History and Components of

Compensation

Nekoh Dela Cerna

 Compensation Handbook
Authors: Milton N. Rock
Lance A. Berger
 Learning Objectives

• Introduction and brief history of

compensation;
• Compensation management,
– What is compensation management?
– How compensation works?
• Discuss the basic components of
compensation program;
• Understand the compensation structure of
the Philippines.
 History of Compensation (world)

• The Nippur tablet No. 3191 from ancient

Sumeria outlines the law of Ur-Nammu, king
of the state of Ur. The law of Ur provided
compensation for specific injury to workers. It
dates to approximately 2050 B.C.
• In ancient Egypt the remuneration of workers
is in the form of bread, beer, grain, meat and
cloth rations, which were the necessities of
life.
 Compensation Management

• Compensation- Compensation is the total

cash and non-cash payments that you give to
an employee in exchange for the work they
do for your business. Compensation is one of
the biggest expenses for businesses with
employees. Compensation is more than an
employee’s regular paid wages. It also
includes many other types of wages and
benefits.
 Compensation Management
• Credited as the most influential person in the
human resources profession, Edward N. Hay
laid the foundation for 20th-century
compensation management and pioneered
many of today's people management
practices.
• Hay acknowledged the need for a consistent
salary-administration system to facilitate job
evaluation, ranking, and pricing. Evaluated
and ranked jobs according to several
variables: know-how, accountability, working
conditions, physical effort and problem
solving.
 Compensation Management
• A segment of human resource management
focusing on planning, organizing, and
controlling the direct and indirect payments
employees received for the work they
perform.
• The ultimate goal of compensation
management are; efficient maintenance and
productive workers, equitable pay, and
compliance with the federal, state and local
regulations based on what companies could
afford.
 Compensation Management

• It helps the organization achieve employee

satisfaction. A happy employee will be more
productive, while contributing to the overall
profit of the business.
• This stabilizes the labor turnover rate as
employees get compensated for their work at
a competitive market rate.
• It is a practice which helps to improve the
relationship of the company with the labor
union, as it allows the compliance of different
labor laws and acts
 How it works?

The basic concept of compensation

management is rather simple: employees
perform task for the employers and so
companies pay employee wages for the job
they do.
 Employee’s perspective

• A compensation is an exchange or a
transaction, from which both parties
employee and employer benefit: both parties
receive something for giving something.
 Employer’s perspective

• Compensation is an issue of affordability

and employee satisfaction.
Basic Components of Compensation
Program

• A pay program may include the four(4)

following components: base pay, wage and
salary add-ons, incentive payments, and
benefits and services.
Basic Components of Compensation
Program
1. Base pay is either wage or salary
 The basic amount of money that someone is
paid for doing a job, not including any extra
amounts such as overtime payments or
bonuses.
• Example. Php396.00 is your daily wage for 8
hours and in a month you receive 10, 296 for
26 days.
Basic Components of Compensation
Program

2. Wage and salary add-ons

 Include Cost of Living adjustments
(COLA),overtime, holiday and other premium
wages, travel and apparel/ Clothing
allowances, and a host of related forms of
premiums and reimbursements.
Basic Components of Compensation
Program
3. Incentive payments
 Refers to fund employees receive for meeting
the performance output goals as well as to
seniority and merit pay.
 Commissions
 Merit Pay
 Incentive Benefits
Basic Components of Compensation
Program
4. Benefits and services
 Any benefits that the employee receive in
addition to direct remuneration.
• Fringe Benefits Employee services
 Employee security 1. Housing services
 Safety benefits 2. Eating Facilities
 Health benefits 3. Transportation
 Maternity benefits 4. Cafeteria services
 8 components of an effective
employee compensation plan
1.Statement of overall objectives
This should explain how the rewards program supports
the needs of the business, employees, shareholders
and/or customers.
2.Relative importance of compensation
The compensation plan should explain how the
rewards compare with other company identifiers.
3.Performance measures
The compensation plan should identify the
performance criteria to be rewarded and should define
the measurement levels. It should outline the degree
that rewards are expected to drive employee actions.
 8 components of an effective
employee compensation plan
4.Competitive reference points
The plan should describe the comparative
group for your rewards package. This might be
your industry and/or geographic competitors.
5.Competitive positioning
Describe your desired position vs. the market
described in the last point. For example, do you
want to provide salaries consistent with the
industry average? Or do you want to establish
yourself as a company who provides premium
pay over the competition? No matter your
position, be transparent and state the intent.
 8 components of an effective
employee compensation plan
6.Internal equity and consistency
Will your strategy be consistent? Will it apply to all
employee groups? Employees will look for fair and
uniform treatment without favoritism between
groups.
7.Communication and involvement of employees
How much program information will be disclosed?
8.Governance The program should be reviewed and
refreshed; the frequency and responsibility for review
needs to be established up front.
 Compensation Structure in the
Philippines

The labor code of the Philippines, otherwise

known as the Presidential Decree No. 442,
governs all employee-employer relations, their
rights, and obligations.
 Compensation Structure in the
Philippines

1. Minimum wage
• 1965-1986 by the Marcos Administration.
- for almost 20 years the minimum wage
increased a total of 12 times. Increase were
dependent on certain factors, such as location
and type of work.
 Compensation Structure in the
Philippines

Republic Act. No. 6727 on the Wage

Rationalize Act, sets the minimum wage rates
applicable per region, province, and industry
sector. The industry sector are: non agriculture,
agriculture(plantation and non-plantation),
cottage and bandicraft, retail and service
sector.
• Example: Minimum Wage
– Formula (Hourly rate* hours of work)

(40 hourly rate*8 hours)

=Php320.00
 Compensation Structure in the
Philippines

2. Overtime
 Regular workday: plus 25% of the hourly rate
 Rest day, regular/special holiday: plus 30% of
the hourly rate.
• Example A: Overtime pay
– Hourly rate: Php57.00
– Overtime- 1 hour
Formula ( hourly rate * 1.25%)
(Php57.00* 1.25%)
= Php 71.25

• On rest day overtime pay * 1.69%

• On special holiday overtime pay *1.69%
• On special holiday at the same time rest day *
1.95%
 Compensation Structure in the
Philippines
3. Premium pay
 For non working days ( rest days/special
holidays)
 On a rest day or special holidays the
employee is entitled to an additional 30% of
his daily basic rate.
 On a rest day which is also a special holiday
employee is entitled to an additional 50% of
his daily basic rate.
 Compensation Structure in the
Philippines
4. Holiday pay
 If worked is accomplished on regular holiday
( up to 8 hours) an employee is entitled to at
least twice (200%) of his basic rate and if the
holiday corresponds to a scheduled of rest
day the employee is entitled to an additional
30% based pay.
• Example A
– Hourly rate:Php57.00
– Working hours: 8 hours
– Holiday pay’ 200%

– Formula: (hourly rate* holiday pay* 8hours)

– (Php57.00*200%*8hours)
= Php 912.00
 Compensation Structure in the
Philippines

5. Night Shift Differential

 For work done between the hours of 10pm to
6am, employees are entitled for night shift
differential (NSD), which represents an
additional 10% to the regular wage for each
hour of work performed.
 Compensation Structure in the
Philippines
6. Service Charges
 Employees of employers collecting service
charges are entitled to equal share In the
85% of the total of such charges, except
managerial employees. The remaining 15%
of the charges may be retained by the
management to answer for losses and
breakages and for distribution to managerial
employee.
 Compensation Structure in the
Philippines

7. Service Incentive Leave

 Every employee who has rendered at least
one (1) year of service is entitled to a Service
Incentive Leave (SIL) of five (5) days with
pay. It may be used for sick and vacation
leave.
 Compensation Structure in the
Philippines

8. Parental leaves
 The labor code of the Philippines covers
three different types of parental leaves;
maternity leave, paternity leave, and solo-
parent leave.
 Compensation Structure in the
Philippines
• The recently-signed Republic Act (RA) No.
11210 or the Expanded Maternity Leave Act
not only gives mothers up to 105 days or 3
months of maternal leave, it also entitles
fathers to 14 days of paid leave.
• Article II, Section 6, of the new law allows any
female worker who will avail of maternity
leave to transfer up to 7 of her 105 days of
paid leave to the child’s father, whether they
are married or not. Signed on Wednesday,
February 20, RA 11210
• • Solo Parent Leave: Seven (7) working days
 Compensation Structure in the
Philippines
9. Other Leave
• You are qualified for the Magna Carta Special Leave
Benefit for Surgery to Treat a Gynecological
Disorder
1. You are entitled to a PAID leave of up to 60 calendar
days.
2. Major surgery entitles you to 22 to 60 calendar days.
3. Minor surgery entitles you to 14 calendar days or
less.

• Leave for Victims of Violence against Women and

Their Children: Ten (10) days leave benefit shall
cover the days that the woman employee has to
attend to medical and legal concerns.
 Compensation Structure in the
Philippines
11. Separation pay
 Following the Labor Code of the Philippines , Article 283 and
284 of the cases of legal termination or valid termination due
to authorized causes namely: installation of labor –saving
devices or redundancy (separation pay is to at least one (1)
month pay or to at least one (1) month pay for every year of
service, whichever is higher),

 Retrenchment to prevent losses or the closing or cessation of

operation of the establishment or undertaking (separation pay
is equivalent to one (1) month pay or at least one-half (1/2)
month pay for every year of service, whichever is higher)
(Article 283) and if an employee is suffering from any disease
and whose continued employment is prohibited by law or is
prejudicial to his health as well as to the health of his co-
employees (Art. 284)
Example A : installation of labor
Salary: Php20, 000
Years of employment: 5 years
Formula:(Salary *years of employment)

Computation: (Php20, 000 salary* 5 years)

=Php100, 000
Example B : Cessation of operation
Salary: Php8, 000
Years of employment: 3 years
Formula:{(Salary /1/2)* Years of employment}

Computation: {(Php8, 000 salary /1/2)*3 years}

= Php12, 000
 Compensation Structure in the
Philippines
10. 13 Month Pay
 Under the presidential decree No. 851,
employers from the private sector in the
Philippines are required to pay their rank-
and-file employees a Thirteenth 13th Month
Pay not later than December 24 every year.
The 13th month pay is equivalent to one
twelfth (1/12) of an employee’s basic annual
salary.
Example: an employee basic salary is Php15,
000 per month and had worked for 10 months,
the 13th month computation is:

Formula:(Basic salary*months)/ 12 months

(Php15, 000 * 10 months) / 12= Php12, 500

 Compensation Structure in the
Philippines
12. Retirement Pay
All employees from the private sector may
retire from the age of 60 up to age 65, at
which retirement is compulsory, and must
have served the establishment for at least
5 years.
Example A: Minimum Retirement Pay
• Salary- Php30, 000
• Years of employment- 35 years

• Formula:(latest daily rate*22.5 days per

month)* number of years in service
• Computation: {(Php1, 000*22.5)* 35}
=Php787, 500