‫بسم اهلل الرمحن الرحيم‬

GSB
Human Resources Management

Compensation Systems
Dr. Abdelnasser Ghanem
Dr. Abdelnasser ghanem ([email protected])
6
Objectives & Contents

1 Basics of Compensations

2 Objectives of compensations

3 Developing Rewards System

4 Types of compensation

5 Compensation philosophy & Equity Theory

6 Pay Structure Design

7 Job Evaluation & Developing Grading System

Basic Concepts of Compensations
Management of incentive and compensation systems is one of the most
critical functions of HRM because of its great impact on productivity of
organizations and satisfaction of employee.
Compensations are the most important tools to manage the internal
motivations of individuals, where the productivity depends on the basic
two elements:
Individual characteristics
Performance = Willingness X Ability X Conditions
Compensation system combines Monetary compensation and benefits with
personal growth opportunities inside a supportive work environment.
For employees, compensation and incentives have a direct impact on the
standard of living of employees and their families.
For Organizations, compensation and incentive represent one of the largest
operational costs, especially in labor-intensive organizations.
A strong rewards system can help organizations to maintain a balance between
providing competitive compensation and stick to a suitable budget.
 Objectives of Compensations
There is a fundamental difference in the way employers and employees view the
role of rewards; however compensation systems must meet both (organizational
objectives and employees’ satisfaction). It should addresses five objectives:
1- Recruitment Providing a suitable flow of new employees when needed as
organizations should have an Image as a good employer

2- Retention Keeping people loyal but not only for money. Careers &
recognition should be also considered.

3- Motivation An important element of the psychological contract is equity

where employee gets a fair day's pay for a fair day's work.

4- Control Control costs: Pay is usually the largest element of budget and thus it
calls for the largest attention. In addition we need to give sort of
power to managers.

5- Legal Issues Legal compliance with all appropriate laws and regulations.
 Stages of Developing Rewards System
Developing Rewards System usually is a part of a larger strategic project

Developing a rewards strategy can be as a four-step process :

Assessment Design implementation Evaluation

Assessment stage aims to evaluate the ability of current compensation systems to

support organization strategy on one hand, and on other, employees’ satisfaction
regarding their package of compensation & benefits.

This stage include investigating many reports by HR and financial staff aiming to
evaluate the efficiency of what is being paid compared to organization
performance in different areas.
In addition, a survey aiming at determining common wage rates in the industry. A
good salary survey should be focused on a specific industry aiming to provide
specific wage rates for every specific job. Usually such surveys are conducted by
specialized agencies considering only similar organizations inside our industry.
 Stages of Developing Rewards System

Assessment
The most important outcome of this phase is a report, which includes:
▪ Identification of the ability of current reward system to support organization
goals.
▪ Identification of the desired behaviors or values are to be rewarded by the new
reward system
▪ Clear awareness about our position among similar organizations in the industry
▪ Key indicators of the performance or behavior, based on rewards will be offered.
▪ Types of rewards that might work better
Elements of Compensation system
Compensation is the reward received by an employee in return for his
contribution to the organization. It should balance the organization-employee
relation by providing suitable package of benefits to employees. Two major
types in terms of why the compensations are offered:

Direct (Performance based) Indirect (Membership based)

Monetary : cash non-monetary Monetary: cash non-monetary
paid to employees, services and paid to employees The services and
in return for the benefits offered to because they benefits offered to
contributions employees in belong to the employees in
they give. It is return for their organizations return for their
called direct direct work regardless of membership such
because the activities such as performance : as:
payment is directly transport services Life Insurance Medical Insurance
linked to the and meals during Pension and social care
performance and work and uniform Social security
the level of effort.
Elements of Compensation system

Another two types of compensation in terms of stability:

1. Base Pay: the major part of rewards, it is of two categories, hourly and salaried:

Hourly pay is the most common In contrast, most of (White Collars)

means of payment based on time, it receive consistent payments (salaries)
is common among (blue Collars) regardless of the number of hours.

2. Variable pay: is compensation linked directly to individual, team, or

organizational performance in a form of variable bonuses.
In addition to money, compensation system must contain another types:

3. Benefits : are indirect compensation, 4. Recognition: it should be contained

employees receive tangible values in reward systems to provide a
such as: health insurance, vacation psychological rewards. This is useful to
pay, or retirement pension given to an keep employees loyal and committed
employees as a part of organizational (especially the highly qualified). It is a
membership,
8 regardless of tool to motivate staffs while keeping
performance. costs low.
 Compensations Philosophy
Two basic compensation philosophies lie on opposite ends of a scale.

Entitlement philosophy performance-oriented philosophy

Is to give automatic yearly increase to Organizations do not guarantee
employees every year. additional increase simply for
Incentive and benefits programs completing another year. Instead, pay
continue to increase regardless of reflect performance differences
changing economic conditions, and among employees and teams.
regardless of employees or Thus, performance maintains
organizational performance differences among employees, which
Although we can see entitlement may be based on individual, team, or
orientation doesn’t support organizational performance .
performance, but it is still accepted Most organizations adopt systems
because of: decades of paying automatic that composed the two philosophies
increases, and the general agreements in a way that maintains different sorts
that require automatic increases. of equity.
 Approaches to Compensation Level

Market-Based Compensation is the most widely used approach to compensation

level.

Establish specific policies about where the organization aims to be positioned in

the labor market. These policies use a quartile strategy

Third Quartile: Above-Market Strategy In many cases, depending

( Firm positions pay scales so that it is among the on issues such as: the
highest 25% of firms and 75% pay below ) strategic objectives,
availability of workers, core
Second Quartile: Middle-Market Strategy business, and others,
(Firm positions pay scales so that organizations may adopt a
50% of firms pay above and 50% pay below ) strategy to utilize a third-
quartile approach for some
First Quartile: Below-Market Strategy
job families, and first-or
(Firm positions pay scales so that it is among the
second-quartile levels for
lowest 25% of firms and 75% pay above )
less important positions
 Equity Theory
Equity is balance between the inputs an individual brings to a job & the outcomes
he /she receives from it. Equity is a major factor for success of a compensation
system, however it is difficult to be identified.

Inputs includes experience, education, skills, efforts and time.

Outcomes includes pay, benefits, recognitions, and any other rewards.
Inputs and outcomes are in different units, and are hard to compare to each other.

Equity theory suggest that individuals determine whether they are being fairly
treated by comparing their own inputs/outcomes ratio to the input/outcome ratio
of others. Three forms of equity can be distinguished:

External equity :refers to Internal equity: How fair Individual equity: How
How a job’s pay rate in the job’s pay rate is, fair an individual’s pay as
one company compared when compared to other compared with what his
to the job’s pay rate in jobs within the same or her co-workers for the
same or very similar jobs
other companies company within the same
(comparison of one job in company.
different organizations)
 Pay Structure Design

Pay structure design process involves the following major activities

Job
Pay Structure
Identify job Documentation
Establish the
tasks and Create job values of jobs Establish pay
qualification description within grades and
of employees: and organization pay range
specification Job
Job Analysis
Evaluation
 Job Evaluation

Job evaluation provides a systematic basis for determining the relative value of
jobs within an organization. It is a systematic comparison to be done in order to
determine the worth of one job relative to another within the organization

In a job evaluation, every job is examined and priced according to the following
features:

Relative importance of KSAs needed to Difficulty of the job

the job perform the job

It is important to identify benchmark Jobs-jobs that are

Similar jobs found in other Similar jobs performed by

organizations individuals who have similar
13 duties require similar KSAs
 Job Evaluation

There are a variety of methods used to determine internal job value through job
evaluation . Regardless of the method used; the intent is to develop a usable,
measurable, and realistic system to determine compensation in an organization

Ranking-Method Classification Point Method

one of the simplest Method The most widely used job
methods . It places jobs Descriptions of each evaluation method, is more
in order, ranging from class of jobs are sophisticated than the
highest to lowest in value written, and job is ranking and classification
to the organization. The put into a grade methods. It breaks down
entire job is considered. according to the jobs into various
class description it compensable factor and
best matches. places weights, or points, on
them

14
 Job Evaluation Point Method

A quantitative technique that involves:

– Identifying the degree to which each compensable factors are present in the job.
– Awarding points for each degree of each factor.
– Calculating a total point value for the job by adding up points for each factor.
There are three major factors and their sub factors are identified as follows

1-KNOW-HOW 2-PROBLEM SOLVING 3-ACCOUNTABILITY

Functional expertise Environment Freedom to act
Managerial skills Challenge Impact of end results
Human relations Magnitude
Factors Job needed Qualification Impact of job Total job
conditions skills (30) end results difficulty Wight
(10) (20) (20) (20) (100)
Accountant (7) (15) (25) (15) (15) (77)
Engineer (10) (15) (25) (15) (15) (80)
15
Security (10) (5) (15) (10) (10) (50)
 Developing Pay Structure

The job structure is developed and the categories and grades are determined
according to the job weight. Similar jobs are grouped into a single category (despite
the different occupations).

Job Family / Marketing & Finance & Production /

Category Sales Accounting operations

Management Marketing Financial Production

Category Manager Manager Manager
specialists Marketing Rep Accountant Engineer
Technicians Delivery Data Entry Technician
Office Boys Office Boy Office boy Worker
Developing Pay Structure & Pay Grades
M(1)
S(1) M(2)
S(2) M(3)
S(3)
S(4) Each job category is divided into number of
S(5)
grades that cover the entire employment
S(6)
AT(1+) S(7) years for any employee from entry level to
AT (1) S(8) retirement in a way that enable individuals
AT(2) S(9)
AT(3) S(10)
to progress in their planned career, and
AT(4) S(11) help the company to achieve internal,
AT(5) S(12)
external, and personal equity
L(1+) AT(6)
L(1) AT(7)
L(2) AT(8)
L(3) AT(9)
L(4) AT(10)
L(5) AT(11)
L(6) AT(12)
L(7)
L(8)
L(9)
L(10)
L(11)
L(12)

Labour Admin& Tech Specialis Managers

Developing Pay Structure & Pay Grades

The pay range for each pay grade also must be established. The employer can
determine minimum and maximum pay levels for each pay grade by considering
the desired market level.

▪ Labour category will include the following grades:

experience Annual
Grades Min Max
L(1)
From - To increase
L01 36 40 2,934 3,164 59
L(2)
L02 33 36 2,773 2,989 55
L(3)
L03 30 33 2,620 2,825 52
L(4) L04 27 30 2,477 2,670 50
L(5) L05 24 27 2,341 2,524 47
L(6) L06 21 24 2,213 2,386 44
L(7) L07 18 21 2,093 2,255 42
L(8) L08 15 18 1,979 2,132 40
L(9)
L09 12 15 1,872 2,017 37
L10 9 12 1,771 1,907 35
L(10)
L11 6 9 1,675 1,804 34
L(11)
L12 3 6 1,585 1,707 32
L(12) L13 0 3 1,500 1,615 30
Labour
Developing Pay Structure & Pay Grades
In addition category description must be written following Specialists' category:
▪ Requires high academic qualification in a specialized field, understanding of
the principles, practices and procedures associated with the job field.
▪ Specialized executive or supervisory tasks.
▪ Medium/ high accountability with medium/high value resources
▪ work according to open rules and specific KPIs, and results affect the overall
department’s results
Experience Examples include:
Grade Min Max Annual increase
From - To
S1 33 36 8,542 9,226 171 ▪ Accountant
S2 30 33 8,059 8,704 161 ▪ HR specialist
S3 27 30 7,603 8,211 152
S4 24 27 7,172 7,746 143
S5 21 24 6,766 7,308 135
S6 18 21 6,383 6,894 128
S7 15 18 6,022 6,504 120
S8 12 15 5,681 6,136 114
S9 9 12 5,360 5,788 107
S10 6 9 5,056 5,461 101
S11 3 6 4,770 5,152 95
S12 1 4 4,500 4,860 90
Compensations administration Process

Once organization has determined Job Analysis

pay ranges, they can set the pay for ( Job description and job specifications)
specific individuals. Setting a range
for each pay grade gives flexibility
Valuing Jobs
by allowing individuals to progress • Job evaluations
within a grade. • Market pricing

Pay Policies Pay

Structure

Performance Individual
Appraisal Pay

Implementation,
Communication, and
20 Monitoring