March 27, 2015

Mark Ronald C. Genove

Master in Public Administration
Silliman University
PA 221 Local Government and Business Relations
Atty. Tabitha Tinagan, DPA Candidate, MBA, LLB, BBA

COMPENSATING HUMAN RESOURCES

I.
II.

Introduction
Establishing a Pay Structure
The employees compensation has two main components. These are
the direct financial payments and the indirect financial payments. The direct
financial payments include wages, salaries, incentives, commissions, and
bonuses. The indirect financial payments can take the form of financial
benefits like employer-paid insurance and vacations.
Direct financial payment can be based on increments of time or
performance. The foundation for most pay plans though is till time-based.
This includes workers who are considered blue-collar and clerical workers
who receive hourly or daily wages. White collared workers like the
managers and designers receive salaries and get paid weekly, monthly, or
yearly. The compensation based on performance would depend on the
amount of production the worker turns out, sales commission and other
performance based compensation.
In the perspective of the firm the compensation plan should reflect the
strategic aims of the management. With the strategic aims an aligned
reward strategy can be made and can include a compensation package
which includes wages, incentives, and benefits that make the employees
support the companys competitive strategy. Employers can then formulate
a total rewards strategy which encompasses traditional pay, incentives, and
benefits. This can also bring about more challenging jobs through job
design, career development, and recognition programs.
The management would then have to ask themselves these questions
for them to formulate strategic compensation program.
1. What must the company do to achieve its strategic aims?
2. What are the employee behaviors or actions needed to support this
strategic effort?

3. What compensation policies and practices salary, incentive plans, and

benefits will help to produce the employee behaviors we need to
achieve our strategic aims?
Before this questions can be answered. Another factor that can affect
compensation is equity. The equity theory of motivation postulates that
people are strongly motivated to maintain a balance between what they
perceive as their contributions and their rewards. Equity theory states that
if a person perceives an inequity, a tension or drive will develop in the
persons mind, and the person will be motivated to reduce or eliminate the
tension and perceived inequity. Equity on compensation takes four forms.
They are:
External equity refers to how a jobs pay rate in one company
compares to the jobs pay rate in other companies.
Internal equity refers to how fair the jobs pay rate is when
compared to other jobs within the same company.
Individual equity refers to the fairness of an individual s pay as
compared with what his or her co-workers are earning for the
same or very similar jobs within the company, based on each
individuals performance.
Procedural equity refers to the perceived fairness of the
processes and procedures used to make decisions regarding the
allocation of pay.
Equity issues can be addressed. A way to prevent inequity is to salary
surveys to show what other employers are paying so that external equity
can be monitored and maintained. Another is to use job analysis and
evaluation to maintain internal equity. Performance appraisal and incentive
pay can be used to maintain internal equity. To show the employees that the
pay process is procedurally fair communications, grievance mechanism, and
employees participation can be use. A more direct approach using surveys
to monitor employees pay satisfaction can also be used.
Another factor to think about when making a strategic pay plan
should be based on various laws specifying things like minimum wages,
overtime rates, and benefits. In the Philippines this would be Presidential
Decree 442 which was signed on May 1, 1974. This is otherwise known as
The Labor Code of the Philippines. This law promotes for full employment,
and gives equal opportunities regardless of sex, race or creed, and regulate
the relations between workers and employers. They also made sure that the

rights of workers to organize themselves do collective bargaining, security

of tenure, and just and humane conditions of work.
Other laws that affects the pay plan is the Wage Rationalization Act
(RA 6727) which sets the minimum wage per province. There is also the
13th Month Pay Law (PD 851) which includes Rules and Regulations
Implementing 13th Month Pay Law, Productivity Incentives Act of 1990 (RA
6971), and Magna Carta of Women (RA 9710).
Presidential Decree 442 allowed the workers to organize themselves
and gave rise to unions that influences pay plan design. Giving them the
power to do collective bargaining and negotiate other pay-related issues
which includes leave with pay, cost-of-living adjustments and health care
benefits among others.
Geography also plays a role in making the pay plan. Different regions
have different minimum wage based on the Wage Rationalization Act. This
takes into account the cost-of-living in certain regions and adjusts the
minimum wage accordingly.
There are two approaches to setting pay rates. It could be marketbased approach or job evaluation method. Market-based approach is
commonly used by smaller firms. This approach involves conducting formal
or informal salary surveys to determine what others in the relevant labor
markets are paying for particular jobs and use these figures to price their
own jobs. Job evaluation methods involve assigning values to each of the
companys jobs. This helps to produce a pay plan in which each jobs pay is
equitable based on its value to the employer.
Job evaluation is a formal and systematic comparison of jobs to
determine the worth of one job relative to another. Job evaluation aims to
determine a jobs relative worth. Job evaluation eventually results in a wage
or salary structure or hierarchy (this shows the pay rate for various jobs or
groups of jobs).The basic principle of job evaluation is this: Jobs that require
greater qualifications, more responsibilities, and more complex job duties
should receive more pay than jobs with lesser requirements. The basic job
evaluation procedure is to compare jobs in relation to one another in terms
of required effort, job complexity, and skills. Once the worth of the jobs in
the firms is established a salary survey can then be conducted to what
others are paying for similar jobs.
The worth of several jobs can be compared by using either the
intuitive approach or using compensable factors. The intuitive approach just
makes a decision on which jobs are more important in the firm, nothing
more. Another way is to compare the jobs by focusing on certain basic
factors the jobs have in common which is called compensable factors. These

factors establish how the jobs compare to one another, and that determine
the pay for each job. Factors could be in the form of laws like the Wage
Rationalization Act. Every firms factors can differ. It can be the skills,
working conditions, responsibility or accountability. Whatever the factors
are, they play a vital role in job evaluation. Jobs are compared to other jobs
using the same compensable factors.
Here are the steps in preparing for the Job Evaluation which is a
critical process and demands close cooperation among supervisors, HR
specialists, and employees and union representatives. The main steps
include identifying the need for the program, getting cooperation, and then
choosing an evaluation committee.
Identifying the need for job evaluation can come in the form of
dissatisfaction reflected in high turnover, work stoppages, or arguments
may result from paying employees different rates for similar jobs and
managers may express uneasiness with an informal way of assigning pay
rates.
Employees may fear that a systematic evaluation of their jobs may
reduce their pay rates, so getting employees to cooperate in the evaluation
is important. This can be done by telling the employees that because of the
impending job evaluation program, pay rate decisions will no longer be
made just by management whim, and that no current employees rate will
be adversely affected because of the job evaluation.
The job evaluation committee usually consists of about five members,
most of whom are employees. Management has the right to serve on such
committees, but employees may view this with suspicion. However, a human
resource specialist can usually be justified to provide expert assistance.
Union representation is possible. In most cases, though, the unions
position is that it is accepting the results of the job evaluation only as an
initial decision and is reserving the right to appeal actual job pricing
decisions through grievance or bargaining channels.
After the appointment, each committee member should receive a
manual explaining the job evaluation process, and how to conduct the job
evaluation. The evaluation committee performs three main functions. First,
it usually identifies 10 or 15 key benchmark jobs. These will be the first jobs
they will evaluate and will serve as the anchors or benchmarks against
which the relative importance or value of all other jobs is compared. Next,
the committee may select compensable factors which could have already
been chosen by the HR specialists. Finally, the committee performs its most
important function actually evaluating the worth of each job.

The methods that can be used are ranking, job classification, or point
method. The simplest and method is the ranking method. This method ranks
each job relative to all other jobs and is usually based on an overall factor
like job difficulty. The steps to job ranking method are as follows:
1. Obtain job information
Using Job analysis is the first step. This is where job descriptions for
each job are prepared, and the information they contain about the
jobs duties is usually the basis for ranking jobs.
2. Select and group jobs
It is usually not practical to make a single ranking for all jobs in an
organization. The usual procedure is to rank jobs by department or in
clusters (such as factory workers or clerical workers). This eliminates
the need for direct comparison of, say, factory jobs and clerical jobs.
3. Select compensable factors
In the ranking method, it is common to use just one factor and to rank
jobs based on the whole job. Regardless of the number of factors
chosen, it is advisable to explain the definition of the factor(s) to the
evaluators carefully so that they will be able to evaluate the jobs
consistently.
4. Rank jobs
Each rater are to be given job descriptions that has been decided on
in the previous steps and ranks them from lowest to highest. An
alternate and more accurate way of doing this step is to first choose
the highest and lowest rank and continue doing so until all the jobs
are ranked.
5. Combine ratings
Raters rank the jobs independently. Then the rating committee can
simply average the raters rankings.
Another method for is called job classification or job grading. In this
method raters categorize jobs into groups that consists of jobs that can be
of same pay. The groups are called classes if it contains similar jobs that are
similar in difficulty but otherwise different. One way of classifying jobs is to
write a job description and place jobs in classes or groups based on how
they fit the descriptions. Writing a set of compensable factors-based rules
for each class and classifying the jobs based on the rules is another way of
classifying jobs. Using the compensable factors as basis for classification
makes this a more popular procedure. The compensable factors can include:
(1) difficulty and variety of work, (2) supervision received and exercised, (3)
judgment exercised, (4) originality required, (5) nature and purpose of
interpersonal work relationships, (6) responsibility, (7) experience, and (8)
knowledge required.
Point method that aims to determine the degree to which the jobs that
are evaluated contain selected compensable factors is another job
evaluation method. This method identifies several compensable factors and

the degree to which each factor is present in each job. The amount of
compensable factor in a certain job is assigned a number of points. The
evaluation committee then calculates the total point value of the job. This
method rates the jobs quantitatively which made it the most popular job
evaluation method.

III.

Recognizing Employee Contribution with Pay

Frederick Taylor, an American Mechanical Engineer who at that time

was working as a supervisor in Midvale Steel Company, noticed that his
employees work at the slowest pace possible and produce at the minimum
acceptable level. A phenomenon he called systematic soldiering. He also
noticed that this same employees, even after 12 hour shifts, still has energy
to run home and work on their houses. He knows that if he could tap that
energy his productivity would increase. He defined productivity as the ratio
of outputs (goods and services) divided by the inputs (resources such as
labor and capital). To achieve greater productivity Mr. Taylor popularized
the use of financial incentives - financial rewards paid to workers whose
production exceeds some predetermined standard. In the wake of the
primitive and ineffective financial incentives of the 1800s he contributed
three things to make it better. He formulated what is called as a fair days
work or the standards of output for a job based on careful, scientific
analysis. He also spearheaded a management approach that emphasized
improving work methods through observation and analysis he called the
scientific management movement. Then he popularized the use of incentive
pay as a way to reward employees who produced over the standard.
Incentive pay may be popular but many programs are deemed
ineffective and sometimes disastrous. A study among U.S. workers were
surveyed and only 28% say that this plans motivated them and their
performance is not influenced by the incentive plan. This is because
incentive pay cannot motivate all employees. This plans should have
motivational basis for it to work. The following are the authors and their
theories of motivation.
Abraham Maslows Hierarchy of Needs is one of such theory. This is
usually shown as a stepladder or pyramid. He said that people have a
hierarchy of five types of needs: physiological (food, water, warmth),
security (a secure income, knowing one has a job), social (friendships and
camaraderie), self-esteem (respect), and self-actualization (becoming the
person you believe you can become). According to Maslow s prepotency
process principle, people are motivated first to satisfy each lower-order
need and then, in sequence, each of the higher-level needs.
Frederick Herzberg would say that best way to motivate someone is
to organize the job so that doing it provides the feedback and challenge that
helps satisfy the person s higher-level needs for things like accomplishment

and recognition. These needs are relatively insatiable, says Herzberg, so

recognition and challenging work provide a sort of built-in motivation
generator. Satisfying lower level needs for things like better pay and
working conditions just keeps the person from becoming dissatisfied. The
best way to have a self-motivated workforce is to enrich workers to make
their jobs more challenging, then giving them feedback and recognition to
make the job intrinsically motivating. Organizational psychology would
define intrinsic motivation as motivation that derives from the pleasure
someone gets from doing the job or task. It comes from within the person,
rather than from some externally applied motivator. When one is
intrinsically motivated, just doing the job or task provides the motivation.
Psychologist Edward Decis work highlights another potential
downside to relying too heavily on extrinsic rewards: They may backfire.
Deci found that extrinsic rewards could at times actually detract from the
person s intrinsic motivation. Devising incentive pay for highly motivated
employees should be done with caution as this can inadvertently demean
and detract from the desire they have to do the job out of a sense of
responsibility.
People won t pursue rewards they find unattractive, or where the
odds of success are very low is another motivational fact. According to
psychologist Victor Vrooms expectancy motivation theory echoes these
commonsense observations. He says a persons motivation to exert some
level of effort depends on three things: the persons expectancy (in terms of
probability) that his or her effort will lead to performance; instrumentality,
or the perceived connection (if any) between successful performance and
actually obtaining the rewards; and valence, which represents the perceived
value the person attaches to the reward. In Vrooms theory, motivation is
thus a product of three things: Motivation = (E x I x V), where, of course, E
represents expectancy, I instrumentality, and V valence. If E or I or V is zero
or inconsequential, there will be no motivation. Vrooms theory has three
implications for how managers design incentive plans.
1. If employees don t expect that effort will produce performance, no
motivation will occur. So, managers must ensure that their
employees have the skills to do the job, and believe they can do
the job. Thus training, job descriptions, and confidence building
and support are important in using incentives.
2. Vrooms theory suggests that employees must see the
instrumentality of their efforts they must believe that successful
performance will in fact lead to getting the reward. Managers can
accomplish this, for instance, by creating easy to understand
incentive plans.
3. The reward itself must be of value to the employee. Ideally, the
manager should take into account individual employee
preferences.