HUMAN RESOURCE

MANAGEMENT
Chapter 8

Compensation and
benefits

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 Chapter outline
8.1 Introduction
8.2 Equity theory and fairness
8.3 What effects pay structure
8.4 Influence of pay to employees

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 8.1 Introduction
Type of
compensation

Direct Indirect

Non
Base Commis Bonus Equity Stock
Benefits moneyt
pay sion pay package option
ary

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 8.1 Introduction
• Employer’s View
• critical in attaining strategic goals.
• impacts employee attitudes & behaviors.
• effect organizational cost.
• Employee’s View
• Policies regarding wages, salaries & other earnings
affect their overall income and standard of living.
• Both level of pay & fairness compared with others’
pay are important.

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 8.2 Equity theory and fairness

People compare their own

People evaluate the ratio of perceived
fairness of their outcomes (pay, benefits,
situations by working conditions) to
comparing them perceived inputs (effort,
with those of other ability, experience) to the
people. ratio of a comparison
other.

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 8.2 Equity theory and fairness
• A person (p) compares her own ratio of perceived
outcomes O (pay, benefits, working conditions) to
perceived inputs I (effort, ability, experience) to the
ratio of a comparison other (o).
𝑶𝒑 𝑶𝒐
<, >, 𝑜𝑟 = ?
𝑰𝒑 𝑰𝒐

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 8.2 Equity theory and fairness
• If p’s ratio (𝑂𝑝/𝐼𝑝) is equal to the comparison
other’s ratio (𝑂𝑜/𝐼𝑜) → equity results

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 8.2 Equity theory and fairness
• If p’s ratio (𝑂𝑝/𝐼𝑝) is smaller than the
comparison other’s ratio (𝑂𝑜/𝐼𝑜), then under-
reward inequity results.

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 8.2 Equity theory and fairness
• If p’s ratio (𝑂𝑝/𝐼𝑝) is larger than the
comparison other’s ratio (𝑂𝑜/𝐼𝑜), then over-
reward inequity results.

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 8.2 Equity theory and fairness
• Employees care more about what they
perceive.
• Employees know more about what other
employers pay.
→ Organizations face a pressure to clearly
explain the pay policies.

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 8.2 Equity theory and fairness
Pay structure
• Pay level: the average pay (including wages, salaries,
and bonuses) of jobs in an organization.
• Job structure: the relative pay of jobs in an
organization.

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 8.2 Equity theory and fairness
Pay structure
✓ In Organization 1, jobs A and B are paid an annual
average compensation of $40,000 and $60,000.
✓ In Organization 2, the pay rates are $45,000 for jobs A
and $55,000 for jobs B.
✓ Organizations 1 and 2 have the same pay level
($50,000), but the job structures (relative rates of
pay) differ.

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 8.3 What effects pay structure
Pay structure
• The organization's job structure and pay levels
are policies of the organization rather than the
amount a particular employee earns:
• Legal requirements
• Market forces
• Organization’s goals

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 8.3 What effects pay structure
Pay structure

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 8.3 What effects pay structure
Legal requirement
• A salary is an amount the employer pays the
employee under an agreement for a work performed
by the latter.
• Salary equals (=) base salary plus (+) allowances and
other additional amounts.
• Salaries must be fair without discrimination against
genders of employees who perform equal works.

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 8.3 What effects pay structure
Legal requirement: Minimum wages
• The minimum wages of workers who do the simplest
jobs in normal working conditions that are sufficient
to support themselves and their families, and
appropriate for socio-economic development.
• Statutory minimum wages per month or per hour
vary according to regions.

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 8.3 What effects pay structure
Legal requirement: Minimum wages
Year Area I Area II Area III Area IV
4.680.000 4.160.000 3.640.000 3.250.000
2022
22.500 20.000 17.500 15.600
2021
4.420.000 3.920.000 3.430.000 3.070.000
2020

2019 4.180.000 3.710.000 3.250.000 2.920.000

2018 3.980.000 3.530.000 3.090.000 2.760.00

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 8.3 What effects pay structure
Legal requirement: Overtime pay
• The duration of work performed at any other time
than during normal working hours, as indicated in
the law, collective bargaining agreement or internal
labour regulations of an employer
• On normal days: at least 150%;
• On weekly days off: at least 200%;
• During public holidays, paid leave: 300%

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 8.3 What effects pay structure
Legal requirement: Night pay
• From 22:00 – 6:00 the following day
• Normal time: additional amount of 30% of the salary.
• Overtime at night: additional 20% of the salary + overtime
pay

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 8.3 What effects pay structure
Market forces
• Product markets:
• Organizations must be able to sell their goods and services
at a quantity and price that will bring a sufficient return on
their investment.
• Labour cost is an organization’s cost that contribute to the
price policy.
• Product markets place an upper limit on the pay an
organization will offer.

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 8.3 What effects pay structure
Market forces
• Labour markets:
• Reflects the number of workers available relative to the
number of jobs available.
• If an organization is not competitive in the labour market, it
will fail to attract and retain employees of sufficient
numbers and quality.

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 8.3 What effects pay structure
Employees as a Resource or Liability
• Need to evaluate in terms of cost and the returns
they generate – how they attract, retain, and
motivate a high-quality workforce.
• Resource: maximize the salary
• Liability: minimize the salary

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 8.3 What effects pay structure
Efficiency wage theory
• Employees who are paid more than they would be
paid elsewhere will wish to retain their good jobs.
• Effective when organizations have technologies or
structures that depend on highly skilled employees.

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 8.3 What effects pay structure
Market Pay Surveys
• Benchmarking – comparing an organization’s
practices against those of the competition
• Pay surveys require answers
• Which organization should be included in the survey?
• Which jobs are included in the survey?
• If multiple surveys are used, how are all the rates of pay
weighted and combined?

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 8.3 What effects pay structure
Developing a Job Structure
• Job Evaluation
• Composed of compensable factors and a weighting scheme
• The Point-Factor System
• Apply a weighting scheme to account for the differing
importance of the compensable factors to the
organization COMPENSABLE FACTORS
JOB TITLE EXPERIENCE EDUCATION COMPLEXITY TOTAL
Computer tech 40 30 40 110
Programmer analyst 40 50 65 155
Systems analyst 65 60 85 210

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 8.3 What effects pay structure
Pay structure and actual pay
• Sometimes average pay for a job falls significantly
above or below the policy line.
• Pay structure represents the organization’s intended
policy, but actual practice may not coincide with it.
• Grade compa-ratio = Actual average pay for grade/Pay
midpoint for grade

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 8.3 What effects pay structure
Pay structure and actual pay
• compa-ratio is 1: well planned pay structure
• compa-ratio is greater than 1: organization pays more
than the plan → affect the operating cost
• compa-ratio is smaller than 1: organization pays less
than the plan → difficult in attract talent.

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 8.4 Influence of pay to employees
Reinforcement Theory
• A response followed by a reward is more likely to
recur in the future.
• High employee performance followed by a monetary
reward will make future high performance more likely.
• Low employee performance followed by punishment will
make future low performance more unlikely.
• The theory emphasizes the importance of a person’s
actual experience of a reward.

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 8.4 Influence of pay to employees
Reinforcement Theory
Positive Negative
Reinforcement Reinforcement
Manager stops
Manager gives nagging
Positive behaviour
pay raise Positive behaviour employees
followed by removal
followed by positive
of negative
consequences
consequences

Punishment Extinction

Manager gives Negative behaviour Negative behaviour Manager ignores

pay deduction followed by followed by removal behaviours
negative of positive
consequences consequences

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 8.4 Influence of pay to employees
Expectancy Theory
• Behaviour is motivated by anticipated results or
consequences.
• A person decides to behave in a certain way based on
the expected result of the chosen behaviour.
• For example, people will be willing to work harder if they
think the extra effort will be rewarded.

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 8.4 Influence of pay to employees
Expectancy Theory
Expectancy Instrumentality Valence

Effort Performance Rewards

Yes Yes Yes
Can I Will completing Do I find Motivation
complete the tasks lead the rewards
the task? to rewards? desirable?

No No No

No No No
motivation motivation motivation

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 8.4 Influence of pay to employees
Expectancy Theory
• Emphasizes expected rewards
• Focuses on the effects of incentives
• The main influence of compensation is on
instrumentality: the perceived link between
behaviours and pay.

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 8.4 Influence of pay to employees
Expectancy Theory
• Intrinsic and extrinsic motivation
• Extrinsic motivation depends on rewards (such as pay and
benefits) controlled by an external source.
• Intrinsic motivation depends on rewards that flow naturally
from work itself.

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