ESTABLISHI

NG PAY
PLANS
COMPENSAT
ION

Compensation

Since people behave in ways that they believe

are in their best interests, they constantly look for
payoffs for their efforts.
They expect good job performance to lead to
organizational rewards, and they further seek
rewards that will satisfy their individual goal and
needs
Organization, then, use rewards/compensation to
motivate people.
Compensation refers to all the forms of financial
or non financial rewards received by an employee

Contd..

Compensation is what employees receive in

exchange for their contribution to the organization.
It is the economic value for human labor and effort
Employees' mental & physical plays a great role for
achieving organizational goals. Hence, appropriate
and timely compensation should be managed to
them
Includes basic wage, salary, incentive, bonus and
other facilities
Must be based on nature, type of jobs, skills, effort,
expertise, experience & working hours

Objectives of compensation
Management

Internal equity
External equity
Individual equity
Attract talent
Retain talent
New and desired behavior
Ease of operation
Comply with legal framework
Cost control
Improve motivation and morale of staff

 Reduce

dissatisfaction
Lower absenteeism
Lower turnover
Lower strikes, grievances
Better understanding (ManagementUnion)
Balance compensation plan

Types of Compensation
Compensation

is what employees
receive in exchange for their
contribution to the organization.

Total compensation =

Direct + Indirect Compensation (Fringe Be

Benefits & Services

Base Pay

Incentives

Direct Compensation
Refers

to the direct cash payment made by

an organization to the employees. For e.g.
salary, basic wages, commission, bonus,
etc.
Can be:
Basic Pay: (wages, salaries paid hourly,
weekly or monthly)
Incentives: Provided for higher
performance (piece wage, commission,
bonus, profit sharing, stock option, etc)

Indirect Compensation
Includes

facilities provided to the

employees which don't reflect to
immediate financial reward
Includes: Benefits & Services
Benefits: paid vacation, holidays, leaves,
paid lunch breaks, Protection programs
(pension, gratuity, insurance, provident
fund, medical care, Executive benefits
(Free newspaper, telephone, fuel, rental
payment, etc)

Services
For

increasing employee well being

(perks)
For e.g. Children's education
expenses, discount on purchases,
car, club membership subscriptions,
free legal advice and counseling, etc

Influencing factors of
Remuneration
Remuneration
External
Internal
Labour Market
Cost of Living
Labour Unions
Govt. Legislations
Economy

Business Strategy
Job evaluation &
PA
The Employee
Productivity

Establishing Pay Plan

(Methods)

Job Analysis Method

Job

Description (Duties,
responsibilities, authority,
accountability, working conditions,
etc)
Job Specification (Minimum
qualification, skills, experience,
abilities, etc

Job Evaluation Method

Determines

the relative worth of each

job
Positions and the job performed by
each of the positions are evaluated
Classifies and ranks the jobs which
helps to determine the relative worth
Considers duties and responsibilities,
working conditions, skills and efforts
required for the job

Job Evaluation
Methods
Job Ranking Method- it ranks jobs in order of

their difficulty from simplest to most complex.

Important & challenging jobs are kept in higher
rank
Specialist or the committee can ranks the job.
Job Grading Method- grade is a group of
different jobs requiring similar skills, efforts and
responsibility. Each job is assigned grade.
Responsibilities, skills, difficulties are used for
grading

Job Evaluation
Methods
Factor

comparison method: The

required level of skills, efforts,
experience, qualification and work
environment to each job is studied &
evaluated and those factors serves
for the basis of compensation
determination
Higher the requirementhigher will
be the compensation and vice versa

Job Evaluation
Methods
Point Method: Factors are identified for job

performance and each factor is assigned

predetermined point of score
Total is measured and compensation is
Factor
Rs.
determined
Responsibilities

12

Skills

16

Mental effect

12

Physical effect

working conditions

Total per hour

50

Compensation Survey
Making

competitive compensation plan by

collecting information regarding market
rate from other competing organization
Survey provides benchmark for
comparing compensation levels
Published surveys, consultants &
agencies, advertisements, applicants,
informal communication are major
sources

Compensation
Structure
Also called job pricing/Establishing pay plan

Importance of job performance, contribution and

required skills, capability, qualification, experience
required etc are analyzed and evaluated to determine
the price of each job responsibility
Based on this, compensation structure is established
Jobs of similar importance are kept under same grade
or rank
Importance and market value of each job is identified
Highly important jobs are compensated highly
Main point is jobs of similar importance are
compensated equally

Incentives

Basic wages and salary makes an employee

ready to put effort to fulfill their responsibility but
can't motivate them to make an extra effort
An addition financial reward for higher
performance is therefore an essential part for the
motivation
Incentives represent special compensation
opportunities that are usually tied to performance
Incentive differs with the situation although the
basic salary may be similar

Forms of incentives
Individual
Incentives

Group Incentives

Organizational
Incentives

Piece-rate plan

Piece-rate plan

Productivity gain
sharing

Bonus

Bonus

Profit sharing

Commission

Commission

Suggestion Plan

Production Plan

Employee share
ownership

Individual Incentives
Considers

the individual performance

level for compensating benefits
Performance appraisal is prepared of
each employee and additional
compensation is provided
Consists:
Piece-rate plan
Bonus &
Commission

Piece rate:
Used for the production workers where
compensation is based on the number of
unit produced.
Can be straight piecework where;
Piece wage = No. of units produced*
Rate/unit OR
Differential piecework where two rates
are used. (standard rate for standard
production and higher rate for higher
production)
Easy for production units but can't be
applied for the managerial tasks

Bonus
Generally

used for managerial and

professional employees for finishing
the job before the predetermined time
Can be also provided to all employees
proportionately but higher performer
can get high bonus on the basis of
their performance appraisal
Useful for motivation but tied to
organizational performance

Commission
Basically

used for sales personnel

It is the provision of providing some
certain margin generally on the sales
revenue
Can be straight (fixed percentage of
sales value) or salary plus
commission

Group Incentives
Performance of the group of employees are
measured
Becomes useful where the output of individual
employee can't be measured or tasks are
interdependent
Provides equal benefits to all employees
Hence, employees who perform less than
average also get incentive on the basis of group
performance
Can be: Piece rate, Bonus, Commission &
Production plan incentive

Production plan
incentive
Provided

to the group of employees

to achieve special production target
Provided when productivity exceeds
the standard of the organization
Target is provided to the department
and evaluation is done

Organizational
Incentives

Based on the overall performance of the

organization
Believes each employee is responsible
and important for the overall
performance of the organization
Directs the efforts of all employees
Incentives are Productivity gain sharing,
Profit sharing, Suggestion plan &
Employee share ownership plan

Productivity Gain
Sharing (PG)
If

additional incentive is distributed

based on the productivity of the
organization, it is called PG
Here, bonus is provided for saving
overall labor and production costs
For e.g. Scanlon plan (analyzing labor
cost & productivity)

Profit sharing
Plan

of sharing some portion of the total

profits for the admiration of employee's
effort
Makes employees sensitive to increase the
organizational profits
Can be current distribution (cash in annual
basis) or deferred distribution (crediting
employee's account and distributing after
the termination or retirement

Suggestion Plans
Employees

are rewarded for providing

their valuable suggestions regarding
the cost reduction, productivity,
market share & profit increment,
Generally experienced employees can
provide such type of suggestions
Helps to utilize the knowledge and
wisdom of employees

Employee share
Ownership Plan (ESOP)
Organization allow employees to buy shares at
a stated price (generally below market price)
This provision creates feelings of
organizational ownership and share in success
of the organization
Employee get motivate to work with more
commitment as the price of share increases if
the organizational profit increases
Organization can also provide facility of
installment purchase, stock option or gift

Employee Benefits

Individuals expect more than wages or salary

from their employers.
Paid vacation
Number of sick leave days
Insurance and pension programs
Benefits are membership based rewards
offered to all employees regardless of
performance they should not be expected to
motivate employees
However, inadequate benefits lead to
employee dissatisfaction and increased
absenteeism and turnover.

Costs of Providing
Employee Benefits
Benefit and service offerings
add about 40% to an
organizations payroll cost.
Benefits become the focus of
negotiations with employees
when large wage and salary
increases are not feasible.

Contemporary Benefits
Offerings
Benefits today reflect the
diversity of the work force.
Challenge -- designing a
benefits package which is
attractive to applicants and
current workers, and provides
all the legally required benefits.

Legally Required
Benefits

Paid for by the organization

Rates based on likelihood of accidents, past
history, and the type of industry.
Benefits pay expenses and/or compensate for
losses resulting from work-related accidents
or illness, regardless of fault.

Voluntary Benefits

Rest periods or Coffee break

Holidays

Popular among office jobs and those requiring heavy

exertion, high repetition, or diligent concentration
Allows worker to rest
Certain days of the year are stipulates as paid
holidays
E.g. Christmas, New Year

Vacations

Paid vacation
Length of vacation is related to length of tenure and
job classification

Voluntary Benefits
Sick

Leaves

Perception of use them or lose them

Companies have started providing financial
incentive to individuals who do not fully
consume their sick leave for the year

Leaves

of absence

Educational leaves
Corporate practice where employees are
paid six month or even a year in order to
engage in community service

Retirement Benefits
Defined Contribution Plans:
Employee and employer may
contribute to account based on rules
established for contributions

Retirement Benefits
Money Purchase Pension Plan
Type of defined contribution plan
Organization commits to depositing
fixed amount of money or
percentage of employees pay
annually.

Retirement Benefits
Profit-Sharing Plans
Variation of defined contribution
plan.
Company amount contributed
depends on profit level in the
organization.

Retirement Benefits
Individual Retirement Accounts
(IRAs)
Currently designed for lower-income
workers who dont have pension
programs at work

Paid Time Off

Disability Insurance
Programs
Provides salary
continuation for:

Short-term disabilities (sick leave)

Long-term disabilities (coverage
usually effective after 6 months).

Other benefits
Provident

fund
Medical fund

Services
The service side of benefits

social and recreational events- company picnic,

Christmas dance
counseling
credit unions savings and lendings
housing
tuition reimbursement
uniforms
company-paid transportation
parking

Employers often can provide services at no

cost or at a significant reduction from the
usual cost.

Executive
Compensation

Salaries of Top Managers

Executive salaries, bonuses and stock
options may seem high.
Competition for executive talent raises
the price of hiring an executive.
High salaries can be a motivator for
executives and lower-level managers

Executive
Compensation
Supplemental Financial
Programs
Compensation

Deferred bonuses paid to executives over extended

time periods, to encourage them to stay with the
company.
Stock options allow executives to purchase stock in
the future at a fixed price.
Hiring bonuses compensate for the deferred
compensation lost when leaving a former company.

Executive
Compensation
Supplemental Nonfinancial
Programs
Compensation: Perquisites
Perks

may include:

paid life insurance

club memberships
company cars
expense accounts
interest-free loans
free financial
legal and tax counseling
mortgage assistance

Executive
Compensation
Supplemental Nonfinancial
Programs
Compensation: Perquisites

Golden parachutes protect executives when a merger

or hostile takeover occurs by providing severance pay
or a guaranteed position.

Compensation in Nepal

In Nepal, the role of direct compensation is

important compared to indirect compensation.
There is no uniformity in wage structure.
Government has been fixing minimum wages
for various categories of workers.
Job grades are prescribed for civil service and
public sector enterprises. Job grades in private
service differs but generally government job is
taken as points of reference
The bonus act has limited the payment of bonus
at 10% of net profit.
Company act has set maximum limit of salary
to the executive employees

Compensation in Nepal
Legally,

gender discrimination is not

allowed. But some employers pay
women low rates compared to male
workers mostly prevalent in tea
estates and construction.

Civil Service pay

system

Pay & allowances

Medical expenses (12 months salary for
gazette officers, 18 & 21 for non-gazette
& classless)
Pension
Disability allowance
One month extra salary for Dashain
festival
Payment of accumulated leave
10% salary as PF

Contd..
Pension

or gratuity for family in case

of employees death
Health insurance; travel insurance

Compensation in Nepal
Labor

act, 1992 has prescribed

following compensation system for
workers and employees:

Pay and allowances, minimum wages

have been prescribed
Welfare fund as prescribed
Compensation for disability
Gratuity, provident fund, medical
expenses as prescribed
Leave and payment for specified
accumulated leave
Housing facilities by allocating 5% of
gross profit
Day care centers for the children of
women workers as prescribed

Contemporary Issues
in Compensation

Employees expect certain extras to be the

norm rather than exceptions
People do have different needs according to
their age, financial and family position,
attitudes and life style. Younger employees
tend to favor compensation that can be of
frequent or immediate use such as vacation
days, holidays and flexible working hours.
Older employees are usually security
conscious, preferring life insurance and
retirement related benefits.
Burden of paying for the benefits to shift to
one that is more equitably shared between
the employee and employer. E.g. Health Care

Problems
Ineffective

compensation
management
lack of professional management in
family-oriented enterprises
Increase of poverty