Lecture No.: ….

– Employee Compensation CS/ DBA/ FIAB/ HRM

EMPLOYEE COMPENSATION
1.0. INTRODUCTION:
Once employees have done their jobs and been appraised, they expect to be paid or compensated for
the work done. Employee Compensation refers to organizational rewards that employers offer to their
staff as a result of their employment. These can be intrinsic - i.e., internal to individuals and are
expressed through feelings of success, job satisfaction, personal growth, and status, etc., or extrinsic –
i.e., rewards that are directly controlled and distributed by the organization to the employees and are
tangible than intrinsic rewards such as salary, promotion, fringe benefits, and incentive payments, etc.
This lecture attempts to explore the role played by compensation in general, and remuneration and
reward management in particular, in achieving human resource management outcomes and objectives.
As one writer states:
“…the pay package is one of the most obvious and visible expressions of the employment
relationship; it is the main issue in the exchange between employer and employee, expressing the
connection between the labour market, the individual’s work and the performance of the employing
organization itself.” (Hegwisch, 1991, as quoted in Beardwell and Holden, 1994).

2.0. NATURE AND SCOPE OF COMPENSATION:

(a) Definition of Compensation:
There are many definitions of the term ‘Compensation’:
 Compensation is any form of payment to employees in exchange for work they provide their
employer. Financial payment made at or near the time work is performed is called direct
compensation. Examples of direct compensation are wages, salaries, overtime pay,
commissions, and bonuses. Wages, which are generally distinguished from salaries, are direct
compensation received by employees who are paid according to hourly rates. Employees paid
on a monthly, semi-monthly, or weekly basis receive salaries; they receive their pay regardless
of the specific number of hours they work; (Stone, 1983)

 Compensation refers to all forms of pay going to employees and arising from their employment.
It has two main components, direct financial payments (wages, salaries, incentives,
commissions, and bonuses), and indirect financial benefits (financial benefits like employer-

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Lecture No.: …. – Employee Compensation CS/ DBA/ FIAB/ HRM

paid insurance, various forms of insurance, paid vacation days and holidays, and pensions).
(Dessler, 2008: 422)

(b) The different forms of compensation:

There are a wide range of forms of compensation. Some of them are stated below.

2.b.1. Base wage / salary:

It is a pay that employees receive for their work which may include overtime. Payment could be on
hourly basis, weekly basis, or monthly basis, or any other way depending on the contract terms.
Whatever the case, salaries are structured according to prevailing factors.

(a) Factors that influence pay structures:

 The supply and demand – the market rate for the job;
 The financial position of organization – ability to pay (i.e., the company’s ability to
pay);
 Management decisions and policies;
 The number of Grades in the structure from top to bottom;
 Trade unions.

(b) Key considerations in the design and development of pay structures:

 Internal Equity: - refers to the relative grades assigned to different jobs within an
organization. Internal equity assesses how reasonable the grades are. It can be
examined on 2 levels, i.e., horizontally (between departments), and vertically
(within one department);

 External equity: - also called ‘external competitiveness’. It is based on the

company’s need to compete for labour in the market. This ensures that the labour
force is neither over-paid (leading to higher labour costs than necessary) nor under-
paid (leading to high turnover and/or labour unrest).

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Lecture No.: …. – Employee Compensation CS/ DBA/ FIAB/ HRM

(c) Factors that influence the pay an employer will offer its staff:
The levels of remuneration a company intends to provide its staff are governed by a number of factors
– both internal and external forces. The combination of these forces produces a complex background
against which to construct an effective payment system. These forces include the following:

 The company’s ability to pay: - organizations vary in their ability to meet their wage and
salary commitments. Those which are profitable and enjoy a good cash flow will possibly pay
generously; while those that are struggling will have difficulties pay their employees well;
 Comparability: - In an attempt to retain their staff, employers look at what other companies are
paying their employees. Ideally organizations endeavour to offer wages and salaries which are
competitive in order to ensure retention of staff;
 Bargaining strength of trade unions: - this refers to the ability by the trade unions to
influence the decisions of management;
 Labour market conditions: - Salaries are dictated by the economic condition of law of
demand. For instance, where unemployment levels are high employers would be at liberty to
dictate the salary levels to offer their employees; but where labour is scarce and employers have
to compete for workers, and the end result is to offer salaries that would attract potential
employees;
 Cost of living: high inflation creates a demand for workers to demand for more money from
their employers in order to cushion their economic status;
 Government action through legislation: in some cases government determines the minimum
wages that companies should offer their workers. This can be done through determination of
the Poverty Datum Line (PDL);
 Productivity: this is the ability by the company/ organization to stimulate efficiency in
operations for purposes of reducing costs. This may lead to savings that could create an
opportunity to finance salaries.

(d) Company salary and wages policy:

A company’s policy for wages and salaries would normally address the following requirements and
considerations:

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Lecture No.: …. – Employee Compensation CS/ DBA/ FIAB/ HRM

 To attract, retain and motivate sufficient number of suitable employees to meet operational
requirements;
 To ensure that labour costs are suitably controlled in relation to other costs and in relation to
its revenues;
 To encourage optimum productivity from the staff;
 To ensure a high level of quality of product or service;
 To recognize the value of jobs in relation to each other (jobs valued highly, are paid more).

2.2.2. Incentives:
These are rewards that are offered in addition to the base wage/salary and usually related to
performance.

2.2.3. Benefits:
These are rewards that employees receive as a result of their employment and position within an
organization, e.g., paid holiday, paid leave, life insurance, retirement benefits, as well as pensions,
including leave days accrued.
(NB: Students are encouraged to research further on a wide range of forms of compensation,
particularly, benefits such as: paid vacation/ holiday, paid leave, retirement benefits, commissions,
bonuses, employer-paid insurance, and holidays, pensions).

3.0. COMPENSATION: A PERSONNEL FUNCTION

Compensation is related in some way to almost every other personnel function. An employee receives
his/ her pay after a period of the job, usually a week to a month. However, the typical employee’s first
contact with compensation is during recruiting. Pay can be an important factor in whether an applicant
accepts a job offer.

Four personnel functions that directly influence compensation policies and practices include: HRP, job
analysis, performance appraisal, and labour / employee relations. Also compensation directly
influences three other personnel functions: recruiting / selection, Benefits, and career planning and
development.

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 JOB ANALYSIS

5
HUMAN RSOURCE RECRUITING /
PLANNING SELECTING
Provides necessary data for
Specifies human resource conducting job evaluations Compensation can be used to
goals which can be and wage surveys attract applicants to the
furthered by compensation organization; high pay may
policies and programs facilitate low selection ratios.
Figure 1: Compensation: a personnel function
Lecture No.: …. – Employee Compensation

Organizational entry and

time on the job COMPENSATION BENEFITS
Provides direct financial payment to Level of direct compensation
employees in exchange for the work received often affects amount
they provide their employer and type of benefits received.

Evelyn Hone College of Applied Arts and Commerce

PERFORMANCE LABOUR/EMPLOYEE CAREER PLANNING
APPRAISAL RELATIONS AND DEVELOPMENT

Performance appraisals are Agreements negotiated Compensation associated

often a factor in pay between labour and with higher paying jobs may
increases and decisions; management specify the influence career plans and

By Patrick Mwela
performance appraisal data amount and form of development activities of
employees.
CS/ DBA/ FIAB/ HRM

are needed to use pay as a compensation paid

motivator employees
Lecture No.: …. – Employee Compensation CS/ DBA/ FIAB/ HRM

(a) Human Resource Planning: - specifies human resource goals, which can be furthered by
compensation policies and programs. The number and type of employees needed have a
substantial effect on an employer’s compensation costs.
(b) Job analysis: - job analysis is basic to two activities of the compensation function, namely,
wage surveys and job evaluations. Wage surveys compare jobs in the organization with
similar jobs in other organizations. They are conducted to ensure that an organization’s pay
is competitive and equitable in relation to what other organizations are paying for similar
jobs.
(c) Performance appraisal: - affect compensation decisions and costs since pay increases and
promotion decisions are often based on performance appraisal data.
(d) Labour / employee relations: - agreements negotiated between labour unions and
management affects the amount and form of compensation.
(e) Recruiting / selection: - (refer to HRP above).
(f) Benefits: - a form of indirect compensation, benefits is closely tied to the compensation
function.
(g) Career planning: - compensation influences an employee’s career plans. The higher pay
associated with higher-level jobs can motivate an employee to prepare for a position of
greater responsibility in the organization.

4.0. LAWS AND SURVEYS ABOUT COMPENSATION

4.1. Major Laws affecting Compensation:
In using compensation to serve its various organizational purposes, employers must work within the
framework of many laws and regulations. Among the most important are the following:
 The Employment Act,
 The Industrial And Labour Relations Act,
 The Human Rights Legislation,
 The Income Tax,
 The Minimum Wages Act, etc.

4.2. Salary / Pay Surveys:

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Lecture No.: …. – Employee Compensation CS/ DBA/ FIAB/ HRM

Traditionally, employers have used money to attract adequate supply of qualified applicants. Whether
an org chooses to be a wage leader or to offer only the market rate for new employees. It must have
accurate information about the pay rates for relevant jobs in other organizations, which is obtainable
through pay surveys. Pay or wage surveys are a way of collecting and analyzing information about jobs
and their pay for the purpose of making pay comparisons between similar jobs in different
organizations. They enable an employer to learn the going rates for jobs included in the survey. This
information is important both for attracting employees and for retaining them.

Many pay surveys are published by private and government agencies. An employer can also gain such
information by participating in local pay surveys conducted by other organizations. If existing pay
surveys prove ill-suited to an organization’s purposes, it can conduct its own pay survey.

4.2.1. Conducting a salary survey:

In order to provide maximum benefit, the makers of a pay survey must follow six steps:
(a) Specify purpose of the survey;
(b) Specify jobs to be surveyed and information needed from survey participants;
(c) Select comparison employers for inclusion in the survey;
(d) Select survey method and design survey instrument;
(e) Administer the survey;
(f) Analyze and display survey data.

5.0. THE COMPENSATION POLICY:

When deciding on the compensation policy organizations consider the following factors:
a) Internal organizational Equity: is concerned with how profits are divided within an
organization. above all, internal equity is concerned with how much an employee is being paid
for doing a job compared to how much other employees in the same organization are being paid
for doing their respective jobs.

b) External Equity: this addresses issue of how much employees in an organization are being
paid compared to employees in other organizations performing similar jobs.

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Lecture No.: …. – Employee Compensation CS/ DBA/ FIAB/ HRM

c) Individual Equity: this addresses issue of rewarding individual contributions. It is closely

related to pay for performance.

6.0. CONCLUSION:
The employment relationship is characterized by a number of factors including Employee
Compensation. Compensation is unavoidable in companies as it is a tangible form of motivation for
workers; no wonder it is a key personnel function. Compensation comes in a variety of forms such as
wages / salaries, paid holiday, paid leave, life insurance, retirement benefits, and pensions.

8 Evelyn Hone College of Applied Arts and Commerce By Patrick Mwela