Chapter 6: Compensation

Introduction

The activities carried out to create economic goods and services are called production. Production means transforming inputs consisting of physical and human resources into outputs so as to meet peoples’ needs. ere appear the production factors within this context. As widely known, the fundamental production factors that make up economic activities are enterprise, labor, capital, and nature. e main purpose of these contributing factors is to generate income at the end of these economic activities.

Wage and Related Concepts

Wage is a fixed regular payment earned for work or services, typically paid on a daily or weekly basis. In order to make sure that the concept and structure of wage are better understood, it will be useful to explain some related concepts. ese concepts are:

Base pay : Base pay, which is also known as main or basic pay, is the amount of wage that is determined to be paid or that needs to be paid per production unit or time unit.

Bare wage and total earnings: Bare wage is the minimum amount (minimum wage) paid to the personnel in cash, i.e., the base wage.

Nominal and real wages: Nominal wages are the quantum of wages. Real wages are the purchasing power of the nominal wage calculated by considering the level of prices in the country.

Gross and net wages: Gross wages are the total wage paid to the personnel. Net wages are the wage received by the personnel after the deductions, such as income and stamp taxes, social security withholdings, amortizations of debt, if any, Personal Retirement Insurance (PRI) premiums, union dues, etc.

Wage level : It is the general average of the wages paid to the employees in an enterprise. For the year 2019, the minimum wage, which is the equivalent of one day normal work, is determined as 85.28 Turkish Liras by the Minimum Wage Determination Commission (Decree No. 2018/1 of 25.12.2018). is decision was published in the O Official Gazette dated 27.12.2018. Unemployment employer premium rate is 2%; SGK Employee premium rate is 20,5% (Non-subsidized), 15,5% (Subsidized).

Wage structure : Wage structure reveals how much a job should be paid compared to other jobs within the enterprise and includes all wage differences. e main factors affecting the wage structure are job analysis, job description, work study, job valuation and performance appraisal. e presence of these elements will help to ensure wage justice.

Wage payment systems : These are the systems that designate the methods of calculation and the payment of the wages.

Compensation management : It is an important human resources management function that includes the establishment and execution of a wage system that meets the expectations of both business management and staff. It requires a systematic and holistic approach. Talking about compensation management requires to know two concepts which are compensation and fair pay.

• 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 more than an employee’s regular paid wages. It also includes many other types of wages and benefits.
• Fair pay is pay that employees generally view as equitable.

Compensation management is a tool that businesses use for various purposes in order to sustain their assets. e most important ones of the objectives are to provide wage satisfaction and wage justice. There are four dimensions that should be taken into account in providing wage justice. These are;

• Internal equality
• External equality
• Individual equality
• Organizational equality

Basic Components of the Wage

The sum of all monetary and pecuniary benefits that are added to the base pay and provided to the employees as perquisites is called total earnings and wage in broad terms in calculation.

1. Benefits
2. Pay incentive

Benefits : This is a way of appraisal other than the base pay, which is paid to the employees in return for their contributions and labor. There are many different benefits paid in addition to the base pay. Some of these are:

• Benefits resulting from laws
• Paid time-off
• Housing allowance
• Employee discounts
• Medical insurance
• Disability insurance
• Life insurance
• Retirement benefits
• Fringe benefits

Pay incentive: This is a program designed to reward employees for good performance. The reward can be one of below:

• Premium
• Bonus
• Commission
• Share from profit or income
• Shareholding

Determinants of Wages Paid to Employees

There is no single scientifically accurate method for determining the wage to be paid to an employee. A wage management system will be perceived as more equitable by the employees the more it is based on systematic factors.

Employer as the Determiner of the Wage to be Paid

As the determiner of the wage to be paid to the employees, the employer makes decisions about:

1. wage policies,
2. wage strategies,
3. the organizational level of the decision-making executives
4. the ability to pay

Wage policy is a general plan that guides the decisions and actions to be taken by the management regarding wages in order to achieve predetermined goals. A policy is a set of principles that guide managers in making decisions. Pay policy identification is the process of determining whether the organization wants to lead, lag, or meet the market in compensation.

Wage strategy is a combination of payment options that enable the management to have a sanction to improve the performance of the organization and staff. e wage policy or strategy will likely influence employee attraction and retention.

Organizational level of the manager taking the decisions on wages has the potential to affect the result. The top management attaches importance to a consistent practice in general when making decisions about wages. However, going down to lower organizational levels, the managers have more opportunities to observe individual performances of the employees.

Employers’ ability to pay like external economic factors would directly influence the enterprises’ ability to pay. External economic conditions, such as national and international competition, inflation, or economic recession, would affect the level of wages to be paid by the enterprises. ese conditions may increase or decrease the wages, and thus, the remaining profit after paying the wages of the employees may increase or decrease.

Jobs as the Determinant of the Wage to be Paid

An employee’s job is one of the significant determinants of the wage to be paid to that employee. Jobs should be analyzed, and job definitions and requirements should be prepared accordingly and then they should be evaluated.

Job analysis is a detailed and systematic data collection technique regarding jobs. e data collected would be summarized in job definitions, which will serve as input in the job evaluation process. Job definitions are one of the key elements that determine the wage structure in a workbased wage system. Job descriptions, which are a critical element of both pricing and selection systems, provide a written definition of the tasks and responsibilities involved in the work, the qualifications to be held by the employee, the function of the job, the environmental conditions in which the work is performed, the hazards involved, the tools and machines used, and other aspects.

Job study allows the identification of inefficient and useless processes that need to be eliminated by using various methods. us, it provides the opportunity to utilize the labor, machinery, materials, and tools at the highest level of efficiency.

Job evaluation includes a systematic evaluation of job definitions. In this evaluation, the similarities and differences between the scopes and values of the jobs are compared. At the end of this comparison, jobs are put in a hierarchical order with regards to their values for the organization. There are two types of evaluation methods:

1. Nonnumeric job evaluation methods: They include ranking method and classification/grading method.
2. Numeric job evaluation methods: They include point-factor method among which he most commonly used job factors (compensable factors) are grouped into four main categories, namely skills (mastership-proficiency), responsibility, effort, and environmental conditions.

Employees as the Determinants of the Wage to Be Paid

When employees are thought as the determinants, the following factors are to be considered.

• Performance
• Knowledge, skills and competencies
• Experience
• Seniority

Labor Market as a Determinant of the Wage to Be Paid

The basic factors affecting the wage level are the following: supply-demand balance in the labor market, the prevailing wage levels in the market, living standards, economic factors, and collective bargaining. The other factors that should be taken into account are:

• Labor market conditions
• Cost of living
• Collective Bargaining
• Economy
• Laws

Compensation of Employees

The main approaches implemented in the compensation of the employees are:

1. Individual compensation,
2. Forming wage/compensation grades,
3. Wage/compensation bands.

Individual Compensation

In this approach, jobs are individually compensated according to their ranks, grades, or scores in accordance with the evaluation method used. So, there would be as many wage levels as the number of jobs within the enterprise. For example, if there are 200 different jobs in an enterprise, there would be 200 different wage levels.

Compensation Grades

In this approach, the employees are classified, and the steps in wage/compensation are created for each class. us, a ladder-like wage structure is developed, and this ensures that the jobs within the same category are paid equally.

Compensation Bands

According to this approach, jobs are divided into point intervals, and a wage range is determined for each point interval. The main factors to be considered in the process of creating wage/compensation bands are the number and height of bands and their positions with respect to one another. e number of bands is as many as the number of point intervals to be selected. e number of point intervals is determined in accordance with the agreements signed with the unions, the wage strategy and policies of the enterprise, and the distribution of jobs on the wage-point diagram.