will lower
wages). If actual wages fall below the
minimum or subsistence level, the
population will decrease which will
eventually lead to a lower labor supply
and an increase in wages.
Ferdinand Lassalle
THEORIES ON WAGES
b. Just Price Theory (Equity Theory)
This theory upholds the equity theory of J. Stacey Adams.
In this theory, wages are provided based on the status or position of

each employee. Employees with high positions have higher wages. The
hierarchy of positions also follows a hierarchy of wages. So, members
of top management have higher wages than middle managers; while
middle managers have higher wages than front line managers. The
more complex the tasks are, the higher the wages. In the same way that
a bigger responsibility entails a higher position, thus a higher wage.
THEORIES ON WAGES
c. Wage Fund Theory
Adam Smith developed this theory to mean that workers are paid
based on a fund that is already there in the first place. This fund is
also called the wage fund. Employees or workers will be paid Adam Smith
equally by dividing the wage fund over the number of workers
Classical economist John Stuart Mill supported Adam Smith's

theory on wage fund. According to Mill, this theory considers the
available wage fund and the number of workers to determine the
employees' wage level. The wage fund may come from
accumulated capital or wealth that will be used as payment of
wages.
John Stuart Mill
d. Residual Claimant Theory
According to this theory, wages are residual claims after

rent, interest, and profits are deducted from the total
product. It suggests that residual claims will only increase
if productivity will increase, given that there is no William Stanley Jevons
additional investment or capital infused for workers to
get more residuals. Wages are called residuals because
the three other factors of production, such as land,
capital, and entrepreneur, are paid first
Francis Amasa Walker

e. Standard of Living Theory
This theory is a better version of subsistence theory in that, wage is determined

by the standard of living of the workers. A standard of living is defined as the
level or quality of life that a particular worker enjoys in a particular location or
area. It includes the basic necessities of life, education, and recreation which
he/she has become accustomed with. If a worker is paid high wages, he/she
will become used to it so that he/she will eventually try to maintain this same
standard of living or even surpass it
f. Bargaining Theory
John Davidson developed this theory to highlight the bargaining power of

workers in negotiating their wages. This is especially true for labor unions that
negotiate their wages on the bargaining table. Wages are high if the workers are
stronger than the employer. If the latter is stronger than the workers, the wages
tend to be low.
The rise of labor organizations had been instrumental in this theory. However,
critics found that laborers can bargain for their own wages even without labor
unions (Chand, n.d.).
DIFFERENCE BETWEEN WAGE AND SALARY
Paid semi-monthly or on a
fixed period such as very Based on the number of
15th and 30th of the month hours worked multiplied by
SALARY the employee’s hourly rate
Does not change each
month or for a long time Received either daily,
weekly, or earlier than the
May change only if there is
semimonthly payment of
a directive for a salary
salaries
increase or promotion, etc.
Usually follow the no work,
May be considered as a
no pay rule
WAGE
total compensation package
which also includes benefits Usually paid on the basis of
work hours rendered; no
Determined thru market pay
paid vacation or sick leaves
rates, industry average,
to be credited
compensation analysis
among competitors
COMPENSATION CONCEPTS
Economic Concept.
Psychological Concept.
Sociological Concept
Political Concept
Equity Concept

Chapter 1 Compensation

Uploaded by

Copyright:

Available Formats

Chapter 1 Compensation

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Chapter 1 Compensation

Uploaded by

Copyright:

Available Formats

FOUNDATION OF

Laura A. Dator, MPA

• Discuss the nature and objectives of compensation;

• Determine the classification of compensation;

• Explain the policies affecting compensation;

• Identify the components of a compensation system;

• Discuss the different theories of wages;

• Differentiate between salary and wage as a concept;

• Explain the different compensation concepts; and

• Identify and discuss labor market theories.

 Compensation administration of Human Resource Management is considered as the heart of the

 Compensation in the form of money is primary motivator and a ticket to survival.

 Compensation can be classified into direct and indirect compensation.

It is the pay linked to actual accomplishments in performance such

These are indirect rewards which may either be government-

To retain high performance employees and reduce employee turnover ;

To achieve high productivity and efficiency by providing fair compensation

To satisfy pay requirements in accordance with the law.

Direct Compensation refers to an actual monetary value that entitles an

Indirect Compensation refers to nonmonetary aspects of compensation,

o recruit and retain qualified employees.

According to the subsistence theory, an

This theory upholds the equity theory of J. Stacey Adams.

In this theory, wages are provided based on the status or position of

c. Wage Fund Theory

Classical economist John Stuart Mill supported Adam Smith's

According to this theory, wages are residual claims after

Francis Amasa Walker

This theory is a better version of subsistence theory in that, wage is determined

John Davidson developed this theory to highlight the bargaining power of

You might also like