14 Synopsis

Learning Objectives

After completing this session, you will be able to:

  • explain job evaluation and its techniques.
  • summarize different forms of employee compensation.

Compensation management is an important factor contributing to employee productivity, engagement and retention. It is about managing entire gamut of financial aspects and non-financial aspects of pay and benefits that will contribute to employee productivity, engagement and retention. A good compensation management go a long way to ensure productivity, engagement and retention.


Objectives – primary objective is to determine relative worth of different jobs in the organization and provide the basis for the compensation management system. There are other objectives also

Process of job evaluation involves following

  • Conduct to gather details about the jobs including & job specification
  • Determine different factors which will be the basis for evaluating each job. One these dimensions are selected, monetary values have to be attached to each of these jobs after proper assessments.
  • Classification of jobs – The monetary value of each job is a reflection of its contribution to the organization & its significance. Jobs are classified in sequential order on the basis of monetary values attached to them

Techniques of job evaluation

  • Ranking
  • Job classification or job grading point rating method
  • Factor comparison method
  • Decision band method

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Total compensation definition – Fixed or Base pay, variable pay,  Benifits

  • Fixed or base pay is non discretionary compensation that does not vary according to the performance or results achieved. This is composite of all components that are paid out to an employee irrespective of performance. It includes basic salary, retirement contributions, HRA, LTA and other allowances
  • Variable Pay- It can be short term variable pay or long term variable pay. This is composite of all components that are paid out to an employee subject to performance.
  • Benefits – Indirect non cash compensation paid to an employee. It include health & welfare plan, retirement plan & programs providing pay for time not worked. Some benefits are mandated by law & others vary by industry & organization


  • Basic salary (40 percent);
    • Mandated by law
    • Linked to PF & gratuity by law

Allowances (40 percent)

  • Allowances may offer tax relief – HRA, Conveyance
  • Reimbursement which also offer tax relief (Medical, LTA)

Perquisites (13 percent)

  • Cost of providing perquisites – , Car lease

Retirement/separation (7 percent)

  • Provident fund
  • Gratuity
  • Pension


Variable pay – compensation that is contingent upon discretion, performance or results achieved

Different variable Pay Plan are

  • Commissions
  • Bounces
  • Incentive plans
  • Profit sharing plan
  • Performance sharing plan


  • Time wage plan
  • Piece wage plan
  • Skill based pay
  • Competency based pay
  • Broad banding


  • Salary range structure
  • Leverage – The amount of increased or upside incentive opportunity that will be awarded for outstanding performance. This additional incentive opportunity is added to the base salary to determine total earnings ata defined level of excellence performance


  • Equity in the distribution of wages & salaries
  • What competing organizations & other spaying
  • Employee expectations &
  • Optimization of employee & management interests
  • Legal requirements.
    • Components of compensation structure – Fixed pay & Variable pay
    • Monetary & non monetary incentives
    • Guidelines for effective incentive plans
    • Employee Benifits


  • Job evaluation
  • What other companies are paying
  • What is paying capacity of your organization.
  • Accordingly decide, what compensation and band.
  • Components of compensation
    • Base pay
    • Variable pay, incentives


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Human Resource Management by Icfai Business School is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License, except where otherwise noted.

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