COMPENSATION

PEOPLE IN ORGANIZATION

Rangga Irawan Prasetyo, MBA.

 Compensation
refers to all forms of financial returns and tangible
services and benefits employees receive as part
of an employment relationship.
RELATED ISSUES

o What is equity?

o Which components make up total reward and based on which

factors are these components determined?

o Under which conditions does money impact motivation for

performance?
RELATED ISSUES
Reward

o Distributive Equity
One’s performance reward relation
compared to others

o Procedural Equity
Do procedures to determine
compensation lead to fair results

Source: Prof. Armin Trost, Lecture on HRM. 2013

Performance/
Contribution to company success
THE BIG PICTURE, OR COMPENSATION CAN’T DO IT ALONE
THE CANDLE PROBLEM

You are given:

- a candle
- a box
- Thumbtacks
- a box of matches
Try to fix the lit candle to the wall so that it will
not drip wax onto the table below.

Time given <1 minute

Duncker, K. (1945). On problem solving. Psychological monograph 58

THE CANDLE PROBLEM

Time given <1 minute Actual >15 Minutes

 THE CANDLE PROBLEM FOR DUMMIES
You are given:
- a candle
- a box
- Thumbtacks
- a box of matches
Try to fix the lit candle to the wall so
that it will not drip wax onto the table
below.

Duncker, K. (1945). On problem solving. Psychological monograph 58

Rangga Irawan Prasetyo, MBA.

 TOTAL REWARDS

TOTAL REWARDS

TOTAL COMPENSATION RELATIONAL RETURNS

CASH Recognition & Learning

Status Opportunities
COMPENSATION BENEFIT
Employment Challenging
Security Work
Base Merit/Cost of Short-term Long-term Income Work/Life Allowance
Living Incentives Incentives Protection Balance

Source: Milkovich, et.al. 2014. Compensation. 11th Edition. The McGraw-Hill Companies

Rangga Irawan Prasetyo, MBA.

FACTORS DETERMINING COMPENSATION

Responsibility Strategic Relevance Performance

Qualification Market Company Success

Cost of Living Civil Status Tenure

FACTORS RELATED TO SALARY
RANGE OF COMPETITIVENESS
 STRATEGIC CHOICE
Corporate objectives,
• What business
strategic plans,
should we be in?
vision, and values

• How do we win (gain

Business unit
competitive advantage)?
strategies
In those business?

• How should HR help us win? HR strategies

• How should total Social, competitive, Strategic

compensation help and regulatory compensation
us win? environment decisions

Compensation
system

Employee attitudes
and behaviors

Competitive
advantage

Rangga Irawan Prasetyo, MBA. People in Organization - Compensation SBM ITB 19 February 2020
 TAILOR THE COMPENSATION SYSTEM TO THE STRATEGY

Strategy Business Response HR Program Alignment Compensation

Innovator: Increase • Product Leadership
Product Complexity and • Shift to Mass
Shorten Product Life Customization
Cycle • Cycle Time
Cost Cutter: Focus on • Operational Excellence
Efficiency • Pursue Cost-Effective
Solutions
Customer Focused: • Deliver Solutions to
Increase Customer Customers
Expectations • Speed to Market
• Committed to Agile, • Rewards Innovation in
Risk-Taking, Innovative Product and Processes
People • Market-Based Pay
• Flexible-Generic Job
Description
• Do More with Less • Focus on Competitors
Labor Cost
• Increase Variable Pay
• Emphasize Productivity
• Focus on System
Control and Work
Specifications
• Delight Customer, • Customer Satisfaction
Exceed Expectations Incentives
• Value of Job and Skills
Based on Customer
Contract

Rangga Irawan Prasetyo, MBA. People in Organization - Compensation SBM ITB 19 February 2020
DEVELOPMENT OF A BASE PAY SYSTEM

Job Analysis

Job Evaluation Pay Survey

Pay Policies Pay Structures

Job Appointment Individual Pay

Implementation,
Communication,
Monitoring

Source: Mathis & Jackson. Human Resource Management

JOB EVALUATION (HAY POINT SYSTEM)

• Practical/Technical • Thinking • Freedom to Act

Knowledge Environment
• Nature of Impact
• Planning, • Thinking
Organizing and Challenge • Area of Impact
Integrating (Magnitude)
(Managerial)
Knowledge

• Communicating
and Influencing
Skills

Source: 2015. Hay Group

COMPENSABLE FACTORS – HAY POINT SYSTEM

Functional Expertise 8

Knowledge Managerial Skills 7

Human Relation 3

Environment 8
Problem Solving

Challenge 5

Freedom to act 8

Accountability Impact on end results 4

Magnitude 8

Source: Prof. Armin Trost, Lecture on HRM. 2013

JOB EVALUATION
Example Consulting Company

`
Junior Senior
Assistant Project Lead Manager
Consultant Consultant
Requirements Weight Rating* Value Rating Value Rating Value Rating Value Rating Value
Knowledge 2 2 4 4 8 8 16 6 12 4 8
Leadership 3 0 0 0 0 2 6 4 12 8 24
Budget Responsilbility 1,5 0 0 0 0 0 0 4 6 10 15
Responsibility for Results 3 2 6 2 6 4 12 6 18 10 30
Cognitive Challenges 2 3 6 4 8 6 12 6 12 6 12
Mobility 1 2 2 7 7 7 7 8 8 5 5
Strategic Impact 2 2 4 1 2 2 4 3 6 8 16
Job Value 22 31 57 74 110
*Scale ranking from 0 (=does absolutely not apply) to 10 (=totally applies)

Source: Prof. Armin Trost, Lecture on HRM. 2013

OPPORTUNITIES AND THREATS OF JOB
EVALUATION AND BASE PAY STRUCTURES
Opportunities
o Common foundation for
compensation-related decisions
o Job-related distributive and
procedural equity
o Transparency of compensation-
related decisions
o Active elaboration of job values
and contribution to company’s
success
Threats
o Significant bureaucracy during
implementation
o Acceptance of all stakeholders
involved
o Requires clear job definitions
o Reduce flexibility of
compensation-related decisions
o May reduce innovation and
employee engagement
One-Time Bonuses

o A one-time bonus is a one-time payment that does not become part of

the employee’s base pay

o Can be used to reward employees for contributing new ideas, coping

with critical challenges, acquiring new skills

o Bonuses usually recognize performance of both the employer and the

company

o Bonuses provide great flexibility in rewarding valued behaviours at

particular situations
PAY FOR ORGANIZATIONAL PERFORMANCE

o Profit Sharing
Proportions of organizational are distributed among employees according to
their base pay

o Employee Stock Ownership

Giving employees stock ownership of the organization or the right to acquire
stocks at a price below market.
Employees must keep stocks for a specific period

o Employee Stock Options

The right to buy (exercise) a certain number of shares of stocks at a specific
price
TYPE OF BENEFITS

o Security o Financial
- Unemployment compensation
- Life insurance
- Disability insurance
- Early retirement options
- Disability retirement benefits
- Pension Plans
o Health
- Health-Care Insurance
- Sabbatical
- Free tennis courts, fitness center usage
- Medical care
- Psychiatric counselling
- Interest-free building loan
- Company credits
- Financial counselling
o Offerings
- Company car
- Private cell phone, laptop usage
- Cafeteria and food services
- Child-care; Company Kindergarten
- Cost advantages for company products
- Company accommodations
FLEXIBLE BENEFITS (CAFETARIA SYSTEM)

o Flexible Benefit Plan

A plan that allows employees to select the benefits they prefer from groups of
benefits established by the employer

o Planning, Organizing and Integrating (Managerial) Knowledge

- Perceived value of benefits depend on employees’ age, family status etc.
- By tailoring the right benefit package employees gain maximum value without
additional costs on employer’s side
- Flex plan heighten employees' awareness of the costs and value benefits
offered

o Communicating and Influencing Skills

- Inappropriate benefits package choices
- Adverse use of specific benefits by higher-risk employees
- Administrative and communication efforts
- Benefit requests are hard to predict
REASONS WHY COMPANIES OFFER BENEFITS

o Benefit attempt to employees and their dependents from financial

risks associated with illness, disability, and unemployment.

o Most benefits are not taxed. For this reason, they might represent a
more valuable reward to employees than an equivalent cash payment

o Benefits may contribute attracting, motivating and retaining human

resources

o Some benefits add value to employee without additional costs for the
employer. As such, benefits might serve as substitutes for financial
compensation

o Some benefit are required by law

Pay Scale & Structure
METHODS OF STRUCTURING PAY SCALE & STRUCTURE

SIMPLE RANKING METHOD

TWO POINTS METHOD

POINT FACTOR METHOD

 Simple Ranking Methods
STEP 1
Determine the position
and job description of
each position
STEP 2 STEP 3 STEP 4 STEP 5
Make a list of positions Create a Salary structure Determine the lowest Determine the highest
and sort by job wage for the lowest wage for the lowest
description from the and scale table that position position
easiest to the most consists of the position
difficult column, the occupational
class, the smallest wage,
and the biggest wage

The
1. Admin: Memastikan administrasi dan laporan tersedia tepat waktu Smallest Wage Highest Wage
Jabatan Class
(Rp) (Rp)
Position
2. PA & Room Att.: Memastikan kebersihan di area public area dan kamar
Admin 1 2,850,000,- 3,350,000,-
3. FDA: Memastikan pelayanan terhadap tamu cek in sesuai standar layanan PA & Room
2
Att.
4. Sales Executive: Memastikan pencapaian target revenue hotel
FDA 3
5. CDP: Memastikan makanan yang tersedia memiliki rasa yang enak, kualitas bagus, food cost terjaga
Sales
6. FB Supervisor: Memastikan segala aktivitas meeting, resto dapat dilaksanakan dengan baik 4
Executive

7. Hotel Manager: Memastikan segala aktivitas sales & operasional sesuai target CDP 5

FB Supervisor 6

Hotel
7
Manager
Simple Ranking Methods

STEP 6 STEP 7 STEP 8

Determine the lowest
wage and highest wage
for subsequent positions
by following STEP 4 & 5
Enter the smallest wage Determine the Class
and the largest wage for Position for each position
each position in the
Wage Structure and
Scale Table

The Class Smallest Wage Highest Wage The Class Smallest Wage Highest Wage
Jabatan Jabatan
Position (Rp) (Rp) Position (Rp) (Rp)

Admin 1 2,850,000,- 3,350,000,- Admin

PA & Room Att. 2 2,950,000,- 3,450,000,- PA & Room Att. 1 2,850,000,- 3,627,000,-

FDA 3 3,100,000,- 3,627,000,- FDA

Sales Executive 4 3,300,000,- 3.960.000 Sales Executive 2 3,300,000,- 3.960.000

CDP 5 4.000.000 5.200.000 CDP 3 4.000.000 5.200.000

FB Supervisor 6 5.000.000 7.000.000 FB Supervisor 4 5.000.000 7.000.000

Hotel Manager 7 8.000.000 12.000.000 Hotel Manager 5 8.000.000 12.000.000

TWO POINTS METHOD

ne
Li
li cy
Salary (Y-Axis)

Po e
ry Lin
ala y
S l ic
y Po
lar
Sa

F
C Polic y Line
Salary

A
E

Job Classification/Group (X-Axis)

TWO POINTS METHOD

MAX B
e
c tur
tr u
MAX
yS MIN
lar
Sa Salary Scale
MAX MIN
Salary (Y-Axis)

MID
MAX MIN MID
MAX MIN
MID
MAX MIN
MID
e
MAX y Lin
MIN MID l ic
y Po
lar
MIN Sa
MID

MID
A

Job Classification/Group (X-Axis)

 TWO POINTS METHOD (PRACTICE)
STEP 1 STEP 2 STEP 3 STEP 4
Prepare a list of positions Sort wages from the Identify lowest wages Determine the number of
and wages consisting of lowest to the highest and highest wages class positions
columns of serial
numbers, names,
positions and wages

No Name Position Wadge (Rp) No Name Position Wadge (Rp) Job Class
1 Nama JJ Kasir minimarket 2.100.000,00
1 Nama AA Office boy 1.575.000,00 1
2 Nama AA Office boy 1.575.000,00
2 Nama HH Supir 1.800.000,00 2 Nomor Urut Job Group
3 Nama HH Supir 1.800.000,00
3 Nama BB Satpam 1.800.000,00 2
4 Nama BB Satpam 1.800.000,00 4 Nama CC Satpam 1.800.000,00 2
5 Nama CC Satpam 1.800.000,00 1 1
5 Nama EE Staf administrasi logistik 1.800.000,00 2
6 Nama MM Staf logistik 2.100.000,00 6 Nama FF Staf administrasi minimarket 1.800.000,00 2
7 Nama EE Staf administrasi logistik 1.800.000,00 7 Nama GG Staf administrasi minimarket 1.800.000,00 2 2 -8 2
8 Nama FF Staf administrasi minimarket 1.800.000,00 8 Nama DD Satpam 1.800.000,00 2
9 Nama GG Staf administrasi minimarket 1.800.000,00 9 Nama MM Staf logistik 2.100.000,00 3 9 -15 3
10 Nama UU Asisten Minimarket 3.000.000,00 10 Nama II Kasir 2.100.000,00 3
11 Nama II Kasir 2.100.000,00 11 Nama KK Kasir minimarket 2.100.000,00 3
12 Nama DD Satpam 1.800.000,00 12 Nama LL Staf administrasi pembelian 2.100.000,00 3
16 - 22 4
13 Nama KK Kasir minimarket 2.100.000,00 13 Nama NN Staf logistik 2.100.000,00 3
14 Nama LL Staf administrasi pembelian 2.100.000,00 14 Nama OO Staf umum 2.100.000,00 3 23 - 24 5
15 Nama AB Kepala minimarket 7.000.000,00 15 Nama JJ Kasir minimarket 2.100.000,00 3
16 Nama NN Staf logistik 2.100.000,00 16 Nama PP Staf IT 2.550.000,00 4 25 - 30 6
17 Nama OO Staf umum 2.100.000,00 17 Nama QQ Staf marketing 2.550.000,00 4
18 Nama PP Staf IT 2.550.000,00 18 Nama RR Staf promosi 2.550.000,00 4
19 Nama QQ Staf marketing 2.550.000,00 19 Nama SS Staf SDM 2.550.000,00 4
31 7
20 Nama RR Staf promosi 2.550.000,00 20 Nama UU Asisten Minimarket 3.000.000,00 4
21 Nama AE Kepala akunting dan IT 8.000.000,00 21 Nama TT Asisten minimarket 3.000.000,00 4
22 Nama TT Asisten minimarket 3.000.000,00
Range of Job Group
22 Nama VV Staf akunting 3.000.000,00 4
23 Nama AF General manager 15.000.000,00 23 Nama WW Supervisor IT 5.000.000,00 5 Nomor Urut Job Classification Job Group Range
24 Nama VV Staf akunting 3.000.000,00 24 Nama XX Supervisor pembelian 5.000.000,00 5 1 - 22 Staff 1-4 40%
25 Nama WW Supervisor IT 5.000.000,00 25 Nama AB Kepala minimarket 7.000.000,00 6 23 - 24 Supervisory 5 70%
26 Nama XX Supervisor pembelian 5.000.000,00 26 Nama YY Kepala marketing 7.000.000,00 6
25 - 31 Managerial 6-7 10%
27 Nama YY Kepala marketing 7.000.000,00 27 Nama ZZ Kepala minimarket 7.000.000,00 6
28 Nama ZZ Kepala minimarket 7.000.000,00 28 Nama AC Kepala logistik 7.500.000,00 6
29 Nama SS Staf SDM 2.550.000,00 29 Nama AD Kepala SDM dan umum 7.500.000,00 6
30 Nama AC Kepala logistik 7.500.000,00 30 Nama AE Kepala akunting dan IT 8.000.000,00 6
31 Nama AD Kepala SDM dan umum 7.500.000,00 31 Nama AF General manager 15.000.000,00 7
 TWO POINTS METHOD (PRACTICE)
STEP 5 STEP 6 STEP 7 STEP 8 STEP 9
Create a Wage Determine the range for Use the lowest wage Calculate the middle Calculate the smallest
Structure and Scale each job class equal to the lowest wage between the wage and the largest
table format consisting middle wage, and the lowest middle wage wage for each
of a range column, Job highest wage equal to and the highest middle Occupation Group by
Class, smallest wage, the highest middle wage using the straight- using the formulas in
middle wage, and wage line equation formula the Wage Scale
largest wage. Enter the Y = a + b (x) Formula Table
job class that has been
grouped in STEP 3 into
the job class column
TWO POINTS METHOD (EXCEL practice)
POINT FACTOR METHOD

DETERMINE
JOB JOB SALARY
ANALYSIS EVALUATION STRUCTURE
AND SCALE
 STEPS FOR DETERMINE SALARY STRUCTURE & SCALE

STEP 1 STEP 2 STEP 3 STEP 4

Make a Factor Table Determine the number of Create a total points and Determine the range for
consisting of positions based on the job group Interval Table each class of position
compensation factors interval of total points. based on the Range
and compensation factor (Number of intervals = Table
derivatives. Determine Number of job group)
the lower limit of the
smallest total points and
the upper limit of the
largest total points

STEP 5 STEP 6 STEP 7 STEP 8

Create a wage structure Determine the lowest
and scale table with a middle wage (groupings
range of positions that have the
smallest total points)
Calculate all middle Calculate the smallest
wages that are between wage and the highest
the lowest middle wage wage for each
and the highest middle Occupation Group by
wage using the straight- using the formulas in the
line equation: Wage Scale Formula
Y = a + b (X) Table
STEP 1 - COMPENSABLE FACTOR
STEP 1 - COMPENSABLE FACTOR
Compensable Factor Level Penilaian
1 SD
2 SMP
Pengetahuan
3 SMP
(Tingkat Pendidikan)
4 Diploma
5 Strata 1
Keahlian
1 < 1 tahun
2 1 s.d 2 tahun
Pengalaman
3 3 s.d 6 tahun
(Lama Bekerja)
4 7 s.d 10 tahun
5 > 10 tahun
1
2
Fisik Seberapa tinggi Pekerja/Buruh mengalami kelelahan fisik (banyak menggunakan tenaga fisik) ketika melakukan pekerjaannya. Pada
3
Umumnya semakin rendah posisi di struktur organisasi, semakin besar poinnya
4
5
Usaha
1
2
Seberapa tinggi Pekerja/Buruh mengalami kelelahan mental ketika melakukan pekerjaannya. Pada umumnya semakin tinggi posisi
Mental 3
di struktur organisasi, semakin besar tingkat poinnya
4
5
STEP 1 - COMPENSABLE FACTOR
Compensable Factor Level Penilaian
1
2 Kewenangan dalam membuat keputusan atau ketentuan sesuai bidangnya. Semakin tinggi jabatan dalam struktur organisasi,
Peraturan 3 semakin besar poin untuk jabatan tersebut. Secara umum, turunan faktor ini dimiliki oleh jabatan-jabatan yang mempunyai
4 tanggung jawab mengelola unit kerja (posisi struktural) seperti supervisor, manager dan seterusnya
5
Tanggung Jawab
1
Kewenangan dalam mengelola keuangan sesuai kapasitasnya. Semakin tinggi jabatan dalam struktur organisasi, semakin besar
2
poin untuk jabatan tersebut. Secara umum, turunan faktor ini dimiliki oleh jabatan-jabatan yang mempunyai tanggung jawab
Keuangan 3
mengelola unit kerja (posisi struktural) seperti, manager keuangan perusahaan, manager yang mengelola keuangan perusahaan,
4
manager yang mengelola keuangan pada unit masing-masing dan sebagainya
5
1
2
Tingkat kenyamanan bekerja. Secara umum, semakin tinggi posisi jabatan itu dalam struktur organisasi, semakin kecil poinnya.
Kondisi Kerja 3
Semakin rendah posisi dalam struktur organisasi, semakin besar poinnya
4
Lingkungan 5
Kerja 1
2
Tingkat risiko kecelakaan kerja yang kemungkinan dialami oleh Pekerja/Buruh. Secara umum, semakin tinggi posisi jabatan dalam
Lingkungan Kerja 3
struktur organisasi, semakin kecil poinnya. Semakin rendah posisi dalam struktur organisasi, semakin besar poinnya
4
5
STEP 2 - 4

Dari perhitungan di atas maka jumlah golongan jabatan 8

PAY SCALE TABLE

Upah Terkecil Upah Terbesar Rentang Upah Tengah

(Min) (Max) (Spread) (Mid)
Diketahui Diketahui (Max – Min) x 100% ( Max + Min )
Min 2
Diketahui Min x (Spread + 1) Diketahui Min x ( Spread + 2 )
2
Diketahui (2 x Mid) – Min 2 x ( Mid – Min ) Diketahui
Min
Max Diketahui Diketahui Max x ( Spread + 2)
Spread + 2 2 x (Spread + 1)
(2 x Mid) – Max Diketahui 2 ( Max – Mid ) Diketahui
(2 x Mid) – Max
2xMid (2 x Mid) (Spread + 1) Diketahui Diketahui
Spread + 2 (Spread + 2)
STEP 5 - 9