Chapter six: compensation & benefit

administration

Contents

Introduction

6.1 Compensation & Benefit Administration

6.2 Objectives of Compensation

6.3 Types of Compensation

6.3.1 Financial Compensation

6.3.2 Non-financial Compensation

6.4 Benefits (Indirect Compensation)

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 6.1. COMPENSATION AND BENEFIT ADMINISTRATION
 Compensation is the reward employees receive in

exchange for their performance.

 It is concerned with wages and salaries, pay raises, and

similar monetary exchange for employees’ performance.

 The purpose of compensation and benefit administration

should be to enhance the effective and efficient utilization

and management of an organization's workforce.
 The purpose should also contribute to the overall

strategic mission of the organization.

2
 Compensation …

Well-designed pay or compensation system enables

the organization:
 To attract sufficient and qualified employees

 To retain and motivate the existing workforce

toward its goal achievement.

 To reward employees for their effort and
achievement

3
 Compensation …
On the contrary, if compensation is not tied to work:
 employees are likely to look for a better paying

job.
their contribution toward goal achievement tend

to be lower.
In severe cases, pay dissatisfaction may lower

performance, cause strikes, increase

grievances, and lead to forms of physical or
psychological withdrawal. 4
 6.2. OBJECTIVES OF COMPENSATION
ADMINISTRATION
Is to establish fair and equitable rewards to the
employees, so that they are motivated.
Other specific objectives are to:
 Acquire qualified personnel

 Retain current employees

 Ensure equity

 Reward desired behavior

 Control costs

 Comply with legal regulations

 Facilitate understanding

 Further administrative efficiency

5
 TYPES OF COMPENSATION
 In general, there are two types of compensation.

These are:

FINANCIAL COMPENSATION
It includes direct compensation, which is paid to

employees in the form of wages, salaries, bonuses,

and commission in exchange for their performance,
and
indirect compensation includes all financial rewards

that are not included in direct compensation.

6
 TYPES OF COMPENSATION
Compensation

Financial Compensation Non-Financial Compensation

Direct indirect The job The envt.
Wages  Insurance Plans  Interesting  Sound Policies
Salaries  Social Assistance Duties  Competent
Commissi  Employee  Responsibility Supervision
ons Services  Congenial Co-
Bonus  Paid Absences  Recognition Workers
 Achievement  Status Symbols
 Advancement  Working
conditions
 Job Sharing

7
It is important here to distinguish wage
and other forms of direct financial
compensation.
Wages

Salaries

Bonuses

Commission

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 DETERMINANTS OF FINANCIAL COMPENSATION
The major parties and issues of concern are:
Parties Main issues of concern
Government Ensure that financial compensation supports the
social and economic interests of the broader
society.
Occupational Protect members’ human capital investment
groups
Unions Protect, maintain, and increase the welfare of the
worker.
Individual Ensure that a balance is maintained between
contributions to work and the outcomes received
from work.
Organization Within budget constraints, attract individuals into
the organization, retain employees, and motivate
behavior toward achievement of organizational
goals.

9
Financial compensation system is influenced by the following

factors:
 the organization,
 the labor market,
 the job and
 the employee have an impact on the job pricing and the
ultimate determination of employee’s financial
compensation.
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 1) Organizational Interest in Compensation

 Why are organizations interested in compensation?

Organizations view compensation mainly as a means:

 To attract qualified candidates for vacant positions

 To retain competent and dedicated employees
 To facilitate performance
 To comply with government employment policies.
Moreover, compensation is an expense in the sense that it reflects

the cost of labor. Organization often has compensation policies.

As organizations differ in size and purpose, so do in pay levels 11
 There are three alternative
strategies, this might be chosen by
organizations. These are high, low,
and comparable.
 The high-pay-level strategy
 The low-pay-level strategy
 The comparable-pay-level
strategy
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The choice of any of the above pay-level strategies
may be affected by factor internal or external to the
organization
Quality and quantity of needed skill
The organization’s current financial position and
financial prospects for the coming year.
Cost of living index
Employees behavior, such as performance, turnover,
absenteeism, unionization attempts, and sabotage.
The profit levels of an organization can also affect
employees’ salaries or wages.
This being the case, who is a pay policy-decision
maker? In most organizations, the top-level
management makes pay decisions by considering the
above factors.
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2) Labour Markets Influence on
Compensation
The number and types of employees indicated in the
organization’s human resource planning are mainly
drawn from the labor market.
Since the market directly affects the pay-levels,
analysis of the demand for and supply of labor is
imperative.
The demand for human resources largely depends on
organization's ability to pay.
On the other hand, the supply focuses on:
 the number of persons of work age;
the attractiveness of the job in pay, benefits,
and psychological rewards;
the availability of training institutions, and so
on.
When the supply of employees exceed the demand, the
initial pay-levels tend to go down.
On the contrary, when the demand for employees
exceed the supply, the initial pay-levels tend to go up.14
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 3) Job Influence on Compensation
Jobs employees are assigned to perform are a
major decisive factor of the amount of pay they
will in turn receive.
Organizations pay for the value they attach to
certain duties, responsibilities, and other job-
related factors.
If this is the case, the question of what are the
techniques used to determine the value of jobs is
an important one that requires an answer.
Compensation techniques used by organizations
for determining the relative value of jobs are:
I) job analysis and
II) job evaluation.
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 I. Job Analysis
If compensation policy is to be based on the nature of job, a
job analysis activity must be conducted to identify the
similarities and differences among the various jobs in the
organization.
As we discussed earlier, job analysis is a systematic process
of determining the skill and knowledge required for
performing jobs.
It reveals the major tasks, duties and responsibilities, the
relationship of a job to other jobs, the skill and
knowledge required for each job, the outcomes that are
expected and working conditions.
The basic premise underlying job analysis is that jobs are
more likely to be described, differentiated, and evaluated
consistently if accurate information is available to reward
managers.
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What are job description, specification and
standard?
If we recall, job description is written
document that describes the duties and
responsibilities of a specified job.
Job specification is a statement that
explains the skill, knowledge, and experience
needed to perform the job.
Job standard, on the other hand, is a
minimum acceptable level of performance.

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 It is based on job analysis that
organizations assign a financial value to
each job.
Thus, unless there is a clear definition of
the job and job performance standards it
would be difficult to imagine how pay can
be linked to individual performance.
It is worth noting that job evaluation is
also a means to compare the relative values
of various jobs in an organization.
Hence, the next pages briefly examine how
it is used to determine financial
compensation.
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 II) Job Evaluation
A certain public enterprise may hire a chief
administrative officer, accountant, mechanic,
engineer, janitor, economist, and so on.
Here it is necessary to get a clear
understanding of how is compensation
determined for various jobs in an organization.
Compensation within an organization is
determined by comparing one job to other job.
This comparison is made possible with job
evaluation. Thus, what is job evaluation?
Job evaluation is that part of a compensation
system in which a firm determines the relative
value of one job in relation to another.
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 The major reason of job evaluation is to
maintain internal pay equity among various
jobs in the organization.
Moreover, job evaluation is used to:
Identify the organization’s job structure
Bring equity and order to the
relationships among jobs
Develop a hierarchy of job value that can
be used to create a pay structure
Achieve a consensus among managers
and employees regarding jobs and pay
with in the firm.
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Job evaluation rates the job and not the employee
performing the job - analyzing the worth of a job to
that of another, without regard to personalities on
the jobs.
In this process accurate job descriptions and job
specifications must be available to analyze and assign
monetary value to organizational jobs.
As Ahuja (1988) noted, the more skill, education and
responsibility required in a job, the more it worth.
 Organizations use four major types of job evaluation
methods. There are:
 Job Ranking
 Job Grading
 Factor Comparison
 Point System
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1. Job Ranking Method
The simplest method of job evaluation is
ranking.
A committee or evaluators review the job
descriptions and rank each job from the simplest
to most challenging job in the organization.
This job-ranking method is based on subjective
evaluation of relative value.
Compensation for each job will be based on the
job hierarchy.
The ranking method is more suitable for small
organizations having a limited number of
employees.
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2. Job Grading Method
The job grading or the classification method
works by having each job assigned to a grade
by matching standard descriptions with each
job’s description.( see on the HO).
To determine appropriate job grade, match
standard description with job description.
Here jobs are assigned to grades by
comparing the job description with the
standard description. The sample above
indicates five grades.

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Jobs, which might be classified under grade I,
are simple and routine. Jobs become more
difficult as the grade level increases.
For example, jobs under grade IV are believed to
be complex and require high-level skill.
In attaching monetary values to the various
jobs, the rater makes pay-level differentials
between jobs, based on their complexity.
More challenging jobs in an organization are
paid more. In this non-analytical method
“complex jobs are difficult to fit into the system;
a job may seem to have the characteristics of
two or more grades.
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3. Factor Comparison Method
In this method, each job is broken down into
factors, which are considered common to all types
of jobs.
The compensable factors used to compare jobs in
the organization are skill, mental requirements,
physical requirements, responsibilities and
working conditions.
For each job in the organization, the factors are
“ranked according to their relative importance in
each job and then the job evaluator assigns a
monetary value to each factor.
For example, a job with worth of Birr 1,200 per
month may have its different contributing factors
costed as shown in HO.
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4. Point Method
The point rating system is the most accurate
and widely used method of job evaluation.
This system resembles the factor comparison
method in that, in both cases, jobs are broken
down into factors like skill, mental effort,
responsibility, physical effort and working
conditions.
However, unlike the factor comparison where
monetary value is assigned to each job, here
points are used to determine the worth of jobs
in the organization.
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 In allocating range of points to each job factor,
the following steps may be followed.
Assign a number (between 1 and 100) to
each factor.
Closely examine each factor in terms of its
importance in relation to the other. For
example, as shown in the figure below, the
physical effort requirements for the job of
labor is thrice as important as skill
requirements.
Finally, each factor point value is added, to
place job in order of importance. Note

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4. Employee Influences on
Compensation
The major goals of compensation are to attract and
retain qualified employees to the organization.
In other words, compensation affects employee
decision to stay or leave the organization, to work
effectively and to accept additional responsibilities.
 Recall from the earlier discussion that
organization, labour market, and the job
influence compensation system.
Moreover, factors related to employee like
performance, seniority, and experience also
determine pay levels in an organization.

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 COMPENSATION AND PERFORMANCE
Paying for performance is the process of
providing a financial reward to an individual,
which is linked directly to his/ her
performance.
Nothing is more de-motivating to productive
employees than to be paid equal salary as less
productive employees.
If this is the case, organizations need to
practice varies method to improve job
performance.
The most common once are piecework,
bonus schemes and commission.
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Seniority and Experience
Seniority refers to the length of time employees
have been working in an organization.
Employees are more likely to be committed to the
achievement of organizational objectives, if their
long services are considered as a basis for pay
increases or have some value during promotion.
Advocates of paying for seniority believe that it
enables the organization to maintain stable
workforce without excessive turnover.
The seniority must be linked with experience on the
job.
Organizations compensate employees on the basis
of experience, because “sometimes the practice is
justified because of the valuable insights that can
only be acquired through experience on the job“.
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Pay Structures
In the process of considering the values of jobs in
an organization, attention must paid to the job
evaluation results and the pays in the labor market.

The relative value of jobs, in the organization, is

determined by the job evaluation whereas its
absolute value is determined by the labor market
(supply and demand).
To set the pay level the job evaluation and pay
survey rates are combined using graph. (Refer to
your handout)
All similar jobs are classified in one grade and they
have the same range.
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 A pay grade is the grouping of similar jobs to
simplify the job pricing process.
For example, as can be noted from the graph,
key jobs ABC (grade 1) have lower pays and
pay range than jobs DEF (grade 2).
The pay range defines the lower and upper
limits of pay for jobs in a grade (Bratton &
Gold, 1995).
The range allows organizations to pay
according to seniority and or performance.

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 The vertical axis in the graph represents the pay
rates.
The midpoint can be established by the use of
pay-survey data from similar jobs.
In the graph, on the vertical axis the pay level
policy line has been set to equal the average paid
by the organization’s competitors for each of the
jobs: a matching-competition policy.
Here, if the organization wants to lead or lag
behind the market rate, the pay policy line can be
shifted up or down.
The pay policy line represents an organization’s
pay level in the market and serves as a reference
point around which pay structures are
established .
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INDIRECT COMPENSATION (BENEFITS)

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1.3. INDIRECT COMPENSATION (BENEFITS )
In addition to financial compensation,
employees enjoy other benefits because of
their membership in the organization.
What then are benefits?
Employee benefits are the indirect form of
the total compensation; they include:
 paid time away from work,
 insurance and health protection,
 employee services, and
 retirement income

Benefits, however, are indirect compensation

that organizations provide to their employees
and are not directly related to performance.
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Objectives of benefit:
What do organizations gain from benefits?
Benefits enable organizations to retain and
attract qualified personnel. Moreover,
employee benefits policies of an organization
are to:
- Reduce fatigue
- Discourage labor unrest
- Satisfy employee objectives
- Aid recruitment
- Reduce turnover
- Minimize overtime costs
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 Major Categories of Benefits
Employee benefits can be divided in the
following major categories:
Insurance Benefits
Security Benefits
Employee Services
Time-off Benefits

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 2. Non-financial Compensation
So far, we have discussed employee benefits, which cost
the organization money either directly or indirectly.
Advocates of motivation claim that employees are not
only be satisfied with basic needs, but other subsequent
needs such as social, ego, and self-actualization are
becoming more important.
These higher order needs may be satisfied through the
job or job environment or both.
The benefits each employee would value depend on their
personal preferences.
In most cases, employees may get personal satisfaction
if the job provides them opportunities for recognition,
feeling of achievement, and above all advancement
opportunities.
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Non financial Compensation:
It includes any satisfaction, which employees
receive from the job, such as the need for
recognition, responsibility, personal
growth and the like
or from environment in which they work.
This job environment consists of comfortable
working conditions, competent
supervision, pleasant work companions
and other related physical and social
needs of employees.
For example, being an accepted member of
the work group results in social motive
satisfaction
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Jobs to be challenging, meaningful, and interesting,
organizations must attempt to match the job
requirements and individual abilities.
The selection and placement processes are extremely
important in this context.
In addition, organizations must establish the proper
working environment so that employees perform their
jobs effectively. By creating a conducive job
environment, supervisors should enable their
subordinates to do their jobs to the best of their abilities.

Other major factors that are part of job environment

include sound policies, congenial co-workers,
appropriate status symbols and comfortable
working conditions.
These factors, among other things are hoped to lead to
job satisfaction, improve morale and increase employee
commitment.
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 According to the Federal Civil Servants Proclamation
515/2006 Part 2 Art. 6. deals with salary scale.
The agency shall prepare a salary scale to be applicable to
the civil service in general and submit the council of
ministers, and supervise its proper implementation up on
approval. (sub.art.1)
The salary scale shall contain the base, maximum pay and
step increments of each grade.
According to the Federal Civil Servants Proclamation
515/2006 chapter 2 and 3, address annual and other
leave.
Annual leave Article 36
Maternity leave Article 41
Sick leave Article 42
Leave for personal matters Article 43
Special leave with pay Article 44
Special leave with out pay Article 45
 Medical benefit Article 46
01/25/25 41
Discussion point.
The fair wage ought to be sufficient to permit
the worker and his family to leave in decent
comfort according the increasing standards of
society.
This comfort includes the possibility of making
some provision for sickness and old age as well
as for the education of children.
In an ideal world, the fair wage would certainly
be measured up to the minimum described
above.

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 CHAPTER SEVEN
EMPLOYEE / LABOUR
RELATIONS

01/25/25 43
What is Employee Relations?
Management of all organizations is mainly
concerned with what should be done to enhance the
contributions of its employees to achieve objectives.

This means maintaining good employee relations

through creating good working atmosphere,
providing attractive rewards, having good
leadership, and assigning employees to
interesting and challenging jobs.
An employee relation is the interactions between
the employer (represented by management) and the
work-force (represented by trade unions).
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Here, interactions imply that management must
support and address issues of employee job
satisfaction and employees must show
commitment towards the success of the
organization.
Moreover, employee relations is concerned with:
Managing and maintaining formal and
informal relationships with trade unions and
their members.
Sharing information with employees and
involving them in decision making on
matters of mutual interest
Creating and transmitting information of
interest to employees.
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Employee Relations Objectives
Employee relations activities are those, whose
objective is to create an atmosphere of trust,
respect, and Cooperation. Further more,
employee relations:
Provide a conducive work environment in
which employees can do their jobs better
Help management to mutually solve
employees problems which otherwise
might affect performance
Helps employee to control over important
aspects of work life.
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Trade Unions and Collective Bargaining
 Trade Unions
Trade union is an organization of workers
whose purpose is to protect and maintain the
interests of union members.
As workers representative, trade unions
“provide workers with a 'collective voice' to
make their wishes known to management and
thus bring actual and desired conditions closer
together .

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This worker organization is established to bargain
with management about pay, working hours,
conditions of employment and to make joint
decisions with management on matters affecting
their members' well being.
Furthermore, the following broad objectives
characterize the trade unions as a whole.
To secure and, if possible, improve the living
standards and economic status of its members.
To enhance and, if possible, guarantee individual
security against threats and contingencies that
might result from market fluctuations,
technological change, or management decisions.
To create mechanisms to guard against the use of
arbitrary and capricious policies and practices in
the workplace.
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Collective Bargaining
Collective bargaining is basic to labor-
management relations.
It is a joint process of job regulation undertaken
by management and trade unions who negotiate
to establish pay and conditions of employment.
This contractual agreement is hoped to give
workers and management an identity of purpose
and provide an atmosphere in which both focus
their attentions towards the achievement of
organizational objectives.
Such union-management agreement enables to
negotiate better position to urge workers to do
their jobs as per the contract.
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In an organization where a trade union is
established and recognized by the management,
collective bargaining will take place. For the
bargaining to take place, the following
conditions must exist:
Employees must be prepared to act collectively
and recognize their common interests.
Management must recognize trade unions and
their representatives as legitimate bargaining
agents for labor,
Trade unions must be free to organize
employee without pressure from state or
employer control.
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 Collective bargaining is a means to reach negotiable
agreements on matters pertaining to employment.
This joint labor-management agreement has two
outcomes.
These are:
 Substantive agreements- agreed terms and
conditions of employment covering pay and working
hours and other aspects such as holidays, overtime
regulations, flexibility arrangements allowance.
Procedural agreements - an agreed up on course
of actions for various eventualities such as equal
opportunities, recruitment, redundancy, discipline
etc.
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The process of bargaining is carried
out by negotiation where workers'
representative (union) and
management discuss issues with a view
to relating a common agreement. ,
Formal negotiations often follow the
following stages.
Preparation:

Negotiation

Closing

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 Although the aim of collective bargaining is to
reach a common agreement, sometimes there
may be disputes that need resolution.
How can such disputes of two parties be
resolved? Various methods can be used to
resolve disputes. These are conciliation,
mediation or arbitration.
Conciliation - a means where by a neutral third
party acts as a go-between to settle the disputes.
Mediation - a means where by a third party
propose recommendations which enable the two
parties to resolve the disagreement.
Arbitration - the submission of a dispute to a
neutral third party. Both sides of the issue are
heard by an arbitrator who acts as judge and jury.
After weighing the facts, the arbitrator renders a
decision.
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Employee Relations Practices
In many organizations, the immediate bosses
are responsible for assigning tasks, counseling
and providing information to employees.
This being the case, concerning issues related
to the entire organization “managers and
human resources departments directly affect
employee relations through:
communication,
counseling,
discipline practice"
In-addition, employee participation can also
affect employee relations.

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 Discipline
The organizational rules and regulations are
intended to direct and control the effective
functions of employees.
Thus, to ensure compliance with
organizational standards rules and regulations
must be communicated to all employees.
This will enable employees to maintain desired
discipline in the workplace.
Discipline is the state of employee self-control
and orderly conduct and indicates the extent of
genuine teamwork within an organization.
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Werther and Davis (1996) suggest two ways to
handle disciplinary cases in an organization.
These are:
Preventive discipline is an action taken to
encourage employees to follow standards and
rules so that infractions are prevented. Its
basic objective is to encourage self-discipline.
Corrective discipline is an action that
follows a rule infraction. The corrective or
disciplinary action is a penalty, such as
warning or suspension without pay.
In principle, disciplinary action should aim at
correcting unaccepted behavior.
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 Disciplinary action may include:
 Informal talk or counseling
 An oral warning
 A written warning
 A final written warning
 Suspension without pay
 Transfer to another task, or section
of the enterprise
 Demotion
 Dismissal/Discharge.
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DETERMINANTS OF DISCIPLINARY ACTION
Four main factors when determining an
employee’s disciplinary action:
Seriousness of offense
Repetition or duration of offense
Existence of any prior offenses and
disciplinary actions
Employee response to previous
disciplinary actions and current
impending disciplinary action
Depending on these four factors, we may
skip any of the disciplinary progression
steps listed above. In the most serious
cases, termination may be the first and
only disciplinary action taken.
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 The Federal Civil Servants Proclamation 515/2007,
PART NINE deals with disciplinary measures and
grievance procedure.
“the objectives of disciplinary penalty shall be to
rehabilitate the delinquent civil servant when he
can learn from his mistakes and became a reliable
civil servant or to discharge him when he becomes
recalcitrant” (Art. 66)
Depending on the gravity of the offence, one of the
following penalties may be imposed on civil servants
for breach of discipline.
 Oral warning;
 Written warning;
 Fine up to one month’s salary;
 Fine up to three month’s salary;
 Down grading up to the period of two years;
 Dismissal

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 THE END!

I wish you all

success in
your Academic
Journey!!!!!
61