BDCM4103 Introductory Compensation Management - Eaug20

BDCM4103
Introductory Compensation Management
Copyright © Open University Malaysia (OUM)

BDCM4103
INTRODUCTORY
COMPENSATION
MANAGEMENT
Mohd Faizal Mohd Isa
Wan Shakizah Wan Mohd Noor
Johanim Johari

Project Directors: Prof Dr Widad Othman
Prof Dr Shamsul Nahar Abdullah
Open University Malaysia
Module Writers: Mohd Faizal Mohd Isa

Wan Shakizah Wan Mohd Noor
Johanim Johari
Universiti Utara MalaysiaPro
Moderators: Prof Dr Shaari Abd Hamid

Lilian Kek Siew Yick
Enhancer: Dr Zabedah Othman
Developed by: Centre for Instructional Design and Technology

First Edition, April 2008

Second Edition, August 2020 (MREP)
Copyright © Open University Malaysia (OUM), August 2020, BDCM4103
All rights reserved. No part of this work may be reproduced in any form or by any means without
the written permission of the President, Open University Malaysia (OUM).

Table of Contents
Course Guide ix–xiii
Topic 1 Introduction to Compensation System 1

1.1 Definition of Compensation 2
1.2 Types of Compensation 4
1.3 Compensation and Organisational Strategy 7
1.4 Compensation System 9
1.5 Compensation Dimensions 10
1.6 Non-compensation System 13
1.7 Compensation Programme 18
1.8 Wage Rate Determination 20
Summary 24
Key Terms 25
Self-Test 1 25
Self-Test 2 27
References 29
Topic 2 Role of Legislation in Compensation Management 30

2.1 Legislative Process 31
2.2 Key Elements in Wage Reformation System 32
2.3 Models of Wage Reformation System 33
2.4 Relationship between Legislation and Compensation 36
Management
2.4.1 Employment Act 1955 36
2.4.2 WorkmenÊs Compensation Act 1952 39
2.4.3 Industrial Relations Act 1967 40
2.4.4 Payment System 44
2.4.5 Job Security 44
2.4.6 Overstaffing and Retrenchment 44
2.4.7 Collective Bargaining 46
2.4.8 Collective Agreement 46
2.5 Importance of Legislation in Salary and Wage Rate 47
Determination
2.6 Legislative Control Over Salary and Wage Rate 50
Determination

iv  TABLE OF CONTENTS
Summary 50
Key Terms 51
Self-Test 1 51
Self-Test 2 52
References 53
Topic 3 Job Analysis 54

3.1 Definition of Job Analysis 55
3.2 Importance of Job Analysis 56
3.3 Objectives of Job Analysis 58
3.4 Information Contained in a Job Analysis 60
3.5 Job Analysis Process 62
3.5.1 Determining the Job to be Analysed 64
3.5.2 Choosing the Job Analysis Method 64
3.5.3 Handling Job Analysis 65
3.6 Mistakes in Job Analysis 66
Summary 67
Key Terms 67
Self-Test 1 67
Self-Test 2 68
References 69
Topic 4 Job Description 70

4.1 Definition of Job Description 71
4.2 Importance of Job Description 73
4.3 Important Components in a Job Description 76
4.4 Steps in the Groundwork Process for Creating a 79
Job Description
4.5 Job Description Process 82
4.6 Job Description Format 84
Summary 86
Key Terms 87
Self-Test 1 87
Self-Test 2 88

TABLE OF CONTENTS  v
Topic 5 Job Evaluation 90

5.1 Definition of Job Evaluation 91
5.2 Importance of Job Evaluation 93
5.3 Job Evaluation Process 94
5.4 Job Evaluation Methods 97
5.4.1 Quantitative Methods 98
5.4.2 Non-quantitative Methods 103
5.5 Issues in Implementing Job Evaluation 104
Summary 106
Key Terms 106
Self-Test 1 106
Self-Test 2 107
References 108
Topic 6 Formation of Wage Structure 109

6.1 Compensation Management 110
6.2 Wage Structure Formation Process 113
6.3 Types of Wage Payments 119
6.3.1 Wage Payment Based on Skills 119
6.3.2 Wage Payment Based on Knowledge 120
6.3.3 Wage Payment Based on Efficiency 121
6.3.4 Wage Payment Based on Seniority 122
Summary 123
Key Terms 123
Self-Test 1 124
Self-Test 2 124
Topic 7 Short-term and Long-term Incentive Plans 126

7.1 Definition of Incentive Payment 127
7.2 Designing an Incentive Payment Plan 128
7.3 Short-term Incentive Plan 129
7.3.1 Individual Incentive Plan 131
7.3.2 Group Incentive Plan 135
7.3.3 Organisational Incentive Plan 141
7.4 Long-term Incentive Plan 143
7.4.1 EmployeeÊs Social Class 144
7.4.2 Tax Legislation 145
7.4.3 Designing a Long-term Incentive Plan 146
7.5 Types of Long-term Incentive Plans 147
7.5.1 Qualified Deferred Compensation 147

vi  TABLE OF CONTENTS
Summary 150
Key Terms 150
Self-Test 1 151
Self-Test 2 152
References 152
Topic 8 Benefits and Services 154

8.1 Definition of Employee Benefits and Services 155
8.2 Employee Benefits 156
8.2.1 Classifications of Employee Benefits 156
8.3 Employee Services 158
8.4 Flexible Benefits Compensation Plan 162
8.4.1 Appreciation towards EmployerÊs Interest 163
8.4.2 Employee Expectation and Priority 164
8.4.3 Developing a Flexible Benefits Plan 165
8.5 Issues for Consideration in Designing a Flexible 166
Benefits Plan
Summary 167
Key Terms 167
Self-Test 1 168
Self-Test 2 168
Reference 169
Answers 170
References 186

COURSE GUIDE

COURSE GUIDE  ix
COURSE GUIDE DESCRIPTION

You must read this Course Guide carefully from the beginning to the end. It tells
you briefly, what the course is about and how you can work your way through the
course material. It also suggests the amount of time you are likely to spend in order
to complete the course successfully. Please keep referring to Course Guide as you
go through the course material as it will help you to clarify important study
components or points that you might miss or overlook.
INTRODUCTION
BDCM4103 Introductory Compensation Management is one of the courses offered
at Open University Malaysia (OUM). This course is worth three credit hours and
should be covered over 15 weeks.
COURSE AUDIENCE
This is an elective course for learners undertaking the Diploma in Management
majoring in Human Resource Management and Diploma in Human Resource
Management.
As an open and distance learner, you should be acquainted with learning

independently and being able to optimise the learning modes and environment
available to you. Before you begin this course, please ensure that you have the right
course material and understand the course requirements as well as how the course
is conducted.
STUDY SCHEDULE
It is a standard OUM practice that learners accumulate 40 study hours for every
credit hour. As such, for a three-credit hour course, you are expected to spend
120 study hours. Table 1 gives an estimation of how the 120 study hours could be
accumulated.

x  COURSE GUIDE
Table 1: Estimation of Time Accumulation of Study Hours
Study
Study Activities
Hours
Briefly go through the course content and participate in initial discussion 3
Study the module 60
Attend 3 to 5 tutorial sessions 10
Online participation 12
Revision 15
Assignment(s), Test(s) and Examination(s) 20
TOTAL STUDY HOURS ACCUMULATED 120
COURSE LEARNING OUTCOMES

By the end of this course, you should be able to:
1. Describe the functions of compensation management in an organisation;
2. Analyse the importance of job evaluation in the process of implementing

compensation management; and
3. Illustrate the wage structure and types of wage payment.
COURSE SYNOPSIS
This course is divided into eight topics. The synopsis for each topic is presented as
follows:
Topic 1 begins with the introduction to compensation system and the definition of
compensation. This topic will introduce you to the compensation administration
perspective and compensation dimensions from the employee and employerÊs
points of view. This is followed by discussions on compensation system and wage
rate determination in the organisation.
Topic 2 covers legislation in compensation administration. You will also be

introduced to the relevant legislation and association with compensation
administration. Among the acts discussed are the Employment Act 1955, the
WorkmenÊs Compensation Act 1952 and the Industrial Relations Act 1967.

COURSE GUIDE  xi
Topic 3 describes job analysis including its purpose and importance. The topic
takes you through the process involved in job analysis. The importance of
gathering accurate information is emphasised. The topic also highlights the
common mistakes that analysts often made in job analysis.
Topic 4 continues with job description, which explains and elaborates the details
of a job in terms of the tasks, scope and responsibilities. The eight components of
a job description are dealt with in this topic. It includes a six-step process in writing
a job description and teaches you to write a standard job description.
Topic 5 discusses job evaluation as well as its importance in an organisation.

Overall, the third, fourth and the fifth topics explain the association between job
analysis, job description and job evaluation in assisting the wage structure
formation of a job.
Topic 6 focuses on wage structure formation. The discussion also takes into
account the types of wage structures that can be used in an organisation, namely
wage payments based on skills, knowledge, efficiency and seniority.
Topic 7 deals with short-term and long-term incentive plans. Types of short-term
and long-term benefits together with their advantages and disadvantages are
discussed. You will be introduced to ChingosÊ (2004) three-stage model, which
focuses on deferred payment for service, in developing long-term incentive plans.
Topic 8 examines the benefits and services provided by employers for their
employees and families in detail. In line with todayÊs trend in compensation, this
topic also focuses on the goals and important aspects of the flexible benefits
compensation plan as well as exploring issues arising.
TEXT ARRANGEMENT GUIDE

Before you go through this module, it is important that you note the text
arrangement. Understanding the text arrangement will help you to organise your
study of this course in a more objective and effective way. Generally, the text
arrangement for each topic is as follows:
Learning Outcomes: This section refers to what you should achieve after you have
completely covered a topic. As you go through each topic, you should frequently
refer to these learning outcomes. By doing this, you can continuously gauge your
understanding of the topic.

xii  COURSE GUIDE
Self-Check: This component of the module is inserted at strategic locations

throughout the module. It may be inserted after one subtopic or a few subtopics.
It usually comes in the form of a question. When you come across this component,
try to reflect on what you have already learnt thus far. By attempting to answer
the question, you should be able to gauge how well you have understood the
subtopic(s). Most of the time, the answers to the questions can be found directly
from the module itself.
Activity: Like Self-Check, the Activity component is also placed at various

locations or junctures throughout the module. This component may require you to
solve questions, explore short case studies, or conduct an observation or research.
It may even require you to evaluate a given scenario. When you come across an
Activity, you should try to reflect on what you have gathered from the module
and apply it to real situations. You should, at the same time, engage yourself in
higher order thinking where you might be required to analyse, synthesise and
evaluate instead of only having to recall and define.
Summary: You will find this component at the end of each topic. This component
helps you to recap the whole topic. By going through the Summary, you should be
able to gauge your knowledge retention level. Should you find points in the
summary that you do not fully understand, it would be a good idea for you to
revisit the details in the module.
Key Terms: This component can be found at the end of each topic. You should go
through this component to remind yourself of important terms or jargon used
throughout the module. Should you find terms here that you are not able to
explain, you should look for the terms in the module.
References: The References section is where a list of relevant and useful textbooks,
journals, articles, electronic contents or sources can be found. The list can appear
in a few locations such as in the Course Guide (at the References section), at the
end of every topic or at the back of the module. You are encouraged to read or
refer to the suggested sources to obtain the additional information needed and to
enhance your overall understanding of the course.
PRIOR KNOWLEDGE
Learners of this course are required to pass BDPP1103 Introductory Management
and BDPB2103 Introductory Human Resource Management course.

COURSE GUIDE  xiii
ASSESSMENT METHOD
Please refer to myINSPIRE.
REFERENCES
Bergmann, T. J., & Scarpello, V. G. (2001). Compensation decision making
(4th ed.). Orlando: Harcourt College Publishers.
Bohlander, G. W., Snell, S., & Sherman, A. (2006). Managing human resources
(14th ed.). Ohio: South-Western College Publishing.
Chingos, P. T. (2004). Responsible compensation for a new era of accountability.

Kuala Lumpur: Leeds Publications.
Faizuniah, Aini Hayati, Daratul, Khulida Kirana, Norazuwa & Norsiah (2002).
Pengurusan sumber manusia. Malaysia: McGraw-Hill.
Henderson, R. I. (2005). Compensation management (8th ed.). New Jersey: Prentice

Hall, Inc.
June Meaw Ling Poon. (1994). Pengurusan sumber manusia. Kuala Lumpur:
Dewan Bahasa dan Pustaka.
Martocchio, J. J. (2016). Strategic compensation (9th ed.). New Jersey: Prentice Hall
Inc.
Milkovich, G. T., & Newman, J. M. (2007). Compensation (9th ed.). Singapore:

McGraw Hill.
TAN SRI DR ABDULLAH SANUSI (TSDAS)

DIGITAL LIBRARY
The TSDAS Digital Library has a wide range of print and online resources for
the use of OUM learners. This comprehensive digital library, which is accessible
through the OUM portal, provides access to more than 30 online databases
comprising e-journals, e-theses, e-books and more. Examples of databases
available are EBSCOhost, ProQuest, SpringerLink, Books24×7, InfoSci Books,
Emerald Management Plus and Ebrary Electronic Books. As an OUM learner, you
are encouraged to make full use of the resources available through this library.

xxvi X COURSE ASSIGNMENT GUIDE

Topic  Introduction to
Compensation
1 System
LEARNING OUTCOMES
By the end of this topic, you should be able to:

1. Describe the main elements of compensation;
2. Discuss the primary dimensions of compensation;
3. Assess the seven aspects of non-compensation system;
4. Examine the main four elements of compensation programme; and
5. Appraise the factors that influence wage payment.
 INTRODUCTION
What are the factors contributing to work satisfaction? Does a challenging job lead
to work satisfaction? Not really. We must remember that work satisfaction cannot
be achieved if an employer neglects to reward his employees adequately. An
employee would expect a salary that commensurate with his performance and/or
the amount of time spent to perform the work.
To attract employees and to retain best performers, employees need to have a

compensation system that will facilitate the achievement of organisational goals.
In addition, employees need to comply with the relevant Malaysian laws that
relate to payment systems and hours of work.

2  TOPIC 1 INTRODUCTION TO COMPENSATION SYSTEM
Payment systems and the quantum of payment play an important function for the
employees, employers and the society. If the salaries or wages received by the
employees are very low, they will have very little money to spend after paying for
their basic necessities. This in turn will limit the growth of the national economy.
When wages increase, employers will increase their cost of services or products to
offset the higher wages. If wages keep on increasing, organisations cannot gain
competitive advantage, which in turn will create a barrier towards furthering the
nationÊs economic growth.
Thus, it is important for an employer to establish an attractive, fair and systematic

compensation programme for his employees. Besides wages and salary,
employees are eligible to receive some fringe benefits as well. As an employee or
a would-be employee, do you know the definition of compensation, types of
compensation and the compensation programme that are offered by your
organisation or one that you will be working for?
This topic will discuss the definition of compensation, types of compensation, the
relationship between compensation and organisational strategy, compensation
system, compensation dimensions and non-indemnity system. In addition,
various compensation programmes that exist in todayÊs organisations will also be
discussed.
1.1 DEFINITION OF COMPENSATION

Compensation has often been mistaken as something given as an equivalent for a
loss or injury. However, in the context of human resource management,
compensation is much more than that. Let us look at compensation in a wider,
more balanced perspective.
The term „compensation‰ in this courseÊs context refers to all financial returns,
tangibles and clear services that are accepted by an employee as part of the job
relationship and reward for his good work performance during his tenure.
ACTIVITY 1.1
Based on the definition given in Subtopic 1.1, in your own words, define
compensation in not more than 15 words.

TOPIC 1 INTRODUCTION TO COMPENSATION SYSTEM  3
The goals of compensation are as follows:
(a) Motivate Employees to Perform Effectively

Compensation is a motivational factor when salary and benefits received can
boost employeesÊ potential. For example, Organisation A gives incentive to
employees who can complete a task within a given period. Because of that,
the employees perform their job as best as they could within the stipulated
time frame. What are the types of incentives preferred by employees? Is it
paid leave, cash reward, welfare or other remunerations? For the answer,
refer to Figure 1.1.
Figure 1.1: A cash reward as an incentive favoured by employees

Source: Bohlander & Snell (2016)
(b) Encourage Desired Behaviour at the Workplace

Besides providing work motivation, compensation also helps to instil team
spirit, culture and values in an organisation. For example, Organisation A
wants to promote full attendance amongst its employees. A bonus will be
given for full attendance. The compensation will act as a catalyst for
employees to go to work every day. Figure 1.2 shows the effect of attendance
bonus on employees.
Figure 1.2: Bonus boosts work attendance

(c) Attract Potential Employees to Work in the Organisation

Strategy is needed for an organisation to achieve its objectives. The strategic
element helps to recruit the best and most desirable employees in the job
market. For example, Organisation A wants to build a strong workforce to
compete with other organisations. Thus, Organisation A offers an attractive
compensation package to attract qualified employees to join the organisation.
(d) Retain Efficient Employees

A good compensation system is able to retain efficient employees. Excellent
and knowledgeable employees are likely to remain longer in an organisation
when they are paid equivalent to their productivity.
SELF-CHECK 1.1
An employee can claim compensation if he is terminated without notice

or if he is involved in an accident during working hours. With the
information gathered from the mass media or perhaps through work
experience, could you define what is meant by compensation?
1.2 TYPES OF COMPENSATION

Does compensation only exist in the form of cash? Most of us are inclined to think
so. However, there are three types of compensation, namely:
(a) Direct Financial Compensation

Direct financial compensation refers to wage payment in the form of cash.
This type of compensation is paid in the form of:
(i) Basic salary;
(ii) Bonus;
(iii) Overtime allowance;
(iv) Commission;
(v) Gain sharing; and
(vi) Cost-of-living adjustments.

(b) Indirect Financial Compensation

Indirect financial compensation includes all forms of employee benefits
regardless if they are mandated by law or are given by organisations as a
token of appreciation to employees. Some examples of indirect financial
compensation are as follows:
(i) Paid leave (holiday, sick leave and annual leave);
(ii) Insurance plan (medical, dental, life);
(iii) Warranty plan (pension, disability insurance); and
(iv) Work-life programmes (educational support, recreational programme).
Figure 1.3 shows some of the benefits that are included in indirect financial
compensation.
Figure 1.3: Examples of indirect financial compensation

(c) Non-financial Compensation

Non-financial compensation is about fulfilling the physical and
psychological needs of an employee. Direct financial compensation and non-
financial compensation are interrelated even though the latter is not included
in the employeeÊs compensation package.
Non-financial compensation refers to non-economic rewards. An example is

the employeeÊs dignity and self-esteem through employerÊs appreciation for,
and satisfaction with, the work performed.
We have discussed three types of compensation. The summary is illustrated in

Figure 1.4.
Figure 1.4: Types of compensation

ACTIVITY 1.2
List each type of compensation that is offered by your organisation and

classify them according to direct financial compensation,
non-direct financial compensation and non-financial compensation.
Compare your answer with those of your friends who are working in
other organisations and identify the type of compensation offered by
their organisations.
1.3 COMPENSATION AND ORGANISATIONAL

STRATEGY
What are the important elements of a successful strategy? Strategy is the result of
the integration of mission and organisational goal. Without effective strategies,
organisational goals cannot be accomplished.
Figure 1.5 shows the strategic planning process of an organisation.
Figure 1.5: Organisational strategic planning process

We have identified the four basic elements of the strategic planning process. They
are elaborated in Table 1.1.
Table 1.1: Strategic Planning Process Analysis
Process Elaborations
Strategic Analysis Evaluation of the organisationÊs mission and assessment of
internal and external environments.
Strategy Mapping of vision, mission and organisationÊs strategic route.
Formulation Corporate strategy is formed to minimise the gap between
current conditions and the desired outcome.
Strategy Performing important activities to ensure that the organisationÊs
Implementation strategy is implemented in the best way possible.
Strategy Monitoring of the organisationÊs progress in implementing the
Observation plan to achieve the mission. Observation is done by identifying
deviations and comparing the current result with the desired
state.
Top management will be directly involved in developing the organisationÊs

mission. The management should ensure that there is an effective strategy in place
to achieve the organisationÊs goal. Strategic planning helps to provide the overall
direction and focus for the organisationÊs workforce.
Every department in an organisation should play its part to ensure that the
organisationÊs strategy is implemented as planned. For example, in compensation
administration, the compensation payment programme needs to fully support
strategic planning. The compensation payment should commensurate with
employee effort.
Compensation payment has commonly been associated with high morale among
employees. Thus, the human resource department should monitor the
compensation payment programme to ensure that it is adequate so that best
employees will be recruited and will remain in the organisation.
ACTIVITY 1.3
Every organisation has its mission and vision. What are your
organisationÊs mission and vision? Does your organisationÊs
compensation programme facilitate the achievement of its mission and
vision?

1.4 COMPENSATION SYSTEM

According to Maimunah Aminuddin (2014) in return for their performance,
employees are paid agreed amounts of remuneration or compensation. Usually a
remuneration consist of several elements, usually a combination of basic pay,
incentives and benefits but the variety of possible system is wide. Organisations
will decide regarding the types and quantum of wages, incentives and benefits to
be offered to their employees. However, payment system may be influenced by
trade union negotiations as well as government intervention.
The goals of an excellent compensation system are to:

(a) Attract potential employees to work in the organisation;
(b) Retain excellent employees;
(c) Motivate employees to perform effectively; and
(d) Establish a compensation system that is easy to administer.
When choosing a compensation system, employer must keep in mind that certain
factors are considered necessary for potential employees. Employees require the
highest financial package but they also require the stability of income, as they can
plan for their financial finances.
SELF-CHECK 1.2
What is meant by compensation system? Does it refer to a procedure?
ACTIVITY 1.4
What are the goals of an excellent compensation system? Share your

answer in the myINSPIRE forum.

1.5 COMPENSATION DIMENSIONS

Earlier on, we have discussed the definition and concept of compensation, types
of compensation and the compensation system. Next, we will discuss eight
compensation dimensions as shown in Figure 1.6.
Figure 1.6: Compensation dimensions
We have identified eight compensation dimensions. Now, let us study each

dimension in detail.
(a) Wage Based on Performance and Work Done

Wage based on performance and work done includes short-term payments
(weekly, monthly, bonus/annual award), which enable employees to pay
and/or form an agreement to pay for the desired products and services.
The overall payment to employees depends on:
(i) Requirements of the job;
(ii) Achieved result; and
(iii) Innovations that bring productivity enhancement, loyalty, trust or a

combination of any of these elements.

The components of wage based on performance and work done are basic
salary, benefits, incentives, short-term bonus, merit pay and certain
allowances.
(b) Paid Leave

In the past few years, there has been a general reduction in working hours.
TodayÊs employees enjoy more leisure time in the form of additional paid
leave and shorter working days. Paid leave such as rest days and public
holidays will raise labourÊs cost but will increase job performance. Figure 1.7
shows the effect of time off from work and employee productivity.
Figure 1.7: Time off from work can make employees happier, more productive and make
less mistakes
Source: Razak, Yusof, Azidin, Latif & Ismail. (2014)
(c) Wage Loss Benefits

Job security is an important aspect of employment quality. Job security
means financial security. Accident, work performance, health and
interpersonal dynamic problems are some of the reasons that justify a
temporary suspension or permanent dismissal from work.
Economic and technological change restricts and sometimes eliminates the

need or demand for certain products and services. This will lead to
organisational collapse and loss of jobs. Unemployment benefits and
severance pay are given to assist unemployed employees in meeting their
cost of living until they find a new job.

(d) Disability Benefits

When an employee suffers a disability because of an illness or accident, he
may not be able to perform the work as well as he did before the illness or
accident, or he may be not be able to resume work at all. If he is the sole
earner in his family, he would worry about providing for his dependants.
There is also the increasing medical bills to consider. To assist employees
who suffer disability as a result of an illness or work-related accident,
employee compensation in the form of paid medical leave as well as short-
term and long-term disability plans are made available by the organisation.
Figure 1.8 shows some examples of long-term disabilities.
Figure 1.8: Long-term disability examples
(e) Deferred Income

Most employees rely on employer–provided programmes to ensure the
continuity of income after retirement. There are two reasons for the existence
of this programme. Firstly, most employees do not have the financial means
to enable them to enjoy their current lifestyle during their retirement years.
Thus, programmes such as retirement plan, savings and economising plan,
annuity and additional income plan have been put in place by organisations
to provide retirement income to their employees. Secondly, tax laws and
regulations provide an attractive approach to deferred income plan.

(f) Spouse/family Benefits

Employees who have a family to support often worry that there might come
a time when they can no longer support their family or maintain their present
standard of living. Thus, certain plans are developed so that in the event an
employee dies or is incapacitated because of a temporary or permanent
disability, he can still provide for his family.
(g) Health, Accident and Liability Protection

Besides the ability to maintain oneÊs standard of living, one must also be able
to afford the rising cost of medical care. Thus, organisations offer various
insurance plans to help employees meet those expenditures.
(h) Income Equivalent Payment

Income equivalent payment is also known as perquisites or perks. Some
perquisites are subjected to tax relief, which benefits both employer and
employees. Examples of perquisites are company credit card, company
sponsored training, food subsidy and childcare services.
ACTIVITY 1.5
In your opinion, how do perquisites such as childcare assistance

programme, which is implemented by the employer, enhances employee
productivity?
1.6 NON-COMPENSATION SYSTEM

We have discussed the benefits enjoyed by employees through the compensation
system. The compensation system does not only include the financial aspects and
benefits. Non-economic aspects such as physical, emotional and physiological
conditions are also part of the employee compensation system. This non-pecuniary
system is called non-compensation system and is crucial to boost employeesÊ job
performance. Figure 1.9 shows the seven aspects of the non-compensation system.

Figure 1.9: Non-compensation system
From Figure 1.9, we can conclude that non-compensation system was formed to
boost employeesÊ job performance through the following:
(a) Enhance Dignity and Satisfaction from the Work Done

Organisations acknowledge individual employeeÊs contribution so that the
employees feel that they are valuable and useful to the organisation. For
example, if an employee has completed a given task successfully, he is
praised or recognised as employee of the month. The appreciation shown not
only will boost the employeeÊs work spirit but will also strengthen his loyalty
towards the organisation.
(b) Boost Physiological Health, Intellectual Development and Emotional

Maturity
Health issues are of serious concern to the employer because health problems
in the workplace can have a negative impact on individual performance.
Thus, care is taken to provide a conducive work environment.
Since physiological and emotional problems often occur when there is

resource shortage, ample resources should be allocated to enable employees
to get the job done.

(c) Promote Constructive Social Relationship among Co-workers

Nobody can live in isolation. This theory applies in the work environment
even though todayÊs workforce is highly specialised. Each employee relies
on other employees to ensure a smooth workflow. This is because the
division of labour creates a situation whereby an employee needs to rely on
other employees with different expertise. Figure 1.10 shows the sociability
among colleagues during a sports day organised by their company.
Figure 1.10: Occasions such as the companyÊs sports day are fun-filled ways for
employees to come together
Source: www.dbkk.sabah.gov.my/images/pekerja15.jpg
This simple co-operation improves social interaction and leads to mutual

trust, loyalty and cohesion among employees. Without constructive social
interaction, issues such as suspicion, envy and negative sentiments are likely
prevail in the organisation and will affect workplace performance.
(d) Design Jobs that Require Adequate Attention and Effort

Job specialisation, which assigns employees to perform specific tasks
repetitively, is intended to increase efficiency of output. However,
specialisation contributes to a monotonous work environment. This will
indirectly affect employee attitude, work satisfaction and attendance. Take
for example, a technician. The technician must face the same machine every
day. The monotonous, repetitive work will cause him to lose interest in his
job over time and demotivate him.

Figure 1.11: Job specialisation can give rise to boredom at work
Figure 1.11 shows a factory technician at work. To solve the problem

resulting from job specialisation, a new approach has been put into practice.
Employees are encouraged to speak up about how a job should be done. This
is because employees are the ones who are most familiar with their work and
the work environment. Thus, they are in a better position to expose areas of
weaknesses and suggest improvements.
(e) Allocate Adequate Resources in Order to Get a Job Done

Employees must be given the resources and organisational support needed
to carry out their work. For example, a technician should be provided with
sufficient and appropriate tools so that he can carry out his job efficiently.
Figure 1.12 shows an example of a technicianÊs tool kit.

Figure 1.12: Example of a technicianÊs tool kit
(f) Give Employees Adequate Control over Their Work so that They Can Fulfil
Personal Needs
Some employees would rather work independently with minimum
supervision. Nowadays, more employees want their voice to be heard,
especially on how to execute and perform a task. They should be given a say
in matters that concern their job function.
(g) Offer Leadership and Management Support

Every employee needs someone who can act as his mentor to fulfil his sense
of belonging within the organisation. There should be effective interpersonal
communication in the workplace. Access to management support reduces
work conflicts and lead to a healthy work environment. Employers should
also acknowledge and reward employees for a job well done.
SELF-CHECK 1.3
Besides a salary that commensurate with the job, what other factors
influence job satisfaction?

1.7 COMPENSATION PROGRAMME

We have learnt how compensation can influence the work environment. Now, let
us discuss the benefits of compensation and the effects on employeesÊ standard of
living. The first step in understanding labour cost in an organisation is to recognise
the main elements of a compensation programme. There are four elements and
they are explained in the following:
(a) Basic Wage and Salary

Basic wage is payment received for a given period. It is typically paid as a
salary, paid hourly or piece rate. Generally, wage or salary is the element that
attracts and retains employees and motivates them to do their job well. This
is because their standard of living and how well they are able to support their
dependants are determined by the amount stated on their pay slip.
(b) Supplementary Wage

This includes overtime, shift difference and premium pay for working
during weekends, public holidays or after normal working hours. They are
added to the basic wage of the employee. Supplementary wages can go a
long way towards easing the financial burdens of low wage earners.
Figure 1.13 shows the importance of overtime pay for those in the low-
income bracket.
Figure 1.13: Benefits of overtime pay

(c) Incentive Pay (Short-term and Long-term)

Incentives are paid to employees for their good work performance.
Incentives are also used to encourage employees to work harder, thereby
increasing the output.
(d) Employee Benefits and Services

This compensation includes:
(i) Paid leave;
(ii) Payment while being suspended from work or for loss of job;
(iii) Payment for stoppage of work due to accident or illness;
(iv) Payment for medical support;
(v) Retirement pay;
(vi) Payment to dependants of employee who died due to work-related

injuries; and
(vii) Allocated products and services such as company car, food coupons,
child or elder care services and recreational activities.
These employee benefits and services could influence the current as well as
the future lifestyle of an employee.
SELF-CHECK 1.4
Do you have colleagues who have to settle for a low standard of living
due to low pay? How can a compensation programme help them
improve their lives?
ACTIVITY 1.6
Based on the compensation list that you have drawn up in Activity 1.2,
classify the various types of compensation into the four different
elements in a compensation programme as stated in Subtopic 1.7.

1.8 WAGE RATE DETERMINATION

Have you ever wondered how your wage payment is determined? What factors
influence the wage rate adopted by your employer?
There are 13 factors to consider in determining the wage rate. The factors are:
(a) Knowledge, skills, abilities and other characteristics;
(b) Type of business;
(c) Union or non-union status;
(d) Capital or labour intensity;
(e) Business size;
(f) Management philosophy;
(g) Compensation package;
(h) Geographical location;
(i) Labour supply and demand;
(j) Company profit;
(k) Job security;
(l) Gender differences; and
(m) Working period and performance.
These factors are linked to one another in the determination of employee wage.
The explanations on the factors mentioned are as follows:
(a) Knowledge, Skills, Abilities and Other Characteristics

The most important factor that influences an employeeÊs wage rate is the
structure of job or tasks involved. The appropriate wage is determined in
consideration of the knowledge, skills, education, experience and other
aspects required by the employer according to the job tasks. For example, an
accounts clerk will be paid lower compared to an accounts executive.

(b) Type of Business

Wage payment is also determined by the type of business. For the same level
of job, private sector employees tend to get better salary compared to those
in the public sector. Besides that, an organisationÊs mission (for example,
profit or non-profit organisation) and the type of goods produced also
influence the wage rate.
(c) Union or Non-union Status

In general, employees who are labour union members will enjoy a higher rate
of pay. This is because labour unions are more aware of employeesÊ rights,
especially the salary and benefits aspects. Unions will negotiate with
employers on behalf of their members with respect to the terms and
conditions of union membersÊ employment.
(d) Capital or Labour Intensity

Capital-intensive businesses whose labour cost only forms a small fraction of
their income will tend to pay their employees a higher rate.
(e) Business Size

Larger companies generally pay better than smaller ones.
(f) Management Philosophy

This refers to a set of basic values upon which a business is established.
Management philosophy differs from employer to employer. Some
employers acknowledge the unique contributions of their employees by
giving them salary that commensurate with their efforts. These employers
believe that paying a competitive salary will enable them to attract, hire and
retain the best employees. However, there are also employers who only pay
the minimum wage as stipulated by law.
When there is a competitive salary structure, employees will tend to work

harder and better. Figure 1.14 shows an employee hard at work to justify his
pay.

Figure 1.14: The likely outcome of a competitive salary structure
(g) Compensation Package

In the past, companies only offered a basic salary. There was no such thing
as fringe benefits. However, employees today not only get a basic salary but
they are also given perks like paid leave, health insurance, dental care and
many others Attractive compensation packages are offered to attract and
retain top quality employees.
(h) Geographical Location

Wage rate is also determined by the geographical location of the business.
For example, the wage rate in Petaling Jaya is higher compared to that in
Mergong, Kedah due to the higher cost of living in Petaling Jaya.
(i) Labour Supply and Demand

In a competitive market, wage rate is determined by the supply and demand
of labour. However, this is true mostly of jobs at the lower skills level. Some
employees are being paid according to their skills and experience.
(j) Company Profit

Employees in a profitable organisation stand a better chance of obtaining a
higher salary.

(k) Job Security

As an employee, what do you expect from the organisation you work for
besides a comparable amount of salary? Surely you would want stability and
job security as well. Job security reduces economic and psychological
anxiety, allowing employees to make plans for their future.
(l) Gender Differences

These are differences between men and women in terms of aptitude, skill and
behaviour. Gender is one of the factors that contribute to unfairness in wage
payment. However, this is not a very visible problem in Malaysia.
(m) Working Period and Employee Performance

In general, a salary increase depends on the employeeÊs job position in the
organisation and length of service. Sometimes there are even different pay
scales within the same position. Generally, an employee is paid according to
his work performance, experience and other factors.
Factors influencing wage payment rate are summarised in Table 1.2.
Table 1.2: Factors Influencing Wage Payment Rate
Factor Explanation
Knowledge, skills, abilities The more qualified an employee is, the higher the offered
and other characteristics salary.
Type of business Private sector employees receive higher salary than those
in the public sector.
Union or non-union status Employees who are labour union members tend to receive
higher salary.
Capital or labour intensity Employees are paid more if the percentage of labour cost
to the organisationÊs income is low.
Business size Large businesses tend to give better salary than small
enterprises.
Management philosophy A set of values upon which to build a successful business.
Compensation package Benefits are given as payment in addition to basic salary.
This is an employerÊs responsibility towards his
employees.
Geographical location Different locations provide different salary quantum.
Labour supply and Wages go up when demand exceeds supply and vice
demand versa.

Company profit The higher the companyÊs profit, the higher the salary.
Job stabilisation A stable company provides job security.
Gender differences There are differences in salary between men and women
of comparable rank in some companies due to gender
differences. Gender differences are socially defined as
differences between men and women.
Working period and The amount of pay increase depends on work
worker performance performance and length of service. The better the work
performance and the longer the service tenure, the better
the pay.
SELF-CHECK 1.5
What are the factors that influence compensation payment?
ACTIVITY 1.7
An employeeÊs salary should cover components such as basic salary,

allowances, paid leave and other benefits. Based on your Internet
research, name three types of allowances that are given to civil servants
in Malaysia.
• Organisations should design a fair, attractive and systematic compensation

payment programme to motivate their employees.
• Compensation can be defined as all types of financial returns, tangible benefits

and other services that are given to employees in return for their contributions
to the organisation.
• Some of the components of a compensation programme are basic salary,

supplementary wage, incentives and benefits.
• The benefits usually include performance pay, paid leave, loss of job or
disability income.

• Generally, three types of compensation are implemented by organisations,

namely direct financial compensation, indirect financial compensation and
non-financial compensation.
• Non-compensation system covers matters such as employeeÊs self-esteem,

physiological and emotional health.
• Many factors determine the wage rate such as knowledge, skills, abilities and
other characteristics of the individual, type of business, labour supply and
demand, and business size, amongst others.
Basic wage rate Indirect financial compensation

Compensation In-kind claims
Compensation system Labour demand
Deferred payment Labour market
Direct financial compensation Labour supply
Incentive Non-compensation system
Multiple-choice Questions
1. The following are examples of indirect financial compensation EXCEPT:

A. Cost-of-living adjustments
B. Holiday and annual leave
C. Disability insurance and pension
D. Educational assistance and recreational programme

2. All the statements below are TRUE of in-kind claims EXCEPT:

A. In-kind payments are allocated by an employer in lieu of financial
payment.
B. The organisation will buy products or services needed so that
employees can benefit from the economies of scale gained through
group purchase.
C. IndividualÊs perspective of in-kind payment, whether it is worth it or
not, is influenced by demographic features.
D. In-kind payments are payments that are received and collected in the
present, not at a future date.
3. Payment for work is money allocated for a short period of time such as on a
weekly or monthly basis. Total payment given to employees depends on the
following factors EXCEPT:
A. Necessity of the work given
B. Loss of job
C. Good work performance
D. Innovation that results in increased productivity
Essay Question
1. Discuss the five compensation dimensions in a compensation system.

1. All of the statements below on wage rate determination factors are NOT
TRUE, EXCEPT:
A. Employees who are labour union members will receive a lower wage
rate compared to employees who do not belong to any trade union.
B. Businesses with high labour cost in relation to their income pay a
higher rate to their employees.
C. Small-scale organisations often offer a higher salary than big-scale
organisations.
D. If wage is determined by geographical locations, employees in the Shah
Alam industrial area would be paid more than those in Bukit Kayu
Hitam, Kedah.
2. All of the following statements regarding compensation programmes are

TRUE, EXCEPT:
A. The growth in the service sector in comparison to the manufacturing
sector has encouraged employers to look for alternatives in giving
incentives to service sector employees.
B. Supplementary wage and salary add to an employeeÊs net income.
C. Examples of employee benefits and services are paid leave, overtime
pay, loss of job income and retirement pay.
D. Wage and salary determine the lifestyle of an employee.
Essay Question
1. Syarikat Maju Jaya Sdn Bhd has hired you as their Senior Human Resource
Officer in the Compensation and Benefits Department. You are assigned to
look into and review the basic salary given by the company.
(a) Define basic salary.
(b) Discuss six factors that determine basic salary.

Matching Exercise
1. Match the factors that influence wage rate (listed in the left column) with the
statement (listed in the right column) relating to organisation.
Factor Statement Relating to Organisation

1. Type of business A. Total annual sales below
RM25 million.
2. Compensation package B. Processing crude oil into
various chemicals.
3. Management philosophy C. Pays research group members
according to their skills and
knowledge.
4. Type and level of skills needed D. Provide food coupon and
accommodation.
5. Business size E. Employees are paid more
compared to other employees
in the same industry.
2. Match the non-compensation dimensions (listed in the left column) with the
appropriate statement on non-compensation components (listed in the right
column).
Non-compensation Dimension Non-compensation Component

1. Raise self-esteem and derive A. Job rotation
satisfaction from work done
well.
2. Promote constructive social B. Give adequate time to
relationship among complete a job.
employees.
3. Provide employees with C. Increase opportunity for
enough resources to carry out teamwork.
a job.
4. Give employees adequate D. Show gratitude towards
control over their work so employeesÊ efforts and
that they can fulfil their contributions.
personal needs.
5. Design jobs that require E. Opportunity to be involved in
adequate effort and attention. flexible work plan.

Bohlander, G., & Snell, S. (2016). Managing human resources (14th ed.). Mason:
Thompson.
Maimunah Aminuddin. (2014). Human resource management: Principles and

practices (3rd ed). Oxford Fajar Sdn Bhd: Shah Alam.
Razak, Yusof, Azidin, Latif & Ismail. (2014). The impact of work stress towards
work life balance in Malaysia. International Journal of Economics, Commerce
and Management United Kingdom, II (11).

Topic  Role of
Legislation in
2 Compensation
Management
LEARNING OUTCOMES

1. Explain the six elements and two models of the wage reformation
system;
2. Discuss the relationship between the compensation management
system and the legislative aspect, which are Employment Act 1955,
WorkmenÊs Compensation Act 1952 and Industrial Relations Act
1967;
3. Appraise the importance of legislation in the determination of
wages and salary; and
4. Examine the role of legislation in setting wages and salary.
 INTRODUCTION
Have you been in a situation where your employer failed to pay or delay paying
your salary because of financial reasons? Did you get the pay raise and bonus that
you deserve? Even though the employer has the right to determine the wage rate
of his employees, the legislative aspect also needs to be considered. Legislation
plays a very important role in compensation payment. Employers should use the
relevant legislation as a guide in administering the organisationÊs compensation
system.

TOPIC 2 ROLE OF LEGISLATION IN COMPENSATION MANAGEMENT  31
In this topic, we will discuss three main legislation, namely Employment Act 1955,
WorkmenÊs Compensation Act 1952 and Industrial Relations Act 1967. We will
also cover the legislative process, which is the role of law in determining worker
salary, the importance of legislation in the determination of wages and salary and
the legislative control over the wage and salary payment rate.
2.1 LEGISLATIVE PROCESS

The standard of living in Malaysia has changed drastically over the past 20 years.
The success of the governmentÊs economic recovery programmes has resulted in
rapid economic growth and the regeneration of employment. For the benefit of all,
any measure that can increase efficiency and productivity should be implemented.
This will ensure that the nation is highly competitive and will improve the quality
of life of its citizens.
For the benefit of employees, the National Labour Advisory Council (NLAC) of
Malaysia has formulated the productivity-linked wage system (PLWS) with
regard to labour and manpower issues.
The purposes of the PLWS guidelines are as follows:
(a) To link wage to productivity in order to increase competitiveness and to instil

a sense of stability among employees;
(b) To enable employers to take a more orderly approach in increasing employee

productivity and salary through active participation and cooperation from
employees; and
(c) To enable employees to reap the benefits of accumulated productivity

increases. With that, fairness and social unity can also succeed. Quality of life
will be improved, employees will have the opportunity to progress in their
career and to enjoy more satisfaction from their job.
The guidelines drawn up will be able to help employers and employees (unionised
and non-unionised) to formulate a wage reformation system that suits their
company.

32  TOPIC 2 ROLE OF LEGISLATION IN COMPENSATION MANAGEMENT
SELF-CHECK 2.1
Other than to instil fairness, social unity and improve the quality of life,
what are the purposed of the PLWS guidelines?
ACTIVITY 2.1
If your employer fails to pay or delay paying your salary as well as other
compensation that you are entitled to under your employment contract,
do you have the right to charge him in court? Discuss in the myINSPIRE
forum.
2.2 KEY ELEMENTS IN WAGE REFORMATION

SYSTEM
The purpose of the wage reformation system is to coordinate salary as a way to
increase productivity. There are six main elements to consider in wage
reformation. They are as follows:
(a) Wage has to consist of a monthly income or other more frequent payments,
annual raise, annual bonus and others.
(b) Wage has to consist of fixed components including basic salary and
additional components in the form of variable payments.
(c) Fixed and variable payments should have these elements:
(i) Fixed Component

Basic salary, annual salary raise and contractual bonus.
(ii) Variable Component

Annual salary raise based on productivity or distribution of profit
formula.
(d) Any change in the basic salary should take into consideration factors such as
living cost.

(e) Fixed salary component should represent the job value while annual salary
increment is to acknowledge the length of service and the experience of
employees.
(f) Variable salary is determined by linking productivity with individual

performance, work group or organisation. Guidelines must be clear and
measurable. Consideration also should be given to the payment of the
variable components.
SELF-CHECK 2.2
What are the key elements of wage reformation system?
ACTIVITY 2.2
Review your monthly pay slip. Are all the six elements of the wage
reformation system included and stated on your pay slip? Do they have
any impact on your salary payment?
2.3 MODELS OF WAGE REFORMATION

SYSTEM
The wage reformation system comprises the profitability model and the
productivity model. Organisations can combine both models by considering
company profitability and employee productivity. The combined model is called
the profitability/productivity matrix.
For the wage reformation system to be successfully implemented, there must be

cooperation between employers and employees. The following will also ensure the
success of the system:
(a) Information should be readily available and sufficient. Continuous

assessment between employers and employees are essential. Moreover,
sensitive corporate information given should be handled appropriately;
(b) Employees should be consulted and be involved in making decisions that

concern them;

(c) Employers and employees should be prepared for the implementation of the
system;
(d) Employer representatives and employees should attempt to reach a

consensus with the mutual interests of all in mind; and
(e) Both parties should develop a consultation draft that sets the general agenda
of the consultation.
Next, we will discuss the profitability and productivity models.
(a) Profitability Model

Under the profitability model, the fixed component consists of basic salary,
annual increment and contractual bonus (whichever applies) while the
variable component consists of a variable performance bonus that is
determined by a profit-sharing formula in which:
(i) The formula is to be agreed upon between the management and the
union, and is expressed in the collective agreement or through
consultation for a sector that does not have a union representative; and
(ii) Wage increment is paid when profits exceed the predetermined level
or value that is calculated based on the return on investment, return on
asset or return on equity and the average profit for the past few years.
(b) Productivity Model

Under the productivity model, the fixed component consists of basic salary,
annual increment and contractual bonus (whichever applies). A variable
productivity payment is made based on the productivity improvement of the
company or the individual employee. Refer to Figure 2.1 for a clearer picture
of the productivity model.

Figure 2.1: Productivity model
What is a variable salary component? This component consists of variable pay that
is determined based on:
(a) Annual productivity increase;
(b) Amount of pay raise that is agreed; and
(c) OrganisationÊs performance
There should be a formula to calculate adjustments to the variable component.

Organisations that do not have their own productivity indicator could use the
industrial indicator or the nationÊs productivity or growth indicator as a guide to
determine wage adjustment. The productivity indicator that is used should be
based on value added per employee.
ACTIVITY 2.3
Based on the given information on the wage reformation system, what

are the differences between the profitability model and the productivity
model? Which model is used in your organisation? Find out from the
human resource department why that model is used.

2.4 RELATIONSHIP BETWEEN LEGISLATION

AND COMPENSATION MANAGEMENT
Employers have to draft the compensation programme based on legislative
guidelines. Legislation provides clear guidelines on what should be included in
the employerÊs compensation programme.
The three main legislation that are involved in compensation management are:
(a) Employment Act 1955;
(b) WorkmenÊs Compensation Act 1952; and
(c) Industrial Relations Act 1967.
Before we proceed to study each of these Acts in detail, be sure to attempt the
question in Activity 2.4.
ACTIVITY 2.4
In your opinion, why is there a need to have legislation to protect

employees? Share your opinion in the myINSPIRE forum.
2.4.1 Employment Act 1955
Employment Act 1955 sets out the rights and responsibilities of employers and
employees in the private sector. This Act, among other things, outlines the
minimum wage and protects employees from being exploited by employers.
The following are employees who are protected under this Act:
(a) Any person working in the private sector in Peninsular Malaysia; and
(b) Any person whose monthly income is not more than RM2,000 or irrespective
of the wages earned in a month, is:
(i) Engaged in manual labour;
(ii) Engaged in the operation or maintenance of mechanically propelled
vehicles;

(iii) One who supervises and oversees workers in manual labour; and
(iv) A migrant worker who has a valid employment document to work in
Malaysia.
Section 61 of Employment Act 1955 makes it compulsory for an employer to

declare employee information in detail such as:
(a) Name
(b) Gender
(c) Age
(d) Identity card number
(e) Permanent address
(f) Position
(g) Date work commenced and resignation
(h) Working terms and conditions
(i) Salary and allowance received by the employee for a length of working
period
Employees should be given a hard copy containing the above information.

Employees should also receive a payment slip on every pay day for a period of
time.
Employees have to play their part by keeping to the terms and conditions of their
contract. For example, an employee who wants to quit his job has to give notice for
the duration of which depends on that agreed by the employer and the employee
as set out in the employment contract, which was signed by both parties. If the
employer contravenes the labour laws or terms stated in the employment contract,
the employees can report him to the Labour Department.
Eight important regulations are stated in the Employment Act 1955. They are:
(a) Employment Regulations 1957;
(b) Employment (Limitation of Powers of Officers) Regulations 1993;
(c) Employment (Procedure – Reciprocal Provisions) Regulations 1957;
(d) Employment (Minimum Rate of Maternity Allowance) Regulations 1976;
(e) Employment (Employment of Women) (Shift Workers) Regulations 1970;

(f) Employment (Limitation of Overtime Work) Regulations 1980;

(g) Employment (Termination and Lay-off Benefits) Regulations 1980; and
(h) Employment (Employment of Women) (Female Conductors) Regulations
1958.
Figure 2.2 summarises the Employment Act 1955.
Figure 2.2: The Employment Act 1955
SELF-CHECK 2.3
Which employees are protected under the Employment Act 1955?
ACTIVITY 2.5
According to the Employment Act 1955, does an employer have to

prepare a retirement plan for his employees? Refer to Employment Act
1955 and discuss.

2.4.2 Workmen’s Compensation Act 1952

WorkmenÊs Compensation Act 1952 came into force on 1 April 1953 (Peninsular
Malaysia) and on 1 June (Sabah and Sarawak). This Act provides indemnification
to employees who are injured or died while on the job. This Act also covers income
benefits to their dependants if the employee died as a result of work-related
accident.
On 1 April 1993, this Act was amended as all local and migrant employees in the
private sector would be protected under the Employees Social Security Act 1969.
Amendment to employee protection was also made on 1 November 1996; only
non-manual workers in the private sector with salary of not more than RM400
would be protected. Migrant workers with salary of not more than RM500 or those
who work as manual labour would be protected under the Foreign Worker
Compensation Scheme (FWCS)/WCA 1952.
Under the FWSC, employers have to pay a premium rate of RM120 per year to
insure each worker. This premium, however, was reduced to RM86 per year on 1
March 1998. In the event of accidents, employers have to report to the Labour
Department within 10 days from the date of the accident. Employers who failed to
do so would be fined up to RM2,000.
Benefits to be given to employees under this Act are:

(a) Temporary disablement benefits;
(b) Permanent disablement benefits;
(c) Income for dependants if an employee died;
(d) Repatriation expenses in the event of death or permanent total disablement;
(e) Funeral arrangement;
(f) Medical expenses;
(g) Constant attendance allowance; and
(h) Rehabilitation benefits.

Examples of the benefits received by employees are cited in detail in a related

legislation, the Employees Social Security Act 1969. The benefits offered under this
Act is similar to the benefits offered under the WorkmenÊs Compensation Act 1952.
Compensations provided to employees under both legislation are managed by the
Social Organisation (SOCSO).
Table 2.1: Implementation of WorkmenÊs Compensation Act 1952
Year Action
01/04/1953 WorkmenÊs Compensation Act 1952 (Peninsular Malaysia)
01/06/1981 WorkmenÊs Compensation Act 1952 (Sabah and Sarawak)
01/04/1993 Employees Social Security Act 1969
01/11/1996 Employees Social Security Act 1969:
Amended to cover non-manual workers with salary of not more than
RM400 and migrant workers with salary of not more than RM500
2.4.3 Industrial Relations Act 1967

Before the Industrial Relations Act was introduced in 1967, employers and
employees were encouraged to settle their disputes based on two ordinances:
(a) Industrial Courts Ordinance 1948 (voluntary reconciliation through third

party); and
(b) Trade Disputes Ordinance 1949 (voluntary arbitration by the Industrial

Court).
The introduction of the Industrial Relations Act 1967 has allowed the government
to intervene and settle disputes between employers and employees, thus
promoting a harmonious and mutually beneficial relationship.
Section 1 of the Industrial Relations Act 1967 states that the Act:
„Creates regulations regarding the relationship of employer with employees

and their labour union, and offers precautionary and solution on any
differences or disputes that arise from their relation, generally in handling
trade disputes and any matters arising from it.‰

Part I of the Act gives the definition of important terms while Part II states the
rights of workers, employees and their trade unions. Section 5 of the Industrial
Relations Act 1967 emphasises that an employer cannot:
(a) Prohibit employees from joining a labour union;
(b) Terminate employees who join a labour union;
(c) Overrule the application of employees who join a labour union; and
(d) Force employees to join a labour union.
Other matters covered by this Act are as follows:
(a) Recognition and delegation scope of labour union (Part III);
(b) Collective bargaining and collective agreements (Part IV);
(c) Conciliation (Part V);
(d) Representation for reinstatement to employment (Part VI);
(e) Settlement of disputes through the Industrial Court (Part VII);
(f) Establishment and functioning of a board of inquiry (Part VIII);
(g) Trade disputes, strikes and lock-outs and matters arising thereof (Part IX);
and
(h) Miscellaneous provisions, for example, procedures to be followed in cases of

non-compliance of awards (Part X).
This Act involves two main parties, namely the Malaysian Employers Federation
(MEF) as the employerÊs representative and the Malaysian Trade Union Congress
(MTUC) as the employeeÊs representative. The MEF, which is the central
organisation of private sector employers in Malaysia, promotes and safeguards the
rights of employers. The MTUC, on the other hand, is a federation of trade unions
representing Malaysian employees. Both organisations provide a forum for
consultation and discussion on matters of common interest, thus helping to
promote harmonious relationships between employers and employees.

Industrial harmony is needed for Malaysia to become a united, socially fair,

unbiased and economically advanced nation. Thus, employers and employees in
Malaysia are encouraged to comply with all the provisions under the Industrial
Relations Act 1967, which are as follows:
(a) Avoid taking improper actions regarding any trade disputes;
(b) Solve conflicts, complaints and disputes based on the times established
through collective agreement, conciliation or arbitration;
(c) Let disputes be solved by the machinery formed for this purpose;
(d) Encourage constructive and positive cooperation at all levels within an

enterprise and hold true to the conciliatory spirit that has been collectively
agreed upon;
(e) Make it a rule to resolve conflicts quickly;
(f) Avoid using force, threats and oppression, and refrain from showing up late
for work, shrinking duties and workplace strike; and
(g) Inform the management and employees regarding their obligations towards
each other.
Both employers and employees should accept the industrial relation practices
agreed from time to time between the MEF and MTUC, and approved by the
Ministry of Labour and Manpower.
Employers should agree not to support nor encourage any unfair labour practices
such as:
(a) Meddling in the affairs of labour union and the employeesÊ right to form a
union;
(b) Practising discrimination, restricting or preventing employees from

conducting legal union activities; and
(c) Abusing their power in any way possible.

Labour unions should not support nor encourage any action that promotes unfair
labour practices such as:
(a) Work negligence;
(b) Vandalism;
(c) Refusal to take orders; and
(d) Stubborn work behaviour.
The Industrial Relations Act 1967 also states that an employer cannot discourage
his employees from joining a labour union. He also cannot turn away an applicant
just because the latter is a union member. In addition, the employer cannot
threaten to terminate his employees if they join a labour union. On the other hand,
a labour union cannot force or influence any individuals to join the union.
SELF-CHECK 2.4
What is the purpose of regulating industrial relations procedures?

Discuss your answer in the myINSPIRE forum.
ACTIVITY 2.6
Visit the website of the Ministry of Human Resources at

www.mohr.gov.my/index.php/en to obtain additional information and
examples of compensation cases that involve the three legislation
discussed in Subtopic 2.4.
How do the three acts help to solve those compensation cases?

2.4.4 Payment System

Payment system may differ depending on the type and arrangement of job, current
situation and other factors. However, the following principles should be adhered
to in order to ensure that payment system disputes are minimised:
(a) Payment system should be simplified;
(b) Rate differences should be linked to employee needs, and if necessary, the
rate should be considered based on the agreed or prescribed method;
(c) Work rate and incentive bonus should be determined from the prescribed
method; and
(d) Rate of payment should be collectively negotiated, preferably by a registered
labour union.
2.4.5 Job Security

Nervousness due to lack of job and other work-related problems can have an
adverse effect on employeesÊ attitude towards work. To address the situation,
employers should:
(a) Provide opportunities for employees to advance their career by giving them
the necessary training; and
(b) Prepare a retirement scheme, employeesÊ reduction of and paid medical
leave as supplementary provisions.
2.4.6 Overstaffing and Retrenchment

When overstaffing occurs, an employer may decide to lay off some of his workers.
This should be done in consultation with the relevant labour union (if the company
is unionised) and the Ministry of Labour and Manpower. Before implementing the
retrenchment exercise, the employer may:
(a) Limit overtime;
(b) Limit work during weekly rest days;
(c) Reduce the number of shifts or the work days per week;
(d) Reduce the working hours; and
(e) Re-train and/or redeploy employees.

The final decision to retrench the workforce rests with the employer. If
retrenchment is unavoidable, fair procedures must be followed. These include:
(a) Informing the employees involved as quickly as possible;
(b) Suggesting a voluntary scheme for retrenchment and retirement to

employees;
(c) Paying retirement benefits to employees;
(d) Assisting employees to search for work outside the company by cooperating
with the Ministry of Labour and Manpower;
(e) Delaying the termination process; and
(f) Ensuring that any announcement on the termination of employees will not
be made before the affected employees or their labour union have been
informed.
The retrenchment exercise should be carried out in an objective manner.

Discussions with employeesÊ representative or labour union should include the
following matters:
(a) Management needs to manage the workplace or the company efficiently;
(b) Capabilities, experience, skills and qualifications needed in the workplace or

company mentioned in (a);
(c) Length of service and the employeesÊ status (non-citizen, part-time,

temporary or permanent);
(d) Age; and
(e) Other retrenchment guidelines and provisions.
If the employer wants to re-employ employees, priority should be given to those

retrenched employees first.
SELF-CHECK 2.5
If retrenchment is unavoidable, what are the fair procedures to be

followed by the employer?

ACTIVITY 2.7
Assuming that your organisation is currently facing a financial problem

and retrenchment is the last option. What can you do to ease the
problem? Discuss in the myINSPIRE forum.
2.4.7 Collective Bargaining

Collective bargaining, is the process where employees organise themselves
collectively and bargain with their employers regarding their employment.
Collective bargaining should be done in an as-easy-as-possible manner and for
that purpose, the employer and labour union should reach an agreement on the
following:
(a) Standard guidelines that can be effectively applied to the industry as a whole;
(b) Standard guidelines on bargaining when it involves issues that cannot be

resolved at the industry level; and
(c) Only one rule to be applied when resolving cases that are similar.
SELF-CHECK 2.6
What is collective bargaining? State the purpose of collective bargaining.
2.4.8 Collective Agreement

Details of a collective agreement and other important issues could be documented
together or separately but a proper report must be done so that updates can be
made.

A proper documented report would include provisions which cover the following:
(a) Matters that will be bargained and at what level;
(b) Important collective bargaining agreement on work conditions including the

duration of agreement and ways a party can terminate and renegotiate the
agreement;
(c) Regulations to solve collective disputes and individual complaints; and
(d) Regulations on overstaffing, temporary suspension, rule of conduct and

termination.
These provisions should also cover wages and salary, overtime rate, bonus or other
performance-related payments, working hours, shift work and employee leave.
Agreements should also cover supplementary benefits like paid medical leave,
pension, secured wage scheme and job research. These provisions are important
to determine the level of performance and production force as well as to categorise
the work done such as research method and job assessment; labour union fee
deduction, management fees and others.
SELF-CHECK 2.7
You may already have a job or have been offered a job. What information
in your appointment letter will you prioritise?
2.5 IMPORTANCE OF LEGISLATION IN SALARY

AND WAGE RATE DETERMINATION
Does legislation serve its intended purpose in compensation administration or
does it have little significance? The truth is that the importance of the role of
legislation in compensation administration system is beyond dispute. Legislation
ensures that the system fairly and adequately protects employees. The importance
of legislation in the formation of a compensation administration system is
illustrated in Figure 2.3.

Figure 2.3: Legislation and the four aspects of compensation management system
The four aspects of the compensation management system are described in the
following:
(a) To Achieve Fairness and Equality

To make sure that the appropriate salary is paid to employees, the
Employment Act 1955 has outlined a few terms and regulations on wage
computation. For example, wage computation on general holidays, leave
days and overtime on working days has been set at a reasonable rate.
Thus, the employer should comply with the act to ensure fairness in
employee pay. The WorkmenÊs Compensation Act 1952 guarantees that any
worker who suffers an injury arising from his employment, will receive
appropriate compensation.
(b) To Prevent Oppression and Discrimination

The Employment Act 1955 and the WorkmenÊs Compensation Act 1952 were
introduced to prevent employees from being exploited by their employers.
These acts ensure that they get the compensation they are entitled to and that
workers with disabilities due to accidents arising out of and in the cause of
their employment will not experience oppression at the workplace.
Employers are to take full responsibility for their employeesÊ welfare.

(c) To Maintain Good Relationship among Workers in the Work Environment

Labour unions protect employeesÊ rights through collective bargaining, thus
promoting harmonious relationships between the employer and employees.
In addition, the Industrial Relations Act 1967 regulates relations between the
employer and employees and their trade unions. Thus, industrial relations
are generally cordial.
(d) To Comply with Procedures and Laws in Preserving the Rights of the
Employer and Employees
Every process of work activity has to comply with procedures agreed upon
between the employer and employees. Procedures developed by the
employer should be based on the relevant legislation. For example,
WorkmenÊs Compensation Act 1952 requires the employer to report any
work-related accident to the Labour Department within 10 days of its
occurrence. Failure to do so is an offence punishable by fine up to RM2,000.
SELF-CHECK 2.8
What will happen if the employer does not adhere to the Employment
Act 1955, the WorkmenÊs Compensation Act 1952 and the Industrial
Relations Act 1967?
ACTIVITY 2.8
Assume that your colleague met with an accident outside working

hours. Is he eligible for compensation from his employer? How about
SOCSO? Refer to the related sources and discuss your answer in the
myINSPIRE forum.

2.6 LEGISLATIVE CONTROL OVER SALARY

AND WAGE RATE DETERMINATION
Employment acts were introduced by the government as a tool to control wage
and salary rate payable to employees. Legislative control over salary and wage rate
was first introduced when unemployment rate was low. The salary and wage rate
was raised when there was a huge demand for products and services.
Inflation will result if there is an increase in the supply of money relative to the
availability of goods and services. Thus, control over wages by the government is
essential. Employers are given the right to determine the wage rate but this has to
be done in adherence with legislative guidelines.
• Even though employers have the right to determine the wage rate, the
legislative aspect should be taken into consideration as well.
• Acts that control the payment of worker compensation are the Employment
Act 1955, the WorkmenÊs Compensation Act 1952 and the Industrial Relations
Act 1967.
• The relevant acts were introduced to protect the welfare and improve the
quality of life of employees.
• The National Labour Advisory Council formed the productivity-linked wage

system (PLWS) to establish a closer link between wages and productivity.
• The PLWS guidelines help employers set a wage rate that commensurate with
employeesÊ productivity.
• The wage reformation system consists of two components, namely profitability

profit model and productivity model.

Constant attendance allowance Permanent disablement benefits

DependantsÊ benefits Rehabilitation benefits
Employment Act (1955) Temporary disablement benefits
Industrial Relations Act (1967) WorkmenÊs Compensation Act
(1952)
Medical benefits
1. Employment Act 1955 aims to protect the following employees EXCEPT:

A. Manual labour
B. Manual labour supervisors
C. Legal migrant workers
D. Employees with salary of more than RM2,000 per month
2. The following are some matters that should be adhered to by an employer

according to Section 5 of Industrial Relations Act 1967 EXCEPT:
A. Preventing employees from joining labour union.
B. Terminating employees who join labour union.
C. Rejecting job applicants who are members of labour union.
D. Not taking any proper action regarding any industrial dispute.
3. The following are important legislative aspects to consider when formulating
a compensation administration system EXCEPT:
A. Achieving fairness and equality.
B. Preventing oppression and discrimination among employees.
C. Preventing a good relationship between the employer and employees.
D. Complying with procedures and legislation in protecting employees
and employer rights.
Essay Question
1. State three acts that are used as main guidelines by employers in formulating
the compensation administration system.
1. Legislative control over salary and wage rate is introduced to:

(i) Check the level of employment.
(ii) Check the increasing salary and wage rate.
(iii) Check the increasing demand for products and services.
(iv) Check inflation.
A. (i) and (ii)

B. (i), (ii) and (iii)
C. (i) and (iii)
D. All of the above
2. The WorkmenÊs Compensation Act 1952 was introduced to provide

employees with compensation if employees suffer from:
(i) Occupational illness
(ii) Death or accident during working hours
(iii) Permanent disability
(iv) Temporary disability
A. (i) and (iii)

B. (iii) and (iv)
C. (i), (iii) and (iv)
D. All of the above

Essay Questions
1. State the four roles of legislation in the compensation administration system.
2. Explain the role of legislation in determining the salary and wage rate.
Employment Act 1955.

Topic  Job Analysis
3
LEARNING OUTCOMES

1. Describe the importance of job analysis to human resource
management;
2. Discuss the objectives of performing job analysis;
3. Appraise the steps in the job analysis process; and
4. Examine the mistakes that are often made during the execution of
job analysis.
 INTRODUCTION
What are the work requirements that should determine the appropriate pay level
of a particular job? To find out, the employer should perform a job analysis. Job
analysis is the first task that should be performed in order to complete the job
analysis process under compensation administration. Job analysis should be
conducted before we perform job description, job specification and job
performance standard. In previous topics, we have explained organisational goal
and the external and internal situations that influence the formulation of a
compensation structure.
In performing job analysis, we need to obtain information regarding a job as

accurately and systematically as possible in order to develop a suitable wage
structure that reflects the relative value of each job in the organisation. We will also
need to identify the skills, knowledge and abilities that are required to fill a job.

TOPIC 3 JOB ANALYSIS  55
In this topic, we will discuss the process of job analysis as well as the importance
of job analysis to organisations.
3.1 DEFINITION OF JOB ANALYSIS

We frequently use the term „job analysis‰ but do we really understand what job
analysis is? Knowing the meaning of job analysis will help us conduct an
appropriate job analysis and develop a wage structure. Let us define job analysis.
Job analysis refers to the process of obtaining detailed information regarding

a job. It is a systematic process to determine the tasks involved in the job. Job
analysis is a technique of studying a job to identify the skills, knowledge,
experience and other requirements necessary to perform the job.
Job analysis is conducted in order to gather information to identify the tasks of a

position. The process looks into the skills, knowledge and abilities needed to
perform a job. The information gathered during job analysis is used for the
recruitment and selection process. It is also useful as an evaluation tool to ensure
that employees are given appropriate training as well as being the basis for setting
employee objectives in order to assess and manage their performance.
For example, in the case of an administration clerkÊs position, we should begin by

identifying all the tasks performed by an administration clerk. Among the tasks
are typing and document filing.
After identifying the tasks, we should establish the skills and knowledge needed
for the position. For example, the main skills are writing and typing letters, filing
documents, answering phone calls and operating a computer. Based on these
required skills, we then write a description of the responsibilities and requirements
of the job. This is important in order to attract the right candidate. Hiring the right
people is essential to an organisationÊs success.
ACTIVITY 3.1
What position are you currently holding in your organisation? If you are
a full-time student and have not worked before, assume that you are
working in a job that you like. List the duties and tasks of your job.

56  TOPIC 3 JOB ANALYSIS
3.2 IMPORTANCE OF JOB ANALYSIS

Job analysis is vital to human resource management because the human resource
department needs information to develop job descriptions, hire the right people
and set realistic expectations in managing employee performance. Figure 3.1
summarises the importance of job analysis to human resource management.
Figure 3.1: Importance of job analysis
Let us now discuss in detail the importance of job analysis to human resource
management.
(a) Redesign Job

Organisations redesign a jobÊs components to enhance organisational
effectiveness and employee satisfaction. Thus, detailed and accurate
information regarding a job should be documented and treated properly.
(b) Work Job Assessment

Organisations will place value on a job to help them structure a fair wage.
Through the process of job analysis, information regarding a job should be
gathered properly so that the determination of a wage or salary that will
satisfy every employee can be done.

(c) Human Resource Planning

Job analysis provides information regarding the skills needed in various jobs
in order to enable the planners to match the right candidate to the right job.
Job analysis allows an organisation to hire more thoughtfully and accurately
to meet its demand.
(d) Selection of Qualified Applicants

Job analysis helps an organisation to identify qualified applicants for a
particular job. Selection criteria such as knowledge, skills and abilities, which
are needed to perform a job, can be used to develop appropriate selection
devices.
(e) Performance Analysis

Through job analysis, an organisation can create evaluation tools for
analysing performance. The organisation will be able to recognise and
reward employee effort. This is crucial in retaining best employees.
(f) Training and Development

Job analysis helps an organisation to access training needs and to develop
training programmes that will upgrade employee skills. In that way,
employees will be able to meet the organisationÊs demand and can be
retained in the organisation.
SELF-CHECK 3.1
Earlier in this topic, we have defined job analysis. Imagine what would
happen to your organisation if the job analysis were not performed.
ACTIVITY 3.2
Imagine that you are a teacher. Explain the following work requirements
of a teacher:
(a) Tasks
(b) Skills
(c) Knowledge

3.3 OBJECTIVES OF JOB ANALYSIS

We have already examined the importance of job analysis. Now, let us study the
purpose of job analysis. Before an organisation decides to perform a job analysis,
it should identify the purpose or objective of the job analysis. This is to ensure that
the job analysis is done in line with organisational objectives and goals. A good job
analysis helps to make an organisation more productive, profitable and
competitive. The four objectives of job analysis are as follows:
(a) To Identify the Particular Job Duties and the Relative Importance of
Those Duties
By conducting job analysis, organisations can provide a complete and
descriptive summary of the nature of physical requirements and relative
importance of a job. For example, the organisation chart shows the main
departments and all the positions in the organisation and the reporting
relations between them. Every employee will be able to know whom his
superior, subordinates and same-level colleagues are.
Figure 3.2 is a simple example of an organisational chart. Refer to Figure 3.2

to fully understand the organisational hierarchy of a general management
office.
Figure 3.2: Organisational chart of management office

(b) To Form a Better, Clearer and Correct Understanding of the Working Skills,
Knowledge and Abilities Required to Perform a Specific Job
By conducting a job analysis, the organisation can identify the duties and
tasks associated with the job as well as the knowledge, skills and abilities
needed to perform the job. For example, an administrative clerk should be
able to perform clerical duties such as filing, typing and ensuring timely
completion of tasks as required.
(c) To Set Standards to Track an EmployeeÊs Progress and Measure His

Performance
Job analysis determines the standards for each job in an organisation.
EmployeesÊ progress and performance will be measured against the
established standards. For example, an administrative clerk should set up
and maintain an organised and effective filing system and document
organisational matters in an orderly manner. Suppose Organisation AÊs
performance standard for administrative clerks is set at 80 per cent efficiency
of an administrative clerk. This is the minimum standard that should be
achieved by every administrative clerk in the organisation.
For a clearer picture, refer to Figure 3.3.
Figure 3.3: An example of standard measurement for the position of an

administrative clerk

(d) To Determine the Duties, Tasks, Work Requirements and Work Environment
Job analysis helps to prioritise tasks by identifying the major areas of a
jobholderÊs responsibility. For example, between filing documents and
typing letters, which is a more important task for an administrative clerk? If
typing is more important, it will be placed on top of the to-do list.
Job analysis determines the work requirements including physical

requirements, knowledge, skills and abilities to perform a job. In addition,
job analysis collects information on the tools and equipment needed as well
as the work environment.
ACTIVITY 3.3
Assume that you are the Human Resource Manager in your

organisation. You are required to perform job analysis for a general
assistant. Besides his responsibilities, what other details do you need to
include in the job analysis? Share your answer in the myINSPIRE forum.
3.4 INFORMATION CONTAINED IN A JOB

ANALYSIS
After discussing the objectives of job analysis, the next step is to examine the
information gathered through the process.
Refer to Figure 3.4 for a general picture of the data collected through job analysis.

Figure 3.4: Contents of job analysis information
The information required for a job analysis as highlighted in Figure 3.4 is as

follows:
(a) Tasks and duties performed on the job;
(b) Knowledge, skills, abilities and other characteristics that are needed to
perform the tasks and duties efficiently. This information is useful in
determining the qualification and skills needed for the position;
(c) Tools and equipment that are required to perform certain duties and tasks,
for example, computer and photocopier;
(d) Physical condition of the workplace, for example, huge machineries, racks to
store documents and storage for radioactive substances.
(e) Performance appraisal criteria that an employee is required to meet such as

standards set by the organisation.
ACTIVITY 3.4
What happens if the information gathered through job analysis is

inaccurate or insufficient? In your opinion, what are the reasons for the
lack of accuracy or sufficiency of the information gathered? Share your
answer in the myINSPIRE forum.

3.5 JOB ANALYSIS PROCESS

We have arrived at the most important part of job analysis, which is the process of
job analysis. Before conducting a job analysis, we must be aware of the issues that
could affect the accuracy of the data collected. Some of the issues are as follows:
(a) Lengthy Process

Job analysis involves a long duration because the information needs to be
gathered from various parties.
(b) Involvement of a Huge Workforce

The information gathering process is tedious and involves the use of
structured questionnaires, interviews with the incumbent as well as the
supervisor and finally, the preparation of a job description by the job analyst.
(c) The Need for Expert Job Analyst

The analysis should be conducted by individuals who have the expertise in
the jobs being analysed. Involvement of experts would ensure that the
analysis process is done properly.
(d) The Need for Certain Skills to Ensure a Smooth Job Analysis Process
This includes writing skills and the ability to interpret human behaviour.
Let us now summarise the job analysis process. The job analysis process involves
three stages as shown in Figure 3.5.

Figure 3.5: Job analysis process

Source: Pengurusan Sumber Manusia, Dewan Bahasa dan Pustaka (1994)
SELF-CHECK 3.2
What are the objectives of job analysis?
ACTIVITY 3.5
What are the issues that could affect the data collection of the job
analysia?

3.5.1 Determining the Job to be Analysed

Selecting the job to be evaluated is an important decision in job analysis. A job is
usually selected because the job content has undergone some changes due to
technological advancement. These changes will cause a shift in the nature of the
job. Job analysis is also performed when a new organisation is formed or when a
new position is created.
For some organisations, job analysis is done at intervals, for example, once every
three years. From time to time, the job analysis process needs to be repeated
because as circumstances change, so will the nature of the job. Out-of-date
documentation is useless and brings no benefit to the organisation.
3.5.2 Choosing the Job Analysis Method

We have already known why and under what circumstances a job analysis is
performed. Now let us study the methods that can be used for the process of job
analysis. The job analyst should first understand the objectives of the job analysis
before selecting the analysis method. Besides the objectives of the analysis, factors
such as cost, time, accuracy and budget will also influence the choice of the
method.
In many cases, combinations of methods are used to ensure the information

obtained is accurate and comprehensive. Some of the methods that can be used are
presented in Table 3.1.
Table 3.1: Methods of Job Analysis
Method Description
Questionnaire Employees are asked to identify their duties and
responsibilities by answering questionnaires.
Interview Employees and/or supervisors are interviewed to obtain
information on their jobs and responsibilities.
Observation EmployeesÊ work behaviour is observed and recorded.
IncumbentÊs work Employees record or write their job activities in a book.

3.5.3 Handling Job Analysis

To select the method is easy but to handle job analysis requires detailed planning.
The job analyst should understand the nature of the job as clearly as possible. This
can be done by reviewing organisational reports and creating effective
communication with the organisationÊs employees.
The information gathered will be used to define job description, job specification
and job performance standard.
(a) Job description is a document explaining the scope, functions, tasks,

responsibilities and other aspects associated with a particular job. This
document records everything regarding the job in a concise and precise form.
For example, how filing is done in the office.
(b) Job specification is a document that defines the characteristics of the activities
associated with the job that are given in the job description. Job requirements
such as experience, academic qualification and skills are stated in the job
specification. For example, minimum 2 years of experience, diploma
certification and excellent communication skills.
(c) Job performance standard is a measurement of work standard that should be

achieved by employees. The actual performance will be compared against
the job performance standard. If employee performance is below the
standard, corrective action would be taken to improve job implementation.
ACTIVITY 3.6
In your opinion, what is the best method of job analysis for the position
of a clerk? Discuss with your friends and describe how a job analysis is
done.

3.6 MISTAKES IN JOB ANALYSIS

The job analyst should understand the importance of the information gathered in
order to prevent any mistakes that will risk the accuracy of the data collected. Some
of the most frequent mistakes made by analysts are as follows:
(a) Overlooking important facts during the job analysis. This will result in
inaccuracy of data collected and will affect the structure of job analysis. This
mistake can be avoided if the analyst understands the information regarding
the job and organisation in the first place.
(b) Selection of unsuitable or wrong analysis method. Objectives of the job

analysis will be able to help the analyst decide on the most suitable method
to use. In addition, he should not limit himself to just one method. The
various methods of job analysis may be used in combination.
(c) Failure to evaluate the level of job difficulty. The job analyst should
understand employee behaviour, as some employees may exaggerate or omit
tasks and duties in order to protect their jobs or to secure a higher pay.
(d) Failure to communicate well with employees who are involved in the
information gathering process.
Efforts should be made to minimise job analysis mistakes. An effective job analysis
depends on the ability of the analyst to gather information accurately.
ACTIVITY 3.7
What will become of the job analysis if errors are made during the job
analysis process? What will be the impact on job description, job
specification and job performance standard?

• The purpose of job analysis is to gather information on particular job duties

and requirements.
• The information gathered through job analysis enables human resource

management to redesign jobs, plan for the organisationÊs human resources,
select qualified applicants, develop appropriate employee training
programmes, evaluate types of work compensation programmes and set
performance standards for jobs.
• The analysis process should be performed as efficiently as possible to minimise

mistakes that will cause the information gathered to be inaccurate and unclear.
Job analysis Job specification

Job description Responsibilities
Job performance standard Tasks
Essay Questions
1. Discuss the importance of job analysis.
2. State three objectives of job analysis.

1. The following statements reflect the importance of job analysis to the human
resource department EXCEPT:
A. To help restructure the components of every job in the organisation.
B. To help evaluate a job to determine the wage level.
C. To help determine the form of training to be provided for a job.
D. To help in planning with regard to work environment.
2. Which of the following are organisational objectives of job analysis?

(i) To explain the importance of a particular position in terms of its scope,
status, etc.
(ii) To give a better understanding of the skills, knowledge and abilities
needed for a job.
(iii) To place more focus on employee performance.
(iv) To explain the responsibilities and work environment of a job.
A. (i), (ii) and (iii)

B. (i), (ii) and (iv)
D. All of the above
3. The following information could be obtained from job analysis EXCEPT:

A. Names of supervisor and incumbents involved in the job analysis
process.
B. Tasks and responsibilities of a job.
C. The desired level of knowledge, skills and abilities.
D. Data regarding the tools and equipment used, and the physical
condition of the workplace.

4. Which of these items will influence the selection of job analysis method?
(i) When the information is needed
(ii) The cost of performing job analysis
(iii) The accuracy of the method used in gathering information
(iv) Management support

D. All of the above
5. The following are mistakes that are likely to be made by a job analyst
EXCEPT:
A. Overlooked important facts regarding the job and organisation.
B. Selected the wrong method of job analysis.
C. Did not ensure proper communication between him and the incumbent
or supervisor in gathering information.
D. Misunderstood the level of difficulties of the analysed job.
Essay Question
1. Briefly explain the process of job analysis.
June Meaw Long Poon. (1994). Pengurusan sumber manusia. Dewan Bahasa dan
Pustaka: Kuala Lumpur.

Topic  Job
Description
4
LEARNING OUTCOMES

1. Explain four ways in which job description is useful for
compensation administration;
2. Describe the eight important components in a job description;
3. Review the six steps in writing a job description; and
4. Prepare a standard job description.
 INTRODUCTION
We have discussed job analysis in the previous topic. Information gathered
through job analysis is used to prepare job description. Employees would not have
known about their duties and responsibilities if there were no job descriptions for
their positions. Thus, every type of work should have a job description. This will
make it easier for employees to understand their job tasks and responsibilities.
In this topic, we will define and discuss the importance of job description in
compensation administration. In addition, we will also discuss how to write job
descriptions correctly. Finally, we will explain the job description format.

TOPIC 4 JOB DESCRIPTION  71
4.1 DEFINITION OF JOB DESCRIPTION

Do you understand what is meant by job description? Most employees will say
they do. But do they really understand it? Human resource department staff
should know precisely the description of every position in the organisation
because only then would they be able to ask job-related questions during
interviews. Every employee should know their own job description in order to
perform well in his own job. Now, let us define job description.
Job description is a written document that identifies, explains and elaborates

the details of a job in terms of the tasks, scope and responsibilities.
A good job description must describe the job well and consists of details such as
type of work to be performed, how to perform the job and working conditions.
Common elements that should be, and are often, included in a job description are
summarised in Figure 4.1.
Figure 4.1: Common elements usually included in a job description

72  TOPIC 4 JOB DESCRIPTION
Let us describe each element in further detail.
(a) Main Responsibility

Refers to the overall purpose of the job and the principal role of the jobholder.
This component is useful in determining task priority.
(b) Time Allocation

Percentage of time allocated to each responsibility. This ensures that the top
priority job gets the most allocated time.
(c) Job Performance Standard

The performance standard that should be achieved by the jobholder when
conducting his duties.
(d) Job Situation Clarification

Describes the working condition and any limitation that may be faced during
job execution. The purpose of this element is to provide information on the
work environment and its relationship with the job and tasks in question.
(e) Employees Involved

The number of employees performing the same type of work. Through this
element, the organisation will know the actual number of employees holding
the same job, In other words, does the organisation have too many, too few
or just the right number of employees for that job?
(f) Supervisor
Person whom the incumbent should report to. This element informs the
incumbent the person who is directly responsible for him.
(g) Tools and Equipment

The tools and equipment required for performing a job is an essential
element in the job description because it is used to examine the level of the
employeeÊs skills when performing his job.
Job description clarifies who is responsible for certain tasks. A comprehensive job
description should contain the seven elements mentioned, at the least.

SELF-CHECK 4.1
1. What do you understand by the term „job description‰?
2. Describe the seven elements of job description.
ACTIVITY 4.1
At the start of your job:
(a) Were you informed of your tasks and responsibilities? Was it done
verbally or did it involve any document that outlined your tasks
and responsibilities?
(b) Does your job description include all the seven elements
mentioned in this topic?
(c) What are the similarities and differences between the elements in
your job description and the elements mentioned in this topic?
4.2 IMPORTANCE OF JOB DESCRIPTION

Having defined job description, we now turn our attention to the importance and
functions of job descriptions. The main objective of developing a job description is
to clarify the expectations of a job and to identify employee responsibilities.
Identification, summary on relationship, tasks and responsibilities, power and
desired performance standards, and working environment together with job
specifications are often outlined in a job description.
The writer of job descriptions should be well trained to produce concise and
precise job descriptions. A good job description can help an organisation ensure
the smooth running of its operation while an inaccurate and unclear job
description will interrupt the operational flow.

How is job description useful for human resource management or the

organisation? Let us look at some of the functions of job description as provided
in the following:
(a) Clarifies Duties and Responsibilities of Employees

There have been situations when employees refused to perform certain tasks
because they were not documented. Often, they used the excuse that the
tasks were not outlined in their job description. There have also been cases
where senior employees shifted their assignment to new colleagues by telling
them that it is their responsibility. Figure 4.2 shows how a senior employee
tries to get a newly hired clerk to do her job by telling him it is part of his
work scope. Such as situation can exist due to the absence of a job description.
Figure 4.2: Instance of power abuse in the absence of a job description
To deter the situation depicted in Figure 4.2 from happening, every

organisation should develop clear job descriptions that will allow employees
to be clear about the nature of their role in the organisation and
accountability.
(b) Clarifies Employment Contract

Job description clarifies the employment relationship and allows an
employee to know what his legal status is.

(c) Informs Employees of their Work Activities

Through job descriptions, employees could evaluate their work activities,
whether they are as stated in the job description. When a comprehensive job
description is available, employees will be able know what to do in the
absence of his supervisor. Interpretations of work activities will not vary
even when there is a change in supervisory staff.
(d) Designs Organisational Structure and New Tasks or Modifies Existing Tasks
Job description enables an organisation to divide its labour into distinct jobs
and to design new tasks or modify existing ones in order to maximise
employee performance. It provides a roadmap for the future as jobs evolve.
SELF-CHECK 4.2
What is the importance of job description to an organisation and to an

employee?
ACTIVITY 4.2
Assume that you are working as a human resource officer. Tell us about
your job description as well as that of your colleague who is working in
a different department. What are the similarities and/or differences
between his and your job description? List those similarities and/or
differences. In your opinion, why do these similarities and/or
differences exist?

4.3 IMPORTANT COMPONENTS IN A JOB

DESCRIPTION
Before an organisation decides to develop job descriptions, it should first
understand the components of an excellent job description. This is necessary so
that the organisation can develop job descriptions that are precise, concise and
correct. We have to remember that a good job description enables smooth and
efficient workflow.
Figure 4.3 shows the eight components that should be included in a job
description.
Figure 4.3: Job description components

Let us discuss the components of job description one by one.
(a) Job Identification

The name or title of the job is identified. The name of the job has to be stated
clearly and correctly in the job identification. This is to ease the flow of
information and acknowledgement of the jobholder. The name of a job must
reflect the relationship between the job and other jobs in the organisation to
allow for promotion, relocation and job development.
(b) Job Status

Job status refers to the level of a position in an organisational hierarchy. The
job status has to be accurate, easy to identify and most importantly, based on
the Employment Act 1955.
(c) Job Code

Job code is a unique identification code for a particular job, which was
formed to make it easier for an organisation to differentiate it from other jobs.
For example, all finance-related work in an organisation is assigned job code
010. This means that every position that is related to finance will have the
numbers 010 at the beginning of its job code.
(d) Job Summary

Job summary is an overview of the work activities. It identifies the key tasks
and responsibilities of a particular job.
(e) Job Introduction

Job introduction describes the responsibilities associated with a specific job.
(f) Accountability
Accountability refers to an item that is used to explain work achievements.
It is the responsibility of every employee to perform and complete his work
correctly.
(g) Job Specification

Job specification is a document that outlines the qualifications and personal
characteristics that an employee needs to possess in order to perform the job.
The qualifications include work experience, educational level, skills as well
as health considerations.

(h) Job Performance Standard

Job performance standard is a standard measurement system that is used to
determine an employeeÊs performance level. Performance standard
communicates specific performance expectation for each major task. This
ensures that an employeeÊs actual performance will not be far from the
organisationÊs expectation. The actual work performance will be compared
against the job performance standard.
Table 4.1 shows a sample of job description.
Table 4.1: Sample Job Description
Job Identification
Name of Job: Administrative Clerk
Job Status: Supporting Group
Job Code: 015 – 09 – 25022003
Job Summary: Letter typing, document filing and recording of company
incoming and outgoing correspondence.
Job Introduction: (i) Assist the Head of Administration to type all
correspondence.
(ii) File all documents regarding companyÊs
administrative meetings, stationery purchases and
other office appliances.
(iii) Assign reference numbers for every letter received
and sent to ease the process of correspondence
tracking.
Accountability: Administrative clerk will complete all the above work in

an accurate and organised manner. She will also ensure
the quality of the work done.
Job Specification: Three main skills needed are writing and typing letters,
answering phone calls politely and ability to use a
computer. Should be able to type 40 words per minute.
Minimum educational qualification is Sijil Pelajaran
Malaysia (SPM) with at least a credit in Bahasa Melayu.
Does not have any eye defects.

SELF-CHECK 4.3
1. Describe the components of a job description.
2. In your opinion, what are the measures needed to implement a job

description?
ACTIVITY 4.3
If you are currently working, with the assistance of your organisationÊs

human resource executive, write your job description by taking into
account all of the eight components mentioned in Subtopic 4.3.
4.4 STEPS IN THE GROUNDWORK PROCESS

FOR CREATING A JOB DESCRIPTION
Now that we have identified the important components in a job description, the
next step is to familiarise ourselves with the process that lays the groundwork for
creating a job description.

There are six steps in the groundwork process. The steps are illustrated in
Figure 4.4.
Figure 4.4: Steps in the groundwork process for creating a job description

The steps are explained in the following:
(a) Step 1 – Identifying the Type of Information Needed

This is to ensure a comprehensive job description.
(b) Step 2 – Choosing Data Gathering Method

Various methods can be used to gather information, namely questionnaire,
interview, observation, incumbent work log (diary) and inspection by work
experts. These methods can be used individually or in combination.
(c) Step 3 – Listing Tools and Personnel Involved

Write down the tools and personnel that will be used to develop the job
description. If new employees are involved, training should be provided so
that they know how to do it.
(d) Step 4 – Allocating a Budget

Prepare a budget to fund the job description process.
(e) Step 5 – Studying the Existing Data

Examine the existing data related to the organisationÊs structure, operation
and workforce. This is to understand the relationships between departments
and between employees.
(f) Step 6 – Determining the Position that Needs a Job Description

To decide the position that needs a job description, list the position,
department and its staff in detail.
This preliminary preparation is necessary to ensure all information regarding the

job could be gathered properly, accurately and quickly.
SELF-CHECK 4.4
List the six steps of the groundwork process.

4.5 JOB DESCRIPTION PROCESS

Upon the completion of the groundwork, the next stage is the creation of job
description process. Developing a job description needs extra care. This is to
prevent inaccuracy of the information gathered which could affect the job
description. Thus, early preparation for developing a job description could help to
ensure that complete and accurate information is obtained.
There are six steps in the job description process. Refer to Figure 4.5.
Figure 4.5: Job description process

The steps in the job description process are explained in the following:
(a) Step 1 – Appointing Job Analyst

The human resource department should appoint a job analyst to develop the
questionnaire. Expert analysts would know which information is important
and should be taken into consideration in ensuring a complete job
description.
(b) Step 2 – Distributing Job Description Questionnaires

The human resource department will distribute the questionnaires and issue
a request to all employees to fill up the questionnaires within a given period
of time. Instructions from human resource department should be clear so that
all employees understand why the questionnaires have to be filled.
(c) Step 3 – Filling Up the Questionnaire

Every employee will fill up the questionnaire distributed by the human
resource department.
(d) Step 4 – Examining the Questionnaires

After the jobholders have completed the questionnaires, the job analyst will
examine and approve them to ensure that no details have been left out.
Unfinished questionnaires will be returned to the jobholders to be
completed.
(e) Step 5 – Interviewing Jobholders

Sometimes jobholders may have difficulty giving concise and precise
answers to the queries in the questionnaire. To overcome this problem, the
job analyst will interview the jobholders to obtain a clearer picture. The
analyst will then write down the information himself. The analyst often does
not stick to just one method of creating job descriptions in order to ensure
that the information gathered is complete. A combination of methods such
as observation, interview and questionnaire can provide more insights.

(f) Step 6 – Formulating Job Description

After obtaining all the information, the job analyst will examine the data and
transform it into a job description format.
The human resource department has to ensure that every one of the steps in the
job description process are adhered to. This is to ensure that no information is left
out and that time and cost allocations are in accordance with the job description
process.
SELF-CHECK 4.5
Why does formulating the job description have to be performed

accurately? What are the consequences of an inaccurate job description
for the employee?
4.6 JOB DESCRIPTION FORMAT

After gathering all the information needed to write the job descriptions, human
resource department would create job descriptions for all the positions in the
organisation. The job descriptions should include all the components discussed
earlier.

Table 4.2 illustrates a sample of the job description format for the post of
administrative clerk.
Table 4.2: Sample of Job Description Format
Position: Administrative Clerk Head of Department: Administration

Manager
Department: Administrative Immediate Supervisor: Head Clerk
Department
Location: Headquarters Date: 25 March 2020
Job Summary:
Responsible for handling the companyÊs administrative documents.
Job Description:
(1) Type all letters assigned by the Head of Administrative Department.
(2) File all documents related to company administration, stationery purchases and
other office appliances.
(3) Assign reference numbers to all correspondence to ease the tracking process.
Relationship with Other Parties:

(1) Reports to the Head Clerk.
(2) Supervises two clerks and an office assistant.
(3) Liaises with all departments in the company.
Working Conditions:
On duty five days a week (Mondays – Fridays) in an air-conditioned office and follows
normal office hours from 9:00 am to 5:30 pm.
Qualifications:
Passed SPM, one year of work experience, able to work under minimal supervision,
computer literate and able to manage time properly.

• The goal of a job description is to ensure employees understand the nature of

their job. It describes all the duties and responsibilities associated with a given
job.
• The eight components in a job description are:

– Job identification;
– Job status;
– Job code;
– Job summary;
– Job introduction;
– Accountability;
– Job specification; and
– Job performance standard.
• There are six steps in creating a job description:

– Step 1: Appoint the job analyst
– Step 2: Distribute job description questionnaires
– Step 3: Fill up the questionnaire
– Step 4: Examine the questionnaires
– Step 5: Interview the jobholders
– Step 6: Formulate the job descriptions

Accountability Job performance standard

Job code Job specification
Job description Job status
Job identification Job summary
Job introduction
Essay Questions
1. Give the definition of job description.
2. Give four reasons for creating job descriptions.
3. Briefly discuss the following components in a job description:

(a) Job specification
(b) Accountability
(c) Performance standard
(d) Job summary

1. All of the following statements about job description are TRUE, EXCEPT:
A. Job description is a written document that identifies, clarifies and
elaborates on the scope, tasks and responsibilities of a job.
B. A good job description should clearly state the type of job to be
performed, how to perform the job and the responsibilities of the job.
C. A job description can measure the performance standard of an
employee holding the same post.
D. A job description should include details like the main and additional
responsibilities, percentage of working hours and physical conditions
of the job.
2. The following are the importance of job description:

(i) Clarifies the duties and responsibilities of employees.
(ii) Instructs employees on their work activities and matters regarding
their job.
(iii) Clarifies the employment contract.
(iv) Designs organisational structure and recognises human resources.

D. All of the above

TRUE (T) or FALSE (F) Statements
1. There are six steps in the job description process. ( )
2. In job identification, the name given to a job reflects the nature of the job.
( )
3. Job code reflects a particular criteria of a department in an organisation.

( )
4. The date on a job description tells us when the job description was created.
( )
5. A good relationship must exist between jobholders and the analyst panel.
( )
Essay Question
1. Briefly explain the process of job description.

Topic  Job Evaluation
5
LEARNING OUTCOMES

1. Explain the importance of job evaluation to compensation
administration;
2. Discuss the steps in the job evaluation process;
3. Appraise the two methods of job evaluation; and
4. Examine issues that influence the decision to perform job
evaluation.
 INTRODUCTION
We have studied about job analysis and job description. Now, let us turn our
attention to job evaluation. This procedure completes the work analysis process.
Job evaluation is a systematic assessment of the demands of different jobs in an
organisation. It is a slow process and not easy to perform. This is because it is a
process of problem solving and decision making that requires subjective
evaluation by experts who understand the organisational structure inside and out.
This subjective evaluation is an evaluation of a jobÊs worth.
In performing job evaluation, we must consider the methods used to gather

information about the job value. This is because the selected method will influence
the information collected with regard to the equity in an organisation. Through job
evaluation, an organisation will know if the wages it pays its employees reflect the
value of their job and the contribution of the employees.

TOPIC 5 JOB EVALUATION  91
In this topic, we will discuss the definition of job evaluation from the compensation
administrationÊs viewpoint and the importance of job evaluation. In addition, we
will examine the process of job evaluation and the methods used. Finally, we will
identify the issues that influence the decision to evaluate a job.
5.1 DEFINITION OF JOB EVALUATION

Job evaluation was introduced by Frederick W. Taylor in 1900 in the aftermath of
the Second World War. Countries that were involved in the Second World War
were suffering from economic decline, high inflation and price freeze, which
prevented the wage administration institution from increasing the wages of its
employees. The situation forced employers to transform the wage administration
system into a system that pays according to the type of job.
According to Henderson (2005), job evaluation is a systematic process in

determining the relative value of all positions or jobs in an organisation.
According to Muhammad Ali (2012), job evaluation is a process of systematic
measurement of a jobÊs relative value. It was designed and developed through
job comparisons to establish a hierarchy of job differentials, job relativities and
job grading to achieve internal pay consistency.
Job evaluation takes into account every criteria recorded in the job description and
job specification. Every task and responsibility related to knowledge, skills,
experience and abilities should be identified since they will determine the value of
payment for each type of job.
According to Armstrong and Murlis (1998), job evaluation is a process of

evaluating the relative „size‰ of a job or position in an organisation. The size refers
to the comparison or importance of a job to an organisation. An easier way to
understand job evaluation is by viewing job evaluation as the following:
(a) A comparison process where the size of a job is compared with other jobs.
Factor analysis and scale usage could help in the measuring process to ensure
that comparisons are made accurately;
(b) A process to gauge the subjectivity of the assessment carried out to maximise
equality across the same job. This process is needed to interpret facts and
situations. The conclusion derived helps to identify the relative value of a job;

92  TOPIC 5 JOB EVALUATION
(c) An analytical assessment of the degree in which certain factors are present in
a job and compiles them into a common format; and
(d) A constructive process, meaning that job evaluation will help to reconstruct
a complete job profile, to assist an evaluator to assess a jobÊs worth in a
rational manner.
For example, the job of an administrative clerk is evaluated and given a value. The
job is then compared with the position of an accounting clerk, a job with similar
levels of complexity and responsibility. The purpose is to compare and determine
the relative value of a job against another job. This information will form the basis
of a fair wage system.
SELF-CHECK 5.1
In our working life, most of us would have gone through a job evaluation
process. Normally, the job evaluation process is performed at the end of
the service year. Based on your work experience, what do you
understand by this process?
ACTIVITY 5.1
As an employee, your job performance is being evaluated all year long.

Has this contributed to the job evaluation process, which will boost your
chance for a promotion or a raise?

5.2 IMPORTANCE OF JOB EVALUATION

Job evaluation is important to compensation administration because it determines
whether the wage and compensation given to employees are suitable and fair.
John Stacy AdamÊs (1965) equity theory explains why organisations should
perform job evaluation. Equity theory focuses on individualÊs perceptions of how
he is treated in comparison to others. Employees believe they are being treated
fairly when their salaries are equitable, relative to others.
Some of the functions of job evaluation are as follows:
(a) Comparing EmployeeÊs Contribution with the Rate of Payment Received

Job evaluation sets the internal logic of relation concerning various jobs.
Through job evaluation, an organisation can differentiate the contributions
made by each employee to the organisation, which will then be valued and
compared to obtain the relative value that will determine if the current wage
rate is suitable.
(b) Forming the Basis of Wage Payment System

Through job evaluation, an organisation can identify the main criteria used
to measure and evaluate employee job performance. This will enable the
organisation to differentiate individual contributions in order to determine
the relative value of each different job in the organisation. The relative value
will form the basis of the organisationÊs wage structure.
(c) Comparing the Payment Rate with that of other Organisations

When an organisation performs a job evaluation, information obtained will
help the organisation to determine the payment rate of each job in the
organisation. The organisation will also compare the wages received by its
employees with the wages given by competitors to see its suitability.
(d) Determining the Compensation Rate

An organisation could use the relative job value not only to set the wage rate
but also to determine the compensation package as well. Such a package
would reflect the relative value of the work done in the organisation and
reward performance based on the individual employee or groupÊs
contributions to the organisation.

(e) Forming EmployeeÊs Rank in the Organisational Hierarchy

An employeeÊs rank in the organisational hierarchy is based on the value of
his job in the organisation. The proposed value for each position in the job
evaluation report determines the significance of each job in the organisation.
SELF-CHECK 5.2
If you are an employer, what is the importance of a job evaluation to your

employees?
ACTIVITY 5.2
Identify the tasks performed in the organisation where you (or your
friend) work. Think of the skills and knowledge that you use to perform
your job. Compare the value of your skills against the salary you are
getting. Then compare your salary with the salary that is provided
elsewhere in the job market. Are they equivalent?
5.3 JOB EVALUATION PROCESS

Before an organisation decides to conduct job evaluation, it should first have an
understanding of how to perform a good and accurate job evaluation. This is
important to ensure that the job evaluation will not be disputed by any party.
Figure 5.1 shows the six steps in the job evaluation process.

Figure 5.1: Steps in the job evaluation process
Job evaluation should be done according to the steps prescribed in Figure 5.1. This
is to make sure that the objective of implementing job evaluation is achieved. The
objective is to assist the compensation administrator to design the organisationÊs
compensation system. Job evaluation rates essential job attributes with respect to
their perceived value to the organisation. These values often form the basis of the
compensation system.

As mentioned earlier, there are six steps in the job evaluation process. Let us look
at each of the steps in detail.
(a) Step 1 – Forming a Job Evaluation Team

Job evaluation is usually conducted by a well-trained team. This team may
consist the employeeÊs immediate supervisor, management and labour union
representatives as well as job analyst experts. If the organisation lacks the
skills, it could engage external evaluators.
(b) Step 2 – Determining the Benchmark Job

Job evaluation is often based on a job sample called the benchmark job. A
benchmark job is one that can relate to other jobs. It serves as a reference
point for other jobs to allow a comparison of the job evaluations performed.
Benchmark jobs are also used as a basis for establishing the pay structure.
(c) Step 3 – Forming Compensable Factors

Compensable factors are factors that are used as the base in job compensation
calculation. These factors provide a common measurement link between
jobs. They are used to determine the relative value of a job. Examples of
commonly used compensable factors are skills, efforts and responsibilities.
The three factors will assign a value for each job or task performed by
individuals.
(d) Step 4 – Forming the Dimensions for Organisational Job Value

This step helps an organisation to identify the contributions made by
individual employees in performing their tasks and responsibilities. The
measurement dimensions used are:
(i) Frequency of job performed;
(ii) Amount of time needed to perform a given job;
(iii) Error impact in executing a job to differentiate the level of caution when
executing a job or task;
(iv) Level of a job, that is, the rank of a position in the organisational
structure;
(v) Complexity and difficulty in executing a job to differentiate the level of
difficulties of the job performed;
(vi) Overall connection to organisational performance. This shows the
connection of the evaluated job to the overall achievement of the
organisation.

(e) Step 5 – Choosing the Job Evaluation Method

An organisation would choose a job evaluation method that best suits the
organisationÊs capabilities. The method selected is also dependent on the
objective of implementing the job analysis, whereby in order to obtain
complete information, a combination of methods are required.
(f) Step 6 – Determining the Job Value in Ringgit Amount

After the relative value of each job has been determined, the value will be
converted into ringgit amount through job pricing. Job pricing involves the
establishment of suitable wage rates for every job within an organisation in
order to form a wage structure that could be managed efficiently.
For example, an administrative clerk is paid RM700 per month. This value is the
individualÊs contribution to the organisation. It is also the relative value of the
administrative clerkÊs job to the organisation.
ACTIVITY 5.3
Recall the time when you were evaluated. Who conducted your job
evaluation? What were evaluated and what was the outcome of the job
evaluation process?
5.4 JOB EVALUATION METHODS

Job evaluation assists organisation to form an inner equity, which is fairness in
wage payment of various jobs in the organisation. Organisations could use two
approaches, namely non-quantitative method and quantitative method to execute
the job evaluation. Figure 5.2 summarises the various approaches in non-
quantitative and quantitative methods.

Figure 5.2: Components of the quantitative and non-quantitative methods
5.4.1 Quantitative Methods

There are two types of quantitative methods, namely factor comparison method
and point factor method. They are quantitative methods because they rely on
numerical scores or ratings.
(a) Factor Comparison Method

This is an accurate, versatile and quantitative technique for job evaluation.
An evaluator is required to evaluate the job by considering different aspects
and factors of the job. The job is being graded several times, which is once
for every compensable factor used. This technique involves the following
steps:
(i) Determining the benchmark jobs, that is, jobs which are commonly
found and thus, used to make pay comparisons.
(ii) Determining and defining the compensable factors with common

definitions for all the jobs to be evaluated. Compensable factors
normally used include mental requirement, physical requirement,
skills requirement, responsibility and working conditions.

(iii) Grading every main job for every compensable factor used. This
grading decision is made based on the information contained in the job
description. An example of preliminary grading is arranging
compensable factor in terms of priority. For the position of a lecturer,
the most important compensable factor would be the mental ability
followed by the physical ability.
(iv) Determining the wage rate according to the compensable factor for
every main job. For example, for the position of a lecturer, wage is being
distributed according to the compensable factors, which are mental
requirement RM50, physical requirement RM10, skills requirement
RM30 and responsibility RM10. These values will then be added up to
derive at the total wage per day.
(v) Grading the main jobs in term of wage rates, from the position that
receives the highest salary to the position that receives the lowest
salary.
(vi) Comparing the grading done in steps (iii) and (v) to determine the
consistency of the data gathered. If the results from both sets of data
show significant differences, we cannot use that job as the
organisationÊs main job.
(vii) Forming a job comparison scale or matrix and displaying all the main
jobs on the scale.
(viii) Evaluating other jobs by using the job comparison scale. Other jobs to
be evaluated could be inserted in the factor-to-factor scale by
comparing each of the jobs with the main jobs found on that scale.

The factor comparison method is summarised in Figure 5.3.
Figure 5.3: Factor comparison method
(b) Point Factor Method

Point factor method uses point system to evaluate job factors. All points
given to each factor will be accumulated for each job in order to obtain the
total point score, which will then be used to determine the wage rate for each
job. Point system involves the following steps:
(i) Determining the job to be evaluated, for example, managerial work and
clerical work.
(ii) Selecting the compensable factors to be used for measuring job value.
The number and type of compensable factor used depends on the job
to be evaluated.

(iii) Defining the compensable factors selected to reconcile the various job
evaluators.
(iv) Allocating weights for every compensable factor, according to the

importance of relative factors, to the job that is being evaluated. For
example, the weight for managerial work is 40 per cent for academic
qualification, 30 per cent for experience, 20 per cent for responsibility
and 10 per cent for working conditions.
(v) Determining the number of grade for every compensable factor and
defining each of the grade. For example, for managerial work, the
academic qualification grade is three - bachelorÊs degree, masterÊs
degree and doctorate.
(vi) Determining the point score, which will be used in the point plan and
distributing this value among the compensable factors. For example,
the allocated point is 500, therefore, the academic qualification factor is
200 points (500 × 40%).
(vii) Determining the total point for each grade of compensable factor,
which means to continue the point calculation for every compensable
factor.
(viii) Preparing a guidebook or job evaluation manual to make it easier to

check whether the given points are true and logical.
(ix) Accumulating the points for every job evaluated. The higher the point
score, the more important the job is and therefore, should be given a
higher salary.

The steps in the point factor method are summarised in Figure 5.4.
Figure 5.4: Point factor method

5.4.2 Non-quantitative Methods

There are two basic non-quantitative methods to evaluate job content. The
methods are summarised in Figure 5.5.
Figure 5.5: Non-quantitative methods in job evaluation
These methods are called non-quantitative methods because they do not result in
a quantitative number that can be manipulated by mathematical operations. Let
us now look at each of the two methods.
(a) Ranking Method

Ranking method is the easiest job evaluation method to perform. This
method requires the evaluator to arrange jobs in term of priority. Usually,
the jobs are arranged based on the general perception of that job. However,
particular compensable factors are used in order to determine the rank of a
position in the work hierarchy. This method uses index card to rank jobs. The
index card contains the job description for every job to be evaluated and will
be arranged later. This method organises job ranks from the highest position
to the lowest position in the organisational hierarchy.
(b) Classification Method

This method categorises jobs into certain groups called job class or grade.
Steps in implementing this method are as follows:
(i) Listing the details needed to clarify the amount or level of compensable
factors needed to be prepared for each pay grade.
(ii) Evaluating jobs by comparing the job description of each job with the
job grade.
(iii) Determining the job classification by matching the closest class detail
with the job description.
(iv) Ensuring that each job are classified properly in its class or grade based
on the similarities between job description and class description.

Different jobs could be classified into the same class if the difficulty, responsibility
and qualification level are the same. An example of this method is the classification
of public service sector employees into different classes and pay grades as
prescribed in the New Remuneration Scheme [Sistem Saraan Malaysia (2012)].
5.5 ISSUES IN IMPLEMENTING JOB

EVALUATION
During a job evaluation, we will encounter several issues that will challenge the
accuracy of the information gathered.
Some of the issues are as follows:
(a) What is the most suitable job evaluation method to be used in the
organisation? We will have to take into consideration financial resources and
skills when we decide which method to use. It is important to ensure that the
method selected would not burden the organisation and more importantly,
the data or information collected is accurate.
According to Henderson (2005), the market price method is the most

commonly used method. This is followed by the point factor method and job
ranking method.
Do external market factors have to be taken into account in job evaluation?

The answer is no. Even though market price is commonly used, it is not
suitable to be used in job evaluation. This is because job evaluation only takes
into consideration the internal factors that influence the pay level of an
individual.
External factors will be analysed through market surveys.
(b) Should more than one method of job evaluation be implemented? Some
organisations use more than one method but is this necessary? If the first
method implemented by the organisation cannot provide enough
information, then it is necessary to use another method.
According to Henderson (2005), the percentage of organisations that use

more than one method is high. This is because organisations will try to gather
as much information as possible regarding a job in order to ensure a fair and
equitable wage structure and compensation system.

(c) How effective and valid is job evaluation? Does it measure what it is
supposed to measure? What about the information obtained through the
selected job evaluation method? Does the information reflect the actual
internal labour market situation? This is important because if the information
is not valid, we cannot possibly implement the job evaluation.
(d) Does job evaluation minimise the practice of unfair and illegal payment or
does it hide or disguise the practice? Can the information obtained from a job
evaluation help organisations in planning a fairer wage structure for their
employees? A wage that is less than the minimum wage range for a position
would result in dissatisfaction, low motivation and reduced organisational
productivity. In addition, practicing an unfair wage structure will damage
the image of the organisation.
In conclusion, to ensure that the information collected during a job evaluation is

accurate, organisations should take into consideration the issues discussed.
ACTIVITY 5.4
1. Which job evaluation method is used in your organisation (or your

friendÊs organisation)? List all the methods that have been used by
the organisation. What is the conclusion that you can make?
2. The job evaluation process is a subjective process. Based on your

experience, is it a fair process? What were the difficulties or issues
that you have noticed during your job evaluation?

• Fairness in distributing compensation to employees is important for the

employer, the employee and the labour union.
• Through job evaluation, a guideline could be developed for employers to

determine a wage rate or compensation that is fair and equitable.
• Quantitative and non-quantitative methods can be used in job evaluation.
• Quantitative methods rely on numerical scores or ratings. Two of the

quantitative methods are factor comparison method and point factor method.
• Non-quantitative methods do not result in a quantitative number that can be

manipulated by mathematical operations. Two methods used are ranking
method and classification method.
• Issues that will affect the accuracy of data collected in the job evaluation
process must be taken into consideration by organisations.
Benchmark job Non-quantifiable methods

Classification method Point factor method
Compensable factor Quantifiable methods
Factor comparison method Ranking method
Job evaluation
Essay Questions
1. Briefly discuss your understanding of job evaluation.
2. Briefly explain how to implement job evaluation in your organisation.

1. The following are the roles of job evaluation EXCEPT:

A. Setting the basic rate to determine a wage payment structure.
B. Determining and forming the type of employee payment.
C. Determining a wage payment that is equivalent to the market rate.
D. Determining terms in collective bargaining.
2. Choose the sequence in which the job evaluation process is carried out:
(i) Forming a team to execute job evaluation for the organisation.
(ii) Deciding on the compensable factors.
(iii) Determining the benchmark for the jobs to be evaluated.
(iv) Forming the measurement dimensions for organisational job value.
(v) Determining the value of job in dollar amount or dollar value.
(vi) Selecting the job evaluation method.
A. (i), (ii), (iii), (iv), (v) and (vi)

B. (i), (iii), (ii), (iv), (vi) and (v)
C. (ii), (iii), (i), (v), (iv), and (vi)
D. (iii), (ii), (i), (iv), (v) and (vi)
3. When selecting the job evaluation method, an organisation should take into
account the followoing factors EXCEPT:
A. The method that will be used
B. Funds for the job evaluation
C. Time allocated to carry out the job evaluation
D. The accuracy of information and the result of the job evaluation

4. The following are the reasons why an organisation uses more than one
method for job evaluation EXCEPT:
A. The result from the first method is incomplete and inaccurate.
B. The effectiveness and validity of the job evaluation.
C. The organisation thinks that it can obtain more detailed information if
it uses more than one method.
D. Job evaluation ethics requires the use of at least two job evaluation
methods.
Essay Questions
1. Briefly explain the following job evaluation methods:

(a) Point factor method
(b) Job classification method
2. Discuss in detail two issues that have arisen during the course of performing
job evaluation in your organisation.
Adams, S. (1965). Inequity in social exchange. Advance in Experimental Social

Psychology, 2, 267–299.
Armstrong, M., & Murlis, H. (1998). Rewards management: A handbook of

remuneration strategy and practice (4th ed). United Kingdom & United
States: Kogan Page.
Henderson, R. I. (2005). Compensation management (8th ed). New Jersey: Prentice

Hall.
Sistem Saraan Malaysia (2012). docs.jpa.gov.my/docs/pp/2012/pp012012.pdf

Topic  Formation of
Wage
6 Structure
LEARNING OUTCOMES

1. Explain the seven steps in the compensation management process;
2. Discuss the steps in the wage structure formation process; and
3. Appraise the various types of wage payments.
 INTRODUCTION
Employers have to develop strategic compensation structures according to
individual employee needs and related laws regarding wage rates. Information
regarding employee needs can be obtained from market surveys conducted by the
organisation. Based on the information collected, the organisation can determine
the kind of wage structure that will enable them to motivate and retain employees.
The structure of compensation in general, and wage in particular, should be

designed by an expert who is familiar with the environmental influence on the
organisation. This is important to ensure that the organisation will continue to be
competitive. The biggest advantage that a wage market survey can do for an
organisation is to inform what is happening in the labour market. Besides that, it
also identifies the current reward trends in the market. This will help the
organisation to determine the form of wage structure to offer in order to retain
their employees and to attract potential employees to join the organisation.

110  TOPIC 6 FORMATION OF WAGE STRUCTURE
Wage structure is an arrangement of salary grades for positions within an

organisation. The wage structure planner should realise that designing the wage
structure is related to other human resource management activities. The
organisation will have to incur higher cost if the wages offered by the organisation
are more than the wages offered by other organisations in the marketplace.
This topic will discuss important issues regarding the forming of a wage structure
and identifying the process of wage formation and the type of wage payment that
can be implemented by an organisation.
6.1 COMPENSATION MANAGEMENT

Before forming a wage structure, we should first understand how compensation
is managed in an organisation. This is because it will influence the wage structure
developed by the organisation. The compensation management process is
summarised in Figure 6.1.

TOPIC 6 FORMATION OF WAGE STRUCTURE  111
Figure 6.1: The process of compensation management

Each step in the compensation management process is briefly described in the

following:
(a) Step 1 – Identifying the Structure or Hierarchy of the Organisation

Organisational structure is identified through the organisational hierarchy.
This is to identify the highest and lowest position, the positions of the
support team and the management team. The higher the position held in the
organisation, the higher the pay level and compensation received.
(b) Step 2 – Forming the Job Description and Job Specification

Job description and job specification are developed for every position in the
organisation. A job description defines what a job is about while a job
specification lists the qualifications of the person performing the job. The
higher the skills, qualifications, experience and knowledge, the higher the
wage will be given to the individual.
(c) Step 3 – Determining the Wage Grade

This step will ease the process of wage payment. Every employee who holds
the same position and has the same qualification, knowledge, skills and
experience will receive the same salary.
(d) Step 4 – Comparing Market Wage Rate with the OrganisationÊs Wage Rate
The wage rate of each job in the market is collected to enable comparison
between the organisationÊs payment rate and the wage rate in the market.
Normally, the organisation will conduct a market survey to assess if the wage
it is paying is equivalent or comparable to the market rate.
(e) Step 5 – Forming the Wage Scale

This is done by collecting information on a particular job in the market to
gauge the highest and lowest wage that is paid to an individual who is
holding the same position. This step is important to ensure that the wage
scale is not too narrow or too wide.
(f) Step 6 – Determining the Job Performance Measurement

An employeeÊs performance measurement is assessed through individual job
performance. The purpose is to differentiate each of the individualÊs
performance based on job performance measurement. Normally, the higher
the value of the individualÊs job performance, the higher the wage.
(g) Step 7 – Forming the Individual Wage Payment

Individual wage payment is formed to encourage employees to increase their
efforts.

ACTIVITY 6.1
Interview any human resource officer with regard to the steps in the
compensation management that he or his company has taken. Compare
your findings with the seven steps listed in Figure 6.1.
6.2 WAGE STRUCTURE FORMATION PROCESS

A market survey can provide an organisation with information regarding the
organisationÊs internal and external wage structures. The organisation has to
analyse the information related to the internal and external wage structures in
order to form a wage structure that is competitive and accurate. There are six steps
in developing a wage structure. The six steps are as shown in Figure 6.2.

Figure 6.2: The wage structure formation process

Details of the wage structure formation process is as follows:
(a) Step 1 – Determining the Method to Construct the Wage Policy Line
The wage policy line is the starting point for developing a wage structure.
The organisation will first need to identify the market rates for the
benchmark jobs and then plot the pay rate information on a chart to develop
a scatter diagram. The organisation can either use the line-of-sight method
or the two-point method to develop the wage policy line or trend line.
The line-of-sight method requires the organisation to determine the mid

value for every positionÊs wage grade in the same category. After the mid
value for every job grade is determined, all the points will be connected to
form the wage or pay policy line.
On the other hand, the two-point method requires two points to be obtained
– the lowest wage rate and the highest wage rate. A pay policy line is formed
when these two points are connected.
Example:
The position of clerk in Company A consists of three wage grades - A, B and
C. Table 6.1 shows the maximum, intermediate and minimum wage for the
three grades.
Table 6.1: Wage Grade
The Maximum, Intermediate and Minimum Wage

Wage Grade A B C
Minimum Wage 400 500 600
Intermediate Wage 500 600 700
Maximum Wage 600 700 800
Based on the Table 6.1, we will use the line-of-sight and two-point methods
to construct the wage policy line.

Figure 6.3 shows the wage policy line that was created using the line-of-sight
method.
Figure 6.3: Line-of-sight method
In Figure 6.3, we will use the average wage for all the three grades to
determine the wage line. By connecting the intermediate wage points
(labelled X), a wage policy line for the position of clerk in Company A is
created.

Figure 6.4: Two-point method
Figure 6.4 shows the wage policy line constructed by using the two-point
method. The maximum points for every wage grade are connected to form
the maximum point wage policy line. Similarly, the minimum points are
linked to form the minimum point wage policy line.
Company A can use the line-of-sight method or the two-point method to

determined its wage policy line.
(b) Step 2 – Deciding if There is a Need to Have More Than One Wage Scale
An organisation can choose whether to use one wage structure for each
category of position or otherwise. Two wage structures may be implemented
to differentiate skilled employees from unskilled employees. The purpose is
to portray a clearer wage structure for each position that requires different
qualifications, experience, knowledge and skills.

(c) Step 3 – Interpreting the Data Accurately

An organisations has to be careful when interpreting data obtained through
market surveys. It has to ensure that the going rates for jobs used are correct
and the right calculation method is selected. The method used in choosing
the market value needs to comply with the measurement and evaluation
requirements in order to portray the data in an accurate manner. Some
examples are the usage of mean, median or mode.
(d) Step 4 – Determining the Wage Payment Rate

Identifying the lowest and highest pay rates for each wage grade formed is
to ensure that the difference between the maximum wage and the minimum
wage received by the employees shows a clear and logical gap. Normally,
the desired difference is to make it easier to calculate the annual increment
for every wage grade formed.
(e) Step 5 – Determining the Annual Increment in Wage Payment Rate

An organisation should set the incremental wage increases and time line for
each of the wage grade. For example, the starting salary for the position of
administrative clerk is RM700 and the maximum salary is RM2,000. This
means an increment of RM1,300 within a period of 20 years. Thus, the annual
increment would be RM65. When determining the increment rate, the
organisation should consider the resulting difference between wage
payment rates, as jobholders will assume that there are differences in the job
execution.
(f) Step 6 – Forming the Wage Grade

When designing a wage structure, the organisation should establish the
number of wage increments needed for a jobholder to reach the maximum
level of pay. This will give an indication of the time it will take for him to get
to the maximum level. For example, in the case of the administrative clerk, it
will take him 20 years to reach the maximum pay level of RM2,000. It is also
essential to clarify the difference between the maximum and minimum wage.
This difference recognises the range of performance and experience of
jobholders in the particular job.
SELF-CHECK 6.1
What are the factors that should be taken into consideration when
developing a wage structure?

ACTIVITY 6.2
Identify the gaps between your minimum and maximum wage if you
are currently working. If you are not, seek a friendÊs help to perform this
exercise. Calculate the difference between the maximum and minimum
wage and explain the annual increment gained. Do you feel that the
increment rate is justified?
6.3 TYPES OF WAGE PAYMENTS

Before an organisation decides on the type of wage payment to be implemented,
it should identify the purpose for executing the wage structure. It is important that
the wage payment is in line with the organisationÊs goals and mission.
Implementation of a certain type of wage structure helps an organisation to
identify and shape employee behaviour. The organisation should use the wage
payment that best fits its organisational mission. For example, if the organisation
wants its employees to have higher skills, it will be more suitable for the
organisation to use skill-based payment scheme.
Next, we will identify a few wage payment practices that could be implemented
by organisations.
6.3.1 Wage Payment Based on Skills

An organisation that emphasises employee skills will form a wage structure that
could attract, satisfy and secure higher-skilled workers. A wage payment based on
skills is an approach used to identify the type and level of skills possessed by
employees. This method will pay the employees based on the skills they possessed.
The higher the skills possessed by an employee, the higher the salary that will be
paid to him.
If an organisation wants to use this wage payment method, it should identify

clearly and accurately the type of skills required to accomplish the needed tasks.
For example, the type and level of skills required vary between a general
administrative clerk position and a senior administrative clerk. The prerequisite
skills should be stated clearly and precisely in the job description and specification
for that position.

On the other hand, if an employee possesses less skills, he will be classified in a

lower salary grade even though he and his high-skilled colleague are holding the
same position.
This approach is most used by organisations in the commercial, financial,

manufacturing or service industries. These enterprises require high-level skills to
develop their business. This method will also enable the organisation to assess if
its employees possess the skills required and that they qualify for their job roles. If
their skills are inadequate, the organisation will normally try to send the
employees concerned for training, focusing on the skills needed to perform the job
well.
SELF-CHECK 6.2
Explain how an employeeÊs skills can influence his wage rate?
6.3.2 Wage Payment Based on Knowledge

One component of an employeeÊs job is the level of knowledge he possesses. An
organisation that prioritises its employeesÊ level of knowledge would choose this
approach for wage payment. The higher the level of the employeeÊs job
knowledge, the higher would be the wage offered to him. For example, a lecturer
who possesses a masterÊs degree and a lecturer who has earned his doctorate
qualification will be paid different salary rates by their educational institution.
This approach is also used to evaluate the individualÊs contribution in a team

whose work depends on their level of knowledge.
Thus, if this approach is chosen by an organisation, there should be clear

guidelines on how to differentiate the level of knowledge of their employees. This
is to guarantee that the level of knowledge commensurate with the task and job
requirements. In other words, the level of knowledge of the employee determines
the rate of payment that he will receive.
SELF-CHECK 6.3
What are the guidelines that can be used by an organisation to measure

its employeesÊ level of job knowledge?

6.3.3 Wage Payment Based on Efficiency

This approach emphasises employee efficiency. The more efficient an employee,
the higher his salary. Take the example of technical employees who are assigned
to install car engines. The faster and more efficient the installation is, the higher
the wage earned by the employees. The high wage should commensurate with the
efficiency shown by the employees in executing their tasks. Organisations should
set efficiency standards that could be evaluated and achieved by their employees.
Wage payment based on efficiency should combine the employeeÊs level of

knowledge and skills in executing his job. Some of the types of efficiency needed
to be identified and nurtured by organisations are as follows:
(a) Knowledge efficiency, which is evaluated through three levels, namely

education, experience and skills possessed to complete a certain task;
(b) Efficiency in solving problems concerning the job. It contains three

components, namely interpreting the problem faced, reviewing the problem
in the job situation and ensuring effective communication among colleagues
to find a solution to the problem; and
(c) Efficiency in decision making, which shows how a problem could be solved
by comparing the quality of the solution with the time taken to solve the
problem. It includes interpersonal efficiency, efficiency in managing
resources in solving the problem and efficiency in distributing the
organisationÊs assets such as money when finding a solution to the problem.
Managers are examples of employees who are paid based on their efficiency. They
are evaluated on how they manage and administrate the organisation. Efficiency
means gaining profits for the organisation. Managers have to be able to combine
their knowledge, problem-solving and decision-making efficiency to ensure
operational continuity and profit generation for the organisation.

SELF-CHECK 6.4
1. Efficiency in solving problems is required of higher ranking

employees. Why is this efficiency considered important for lower
ranking employees as well?
2. As an employer, what will you take into consideration when

determining the type of wage payment to implement for your
organisation?
ACTIVITY 6.3
Check the employee list in your organisation (or your friendÊs

organisation). Are you able classify the employeesÊ jobs according to
knowledge efficiency, problem solving and decision making abilities?
Discuss.
6.3.4 Wage Payment Based on Seniority

Seniority is the status obtained as a result of an employeeÊs length of service in an
organisation. The purpose of payment based on seniority is to appreciate the
contributions made by employees who have served the organisation for a long
time. Indirectly, it is also a recognition of their loyalty towards the organisation.
In this wage payment approach, the longer an employee works for the
organisation, with all other things being equal, the higher the salary he will receive.
SELF-CHECK 6.5
What do you understand about the seniority of an employee in an

organisation in the context of wage payment?

• A wage structure is formed by taking into consideration the internal needs of

the organisation and the pay practices in the labour market.
• An organisation may restructure its overall wage level if economic changes

warrant it in order to move forward to survive the competition.
• The tasks of human resource management are to plan the workforce, redesign
jobs, recruit and manage employees, provide training and development,
administer compensation system and appraise work performance.
• There are six steps in the process of developing a wage structure.
• There are several types of wage payments that can be used by an organisation.
Wage payments based on skills, knowledge, efficiency and seniority can be
implemented to reflect the organisationÊs priorities as well as the tasks and
responsibilities of a job.
Line-of-sight method Wage payment based on seniority

Two-point method Wage payment based on skills
Wage grade Wage rate
Wage payment based on efficiency Wage structure
Wage payment based on knowledge

Essay Questions
1. Briefly discuss the steps in the compensation administration process.
2. Elaborate on how an organisation can form its wage structure.
1. Arrange in the right sequence in the compensation management process.
Compensation Administration Items Order

Job description and job specification are created
A wage grade is determined
A wage scale is set
Performance evaluation is made
The compensation rate is compared against the market rate
The organisational hierarchy is determined
Employees are paid
1. All of the following statements regarding the wage formation process are
TRUE, EXCEPT:
A. The organisation should decide whether to use more than one wage
structure for each position.
B. Data obtained from market surveys are useful in evaluating the
organisationÊs wage structure.
C. Earlier market surveys should be referred to when deciding the method
to determine and describe random wage plot.
D. The lowest and highest wage grade in an organisation should be
determined to differentiate individual skills, knowledge and abilities
for each job.

2. The following are CORRECT statements regarding wage payment EXCEPT:

A. Wage payment based on skills serves only to secure high-skilled
employees.
B. Wage payment based on knowledge is necessary when the
organisation emphasises employee knowledge in its operation.
C. Wage payment based on efficiency should combine the level of job
knowledge and prerequisite skills.
D. The three types of wage payments mentioned in A, B and C do not offer
an accurate evaluation of an employeeÊs wage qualification.
3. Choose the most accurate statement.

A. An organisations has the right to determine the type of wage payment
that will be given to its employees except when there is labour union
intervention.
B. Efficiency in wage payment refers to efficiency in solving job-related
problems, efficiency in generating an understanding of the job and
efficiency in decision making.
C. Accurate job description and job specification are needed to clarify the
level of qualification, experience and skills for wage determination.
D. Wage grade should indicate the importance of a job.
Essay Question
1. Briefly explain the wage payment practices based on skills and efficiency.

Topic  Short-term and
Long-term
7 Incentive Plans
LEARNING OUTCOMES

1. Explain the considerations in designing an incentive payment plan;
2. Discuss the types of short-term incentive plans;
3. Assess the advantages and disadvantages of short-term incentive
plans; and
4. Examine the types of long-term incentive plans.
 INTRODUCTION
It cannot be denied that incentives play an important role in encouraging the
efforts of employees. According to Henderson (2005), one of the easiest incentive
plans to implement is a plan that includes every employee in an organisation. A
monetary incentive plan will be able to provide supplemental earnings to
employeesÊ basic salary.
According to Martocchio (2016), more than half (58%) of overall professional

employees and almost all executives (94%) are eligible to receive incentive
compensation rewards. An increasing number of organisations have realised the
importance of providing an incentive payment plan for every rank and category
of employees, including those in the production, technical and service sectors.

TOPIC 7 SHORT-TERM AND LONG-TERM INCENTIVE PLANS  127
7.1 DEFINITION OF INCENTIVE PAYMENT

What is incentive payment? Many employees think that incentive payment is a
type of reward given for their good performance or reward given to them because
they have been able to achieve goals set by their organisation. According to
Martocchio (2016), incentive payment is:
Compensation, besides the basic salary or wage, which varies according to an

employeeÊs achievement based on a standard or based on a determined
formula, goal of an individual or group, or the organisationÊs earnings.
Most organisations implement the incentive payment plan to control wage cost or
to motivate their employees. An organisation can control costs by replacing the
annual merit pay, seniority increment or basic salary with an incentive plan where
the wage paid will only increase when the organisation experiences increased
productivity, profit or other aspects that could measure the organisationÊs business
achievement. This type of basic salary incentive plan that is based on performance
enable employees to control their own level of compensation.
A good and effective incentive payment system is based on the following three
assumptions:
(a) Individual employees and work teams differ in their contributions to the
organisation. They will be evaluated not only by what they do but by how
well they do their job as well;
(b) OrganisationÊs overall performance depends on individual and group
performance in the organisationÊ and
(c) To attract, motivate and secure high-performance employees and to be fair
to every employee, an organisation should reward their employees based on
their relative performance.
Some organisations use incentives to replace all or part of the basic salary to control
wage expenses and link the salary to payment based on performance.
Organisations may also use incentives to encourage rank differences in various
positions.

128  TOPIC 7 SHORT-TERM AND LONG-TERM INCENTIVE PLANS
7.2 DESIGNING AN INCENTIVE PAYMENT

PLAN
Human resource professionals and line managers should consider the following
five factors when designing an incentive payment plan:
(a) Whether the plan should be based on individual or group performance;
(b) Level of employeeÊs acceptable or tolerable risk in the overall compensation

package;
(c) Whether the incentive payment should replace or complete the traditional
salary;
(d) Criteria for evaluating performance; and
(e) Duration to achieve the goal (long-term, short-term or a combination of

both).
An incentive payment plan could be short-term or long-term. Generally, short-

term incentive plans are often implemented for lower ranking workers. For
example, the performance of production line workers is evaluated based on a
duration, which can be as short as one hour. On the other hand, long-term
incentive plans are usually for professionals. For example, an engineer is rewarded
for innovating a product, the process of which requires a long duration or period
of time.
SELF-CHECK 7.1
What are the factors that should be taken into consideration when
developing an incentive payment plan?

7.3 SHORT-TERM INCENTIVE PLAN

Short-term incentives are given to employees based on short-term achievement,
which in general is within the range of five years. It exists in various forms and is
paid weekly, monthly, quarterly, annually or upon achievement of goals and
objectives.
Short-term incentives can be given as a prize (premium) or the difference in

payment for employees who work under exceptional circumstances. Usually, an
incentive payment is given as:
(a) Payment for units produced;
(b) Bonus for individual innovation and creativity;
(c) Bonus or reward for work achievement, for example, full attendance during
a period of service; or
(d) Reward for achieving a specific organisational goal, for example, helping the
organisation make better profits by reducing costs.
In assessing whom to give short-term incentives to, employees must be evaluated

from four different perspectives:
(a) As an individual who contributes to the organisation;
(b) As a member of the team;
(c) As a member of the work unit; or
(d) As a member of the organisation.
Incentive payment plans can be classified into three main categories:

(a) Individual incentive plan;
(b) Group incentive plan; and
(c) Organisational incentive plan.

Table 7.1 shows the performance measurements used for individual, group and
organisational incentive payment plans.
Table 7.1: Performance Measurements for Individual, Group and

Organisational Incentive Plans
INDIVIDUAL INCENTIVE PLAN

• Quantity of work output
• Quality of work output
• Monthly sales
• Job safety record
• Job attendance
GROUP INCENTIVE PLAN
• Customer satisfaction
• Labour cost savings (basic salary, overtime, benefits)
• Material cost savings
• Decrease in the frequency of work-related accidents
• Service cost savings (consumption)
ORGANISATIONAL INCENTIVE PLAN
• Organisational profit increment
• Cost reduction
• Market share increment
• Sales revenue increment
Source: Martocchio (2016)
We will study each of the incentive payment plans in detail in the following
subtopics.

7.3.1 Individual Incentive Plan

This plan rewards employees who work individually and have shown excellent
performance. Individual incentive payment plan works well in the following
settings:
(a) When the job is based on:

(i) Number of units produced;
(ii) Sales amount; and/or
(iii) Reduction in the rate of error.
(b) When employees have sufficient control over their own performance and,
hence, their work outcome.
(c) When employees practise healthy competition in the workplace.
There are four types of individual incentive plans. They are as follows:
(a) Piecework Plan

Generally, there are two types of piecework plans.
(i) Plan Based on Working Hours and Piece Rate

This incentive plan is often used in the manufacturing industry such as the
garment and textile sectors. Employees are given rewards based on their
individual total working hours and physical output (piece rate) by
referring to the output standard and the determined rate of movement of
the operating manufacturing machines. Here, employees are given
incentive payment for each product output that follows the desired
production standard for each hour of work. Employees are also
guaranteed a payment rate based on total working hours regardless if they
have reached the production target.

(ii) Plan Based on Output

This incentive plan, which is based on output, sets an individual
performance standard that covers two important elements:
• Objective Standard
Objective standard takes into consideration the output per employee.
For example, the output per employee per hour is set at 20 units and
employees who are able to produce 20 units each within 50 minutes
will qualify for the incentive.
• Subjective Criteria
Subjective criteria views the overall work quality based on the
supervisorÊs interpretation and evaluation. For example, when
evaluating the performance of a customer service representative, the
supervisor found that there was a sales increase when the sales
representative emphasised the warranty benefits instead of merely
stating the productÊs availability and price.
(b) Management Incentive Plan

Management incentive plan rewards managers when they achieve and
exceed the objectives of their division, department or unit. The plan reviews
performance of managers in areas such as productivity, profitability,
financial resources, human organisation and others. Management incentive
plan is widely known as management by objective (MBO).
(c) Behaviour Motivation Plan

Under this plan, employees receive payment for behavioural achievements
or specific manners such as full attendance or good safety record. Normally,
an organisation will reward employees for full attendance during a specific
period of time. This incentive plan enhances motivation among employees.
(d) Reference Plan

Under this plan, employees receive financial bonus for referring new
customers or successful job applicants. For example, an employee
recommends an applicant for a job and the applicant is recruited by the
organisation. A bonus will be given to the employee when the new employee
has successfully served a given period of time or has exceeded the given
period of time, for example, the minimum appraisal period of at least
30 days.

The various individual incentive plans are summarised in Figure 7.1.
Figure 7.1: Individual incentive plans
SELF-CHECK 7.2
In your opinion, what is the most suitable work setting to establish an

individual incentive plan?
ACTIVITY 7.1
Check with the human resource department of any organisation and

list the incentive plans that have been implemented to motivate
employees.
Let us now examine the advantages of individual incentive payment plan.

There are few main advantages of individual incentive payment plan. They are as
follows:
(a) It Motivates Employees through Rewards

Employees will perform harder when they can expected to obtain a reward
equivalent to their job performance.
(b) It Promotes Fair Compensation in Organisation

Employees who perform better will receive more payment or reward. This
fair compensation will enable an organisation to secure the best employees.
A better pay for higher performing employees shows that the organisation
values a high-performance workforce.
(c) It Promotes Inspiration

When the leaders excel, they inspire achievement for other employees. The
under achievers will imitate their leadersÊ behaviours in order to gain
excellence.
(d) It Creates competition

It will create a competitive situation which engages top performers.
Employees will pursue the competition in order to gain the benefit as well as
the recognition.
SELF-CHECK 7.3
What are the advantages of individual incentive payment plan?
Let us now move on to the disadvantages of individual incentive payment plan.
Even though this incentive plan has been effective in motivating employees in
some work settings, it also has some serious limitations, which are as follows:
(a) It Lacks Flexibility

Employees who are under this incentive plan are fully dependent on their
supervisors who determine their work goals. If the performance standard is
easy to achieve, high-performance employees will not do more than what
other employees do because there is no additional incentive for doing so.
These employees will not motivated to improve their performance.

(b) It May Make Determining Rewards Difficult

When a change occurs at the workplace, employees may take some time to
adjust to their work again. This will make it difficult for the organisation to
determine a fair incentive reward, which in turn may lead to workersÊ
refusing to accept the new method or approach.
(c) It May Promote Untoward Workplace Behaviour

Even though a job has various dimensions such as output quantity, output
quality or customer satisfaction, employees may focus only on one
dimension such as the output, which is the performance measurement
standard for the incentive plan, and ignore other dimensions.
SELF-CHECK 7.4
What are the disadvantages to employees if an organisation implements

the individual incentive plan?
7.3.2 Group Incentive Plan

This plan rewards collective performance. The group incentive plan is effective
when team members show results in achieving a goal even though individual
contributions are not the same.
A group incentive plan that is well designed can strengthen teamwork, encourage
loyalty towards the organisation and increase productivity. There are two types of
group incentive plans. They are as follows:
(a) Small Group or Work Team Incentive Plan

The small group or work team incentive plan is the same as the individual
incentive plan, with one exception. Each team member receives a financial
reward for the achievement of the group. Reward for each employee is based
on standard performance, which has been determined earlier for the group.
There are various types of group incentive plans. The organisation defines
the plan according to a set performance criteria. The group or team will
receive incentive payment based on various criteria including customer
satisfaction, safety record, output quality and production record. These
criteria are followed in other incentive plans such as the individual, group
and organisational plans.

A human resource expert will allocate rewards through one of the following
three methods:
(i) A fair incentive payment to all group or team members;
(ii) A different incentive payment for each member in a team based on

their individual contributions to team performance; and
(iii) A different payment determined by a basic salary payment ratio of each

group member to the groupÊs basic salary payment.
(b) Income-sharing Plan

Under the plan, the incentives paid to the employees are determined by
organisational performance in areas such as productivity, customer
satisfaction, production cost, safety and other aspects. The income-sharing
plan guarantees that all employees will enjoy financial benefits when the
organisation achieves its goal. This plan also focuses on management
philosophy that emphasises employee involvement.
Most income-sharing plans include the following three main components:
(i) Leadership Philosophy

Refers to a cooperative atmosphere in an organisation that highly
promotes faith, trust, open communication and employee involvement.
(ii) Employee Involvement System

This system takes into account the employeesÊ work practices such as
problem solving. These practices reflect employee involvement in the
organisation.
(iii) Bonus
An organisation uses bonus pay to reward its employees when the
actual productivity exceeds its target. Normally, income-sharing bonus
is based on a formula that measures productivity. Employees accept the
formula as being fair and the employer believes that it will produce
good results. Normally, this bonus is given on a yearly basis.

According to Bergmann and Scarpello (2001), eight factors need to be taken into
consideration to ensure the success of a group incentive plan or programme. These
factors are listed in Figure 7.2.
Figure 7.2: Eight factors in group incentive plan

Source: Bergmann and Scarpello (2001)

Four categories of performance measurements can be implemented by

organisations. They are customer-focused, financial-focused, capability-based and
internal business process as shown in Figure 7.3.
Figure 7.3: Four categories of performance measurements

Source: Wilson and Phalen (1996)

Let us study the four categories of performance measurements.
(a) Customer-focused Performance Measurement

This category focuses on two main components. The first component is
employee performance in delivering a product or service on time, and the
way employees handle and introduce the new product in the market. The
second component is customer satisfaction, which can be measured from the
increment in the market share, widening customer base and penetration into
markets that are dominated by competitors. The incentive given will
motivate employees to continue to improve their performance.
(b) Financial-based Performance Measurement

This category focuses on revenue growth, source of revenue, sales increment,
profit margin and economical appreciation as the first component. The
second component is made up of stockholdersÊ returns including return on
invested capital, return on sales or income and increment in expected profit.
Under this incentive, employees will be paid according to the organisationÊs
financial performance.
(c) Capability-based Performance Measurement

This category focuses on two main components, namely human resource
capabilities and other assetsÊ capabilities. The first component includes
employee work satisfaction, resignation rate, overall recruitment cost, rate of
expansion of development plans, motivation index and combined staffing
ratio/number of employees. The capabilities of other assets include patent or
copyright, distribution system and technological capabilities. Incentive
payments are paid to employees who excel in their work performance.
(d) Internal Business Process Performance Measurement

The fourth category refers to consumption sources and effective changes. The
consumption sources include budget versus actual expenditure, cost
allocation ratio, reliability or re-work, zero error rate or accuracy in the work
process as well as safety rate. Effective changes include implementation
according to plan, effective work team and quality or service index. This type
of incentive pay process assesses employeesÊ ability to handle their job and
reward them accordingly.
Let us move on to the advantages of group incentive payment.

Group incentive plan has two advantages:
(a) It is Easier to Develop

It is easier for an organisation to develop performance measurement for
group incentive plan as compared to the individual incentive plan.
(b) Larger Group Results in Increased Efficiency

Larger work groups with their increased flexibility and better information
flow are more efficient in achieving organisational goals than individuals
whose only focus on specific jobs in which their work has been assigned to
them. It is also in the interest of the larger work group members to cooperate
to earn greater rewards.
SELF-CHECK 7.5
What are the advantages of group incentive payment?
The main disadvantage of the group incentive payment plan is the high rate of
employee resignation owing to the free rider effect.
Some workersÊ contributions to the teamÊs goal may not be as significant as other
team members because of their limited capabilities, skills and experience or they
do not want to contribute to the full extent of their capabilities. A free rider is a
person who enjoys more than his fair share of benefits or one who does not
shoulder a fair share of the costs of producing those benefits. The free rider effect
encourages a feeling of unfairness amongst employees who contribute the most to
achieve the goal of the team. The high performers may not feel comfortable that
the ordinary ones are not doing their share of the work but are receiving the same
incentive. Thus, it is highly possible that these dissatisfied individuals will
eventually leave the organisation.
SELF-CHECK 7.6
1. What are the disadvantages of group incentive payment?
2. Discuss how the free rider effect affects the group incentive plan.

7.3.3 Organisational Incentive Plan

Organisational incentive plan rewards employees when the organisation exceeds
its minimum performance standard such as the profit or the overall organisational
value based on its stock value. Nowadays, organisational incentive plan is used to
motivate employees to perform harder to increase profit or increase organisational
value.
Profit sharing is an organisational incentive plan. Employees will receive a

financial reward once the objective of organisational profit has been achieved. This
plan pays one part of the organisational profit to employees where it is separated
from the basic salary, cost of living adjustment or increment in fixed merit pay.
Two types of profit-sharing plans are widely implemented by organisations these

days. They are:
(a) Current Profit Sharing

This incentive payment gives cash rewards to employees as part of the core
compensation usually received on a quarterly or annual basis.
(b) Deferred Profit Sharing

This deferred incentive payment plan rewards employees by giving them a
percentage of the organisationÊs profit. The profits allocated to each
employee are paid into an account or trust.
The organisational incentive payment plan has advantages or benefits for the
employees as well as the organisation.
(a) Employees Benefits

Organisational incentive plan enables employees to share the fortunes of the
organisation. Thus, employees will be motivated to work more productively
in order to increase the organisational profit and their share of it.
(b) Organisational Benefits

An organisation may implement this incentive payment plan to obtain
financial flexibility. The characteristic of this plan enables the organisation to
use limited cash savings when needed such as for research and development
activity.

SELF-CHECK 7.7
How will you benefit if your organisation chooses to implement the

organisational incentive plan?
The disadvantages of organisational incentive plan are as follows:
(a) Negative Effect on Employees

Organisational incentive plan can weaken an employeesÊ economic security
especially if the profit shared represents a huge proportion of the employeesÊ
direct compensation. This is because organisationÊs profit differs from year
to year and when this happens, so will the employeesÊ income. Thus,
employees will find it difficult to predict their income. This will affect their
savings and spending behaviour. The employeesÊ stock selection plan is also
conducted by the organisation. The organisation grants rights to the
employees to buy the organisationÊs shares. The employees do not
technically own the shares until they exercise their stock selection rights. The
uncertainty regarding future income and the stock selection plan may cause
employees to leave the organisation and in worst-case scenario, high-
performance employees may choose to work for its competitors.
(b) Negative Effect on the Organisation

The plan may fail to motivate employees because they cannot see the direct
relationship between their efforts and the organisationÊs profit. This may
result in the migration of employees and disruption to the business.
SELF-CHECK 7.8
State the disadvantages of organisational incentive plan.

7.4 LONG-TERM INCENTIVE PLAN

We will examine long-term incentive plan in this subtopic.
Once an employee has reached the age of 40 and has been with an organisation for
some time, looking for another job is a challenging task. Job security and future
income will be the employeeÊs main concerns at this stage of his life. The following
questions may also be his top-of-mind questions:
(a) Will I be doing this job for the rest of my life?
(b) What will be my future work opportunities?
(c) What will happen once I stopped working or when I am not able to compete
with my younger colleagues in the organisation?
(d) Where can I obtain the funds to enjoy my desired lifestyle once I do not have
a full-time job?
Thus, there are organisations that offer retirement plan, life and medical insurance
plans for their employees.
SELF-CHECK 7.9
What is the difference between long-term incentives and short-term

incentives?
ACTIVITY 7.2
List the long-term incentives that are offered by your organisation (or
your friendÊs organisation). Do the incentives fulfil your long-term
needs? Discuss in the myINSPIRE forum.

7.4.1 Employee’s Social Class

Most long-term incentive payment plans are based on the pattern of life and social
class of employees. Social class refers to individuals in a specific class, sharing
similar experiences, background and position in society.
The upper class refers to a very wealthy and powerful individuals that owns and
controls the means of production.
The middle class refers to individual who are neither at the top nor at the bottom
of the social hierarchy. Most members of the middle class are dependent on their
jobs to improve their socio-economic status and long-term benefits are provided
to help them improve their lives.
The lower class refers to individuals with low – paying jobs or those not working.
They may be poor or living below the poverty line. Poverty line is the minimum
level of income deemed adequate in that particular country.
Figure 7.4 shows seven different social classes.
Figure 7.4: Seven classifications of social class

Source: Henderson (2002)

SELF-CHECK 7.10
Try to classify employees in terms of their social class.
ACTIVITY 7.3
Discuss with a friend how employees and employers could cooperate

to improve the social class of the organisationÊs employees.
7.4.2 Tax Legislation

Loyalty to the organisation, commitment to the job and quality job performance
are some of the factors that organisations take into consideration in determining
the type and amount of incentive to pay its employees. In addition, the type and
amount paid are also determined by tax legislation.
Through the implementation of the progressive income tax plan as stipulated by

legislation, organisations have found a way to increase employeeÊs take-home pay
and at the same time decrease employerÊs tax obligation.
The main components of such an income tax plan are as follows:

(a) Deduction from the gross income to determine the adjustment in gross
income and taxable income;
(b) Rate of income tax and tax payable to determine the tax needed to be paid;
and
(c) Credit or deduction from the estimated tax to determine the actual tax.
Compensation experts should use their knowledge on tax legislation, agencyÊs

regulation, accounting and finance, insurance and compensation practices to help
organisations increase the short-term and long-term incomes of their employees.
For decades, various deferred income plans have been offered to senior
management but lower-ranked employees hardly have a chance to participate in
the organisationsÊ wealth creation plans.

SELF-CHECK 7.11
What do you understand by tax legislation?
7.4.3 Designing a Long-term Incentive Plan

In this subtopic, we will discuss the designing of a long-term incentive plan. The
long-term incentive plan would need the support of both the organisation and
employees in order to be successful. The purpose of long-term incentives are to
reward employees for their achievement of the organisationÊs strategic objectives.
Employees will also remain longer in the organisation in order to receive the long-
term incentives. Types of long-term incentives could be in the form of stock
options, retirement plans or restricted stocks.
After a set length of employment, employees are given the option to purchase
company stocks at a discounted price. Once an employee retires, they will own all
their retirement plan contributions which will help them for their future.
Organisations might give employees restricted stock according to the number of
years they remain in the organisation.
The needs of both parties have to be integrated for long-term growth and economic
survival. Chingos (2004) has proposed a three-stage model to develop long-term
incentive plans. The three stages are as follows:
(a) Establishing the foundation;
(b) Building a super structure; and
(c) Completing the internal structure.
The model focuses on deferred compensation as deferred payment for service.

Under this arrangement, employees postpones receiving salary and wages to a
later year, usually retirement. The lump sum owed to an employee in this plan is
paid out on that date. Examples of deferred compensation includes retirement
plan, pension and employee stock options.

Chingos (2004) has also identified three types of deferred plans. They are as
follows:
(a) Qualified deferred;
(b) Capital accumulation; and
(c) Additional retirement income arrangement and other postponements.
Most compensation experts do not consider the deferred arrangement as an

incentive plan. Henderson (2005) is one of them. He is of the opinion that
organisations have to open up communication in order to inform their employees
of the value of such deferred plan since it can increased or decreased in terms of
value. Therefore, employees have to be given assurance for their economic
survival.
SELF-CHECK 7.12
What are the factors that should be considered when designing a long-
term incentive plan?
7.5 TYPES OF LONG-TERM INCENTIVE PLANS

Long-term incentive plans are developed by employers to help their employees
provide for a more comfortable life upon retirement.
7.5.1 Qualified Deferred Compensation

Most employees assume that they will live a comfortable life upon retirement.
They do not have to wake up early for work every day nor do they have to perform
uncompleted work tasks. However, this dream can only be fulfilled through smart
retirement planning.
Deferred compensation in Malaysia for civil service are as shown in Figure 7.5.

Figure 7.5: Deferred compensation for civil service in Malaysia
Pension Scheme
Under this pension scheme, the government makes payments in the form of an
annuity to retired civil servants each month. The pension scheme takes into
consideration half of the last drawn basic salary before retirement. For example, if
an employeeÊs last drawn salary is RM4,000, his pension paid to him upon
retirement will be RM2,000 per month.
Five aspects that should be taken into consideration when developing a pension
plan:
(a) Retirement Age

In Malaysia, the retirement age is 60 years of age for both gender. However,
for those who want to retire early, upon reaching the required number of
years performed, they can opt to do so.
(b) Size of Benefits

The management has to devise compensation plan that will addresses the
various goals and concerns of different groups of employees. These plans
cannot be based on one size that will fits all employees.

(c) Early Retirement

Withdrawing from the service before the official retirement age is referred to
as early retirement. There are two main reasons why early retirement exists:
(i) To open up employment opportunities for young people; and
(ii) To reduce the number of employees so that there would not be an

excessive workforce.
(d) Vested Needs

The employer must make certain contributions to his employeesÊ retirement
plan account. Employees will accept non-forfeitable rights over the
contributions after a specific period, normally five years. The vested needs
set up by the organisation will determine when the employees can acquire
full ownership of the fund.
For example, if an employee quits his job after five years, he will still have
the rights to the fund contributed by his employer. However, if he leaves his
job before the specified period, his rights will be terminated. This will give
the employees an incentive to perform well and to remain working with the
company.
(e) Employees Provident Fund

Private sector employees who are not under the pension scheme are
obligated to save for their retirement or for their dependants in the event of
their early death by contributing a percentage of their salary to the
Employees Provident Fund (EPF).
In Malaysia, the Employees Provident Fund Act 1991 makes it compulsory

for employees and their employer to contribute to this savings scheme. For
this reason, the EPF was formed and trusted with the responsibility to collect,
manage and invest the savings on behalf of the employees. All of the
employeesÊ contribution in an EPF account can be withdrawn by the
employees once they reach the age of 55.
ACTIVITY 7.4
Develop a long-term incentive plan for your organisation (or your

friendÊ organisation).

• Most organisations implement the incentive payment plan to control wage cost
or to motivate their employees.
• The basic salary incentive plan that is based on performance enables

employees to control their own level of compensation.
• Short-term incentives are given to employees based on short-term

achievement, which in general is within the range of five years. It can exist
weekly, monthly, quarterly, annually or upon achievement of goals and
objectives.
• Incentive plans can be classified into three main categories. They are individual
incentive plan, group incentive plan and organisational incentive plan.
• Most long-term incentive plans are based on the pattern of life and social class
of the employees.
• Most members of the middle class are dependent on their jobs to improve their
socio-economic status. Long-term benefits are provided to help them improve
their lives.
• Through the implementation of a progressive income tax plan as stipulated by

legislation, organisations have found a way to increase employeesÊ take-home
pay and decrease the employerÊs tax obligation.
Incentive payment Profit-sharing plan

Income-sharing plan Qualified deferred compensation
Long-term incentive plan Short-term incentive plan

Essay Questions
1. Discuss three assumptions that should be taken into consideration in

developing an effective incentive payment system.
2. Briefly discuss the suitability of individual incentive payment in two

different work settings.
3. Explain two types of piecework plan.
4. Explain five factors that human resource professionals and line management
should consider when designing an incentive payment plan.
1. A short-term incentive payment plan could be based on individual or group

performance. ( )
2. Incentive payment is favoured by employers because it is not subjected to

tax. ( )
3. Incentives that are given by organisations are rewards, which encourage

employee performance. ( )
4. Incentive packages such as profit sharing and stock selection plan aim to
encourage employees to adjust themselves to the organisationÊs goals and
values. ( )
5. Group incentive plan aims to motivate high work performance through an

increase in employeesÊ efforts. ( )
6. One of the disadvantages of individual incentive plan is the high level of

mistrust between the management and employees. ( )

Essay Questions
1. Explain the three stages in the development of a long-term incentive plan

according to Chingos (2004).
2. Discuss the effects of tax legislation on organisation and employee income.
3. List five aspects that should be considered in all pension plans.
1. All employers and employees are obligated to contribute to the Employees

Provident Fund under the Employees Provident Fund Act 1991. ( )
2. The main reason an employee defers his income is to save for the future. ( )
3. According to Chingos (2004), one of the stages in long-term incentive

planning is organisational incentive payment plan. ( )
4. The pension is sponsored by the central government. ( )
5. The pension plan guarantees job security for employees. ( )
6. A retirement plan could either be a short-term incentive plan or a long-term

incentive plan. ( )


Henderson, M., Sullivan, A., Anders, J., & Moulton, V. (2002) Social Class, Gender
and Ethnic Differences in Subjects Taken at Age 14., The Curriculum
Journal, 29:3, 298–318.


Hall, Inc.
Inc.
Wilson, T. B., & Phelan, C. C. (1996). Managing employee performance:

Design and implementation in organisations: Psychology. Cengage Learning
EMEA: USA.

Topic  Benefits and
Services
8
LEARNING OUTCOMES

1. Identify the seven main groups of employee benefits;
2. Explain the three main components of employee services;
3. Discuss the four important goals of a flexible benefits compensation
plan; and
4. Explore issues in designing a flexible benefits plan.
 INTRODUCTION
Since the 1940s, the employee benefits market has been unpredictable. Indeed,
from the 1940s until 1980s, employee benefits have undergone drastic changes in
an effort to attract and retain employees, as well as to comply with legislation.
Now, an important aspect to consider in employee benefits is the compensation
design process. Indeed, employers have spent billions of dollars providing benefits
to their employees.
Many questions were raised in the designing of a good benefits package for
employees. How does an employer choose the benefits that will fulfil his
employeesÊ needs? Are the decisions made based on employee evaluation,
organisationÊs goal alignment or compliance with the law? Will the benefits
package enable the organisation to attract, motivate and retain employees so that
they stay loyal to the organisation?

TOPIC 8 BENEFITS AND SERVICES  155
8.1 DEFINITION OF EMPLOYEE BENEFITS AND

SERVICES
Benefits obtained by employees from their organisation come in various forms.
Milkovich and Newman (2017) defined employee benefits and services as follows:
Benefits is a compensation component which contributes to the employeeÊs

welfare by fulfilling certain needs and demands for the sake of the employeeÊs
convenience and comfort.
Employee benefits supports the following two important matters:

(a) Healthcare and accident-related problems; and
(b) Future or deferred income, which is income received upon retirement or
termination of job.
In the compensation administration context, besides paying a fair and unbiased

salary, the organisation also assumes responsibility for its employeesÊ welfare as
well as their dependants.
This type of benefits is not related to work performed but its existence will
encourage employees to improve their productivity. Indeed, a good benefits plan
will help an organisation to attract, motivate and retain employees.
SELF-CHECK 8.1
Define employee benefits and services.

156  TOPIC 8 BENEFITS AND SERVICES
8.2 EMPLOYEE BENEFITS

The growing trend among employers today is to provide benefits as a part of their
direct payment. Because of that, employers should inform the employees of the
economic value of their benefits package. Employees, on the other hand, have to
be aware of what economic value they want from their benefits package.
Benefits will influence individual behaviour towards achieving organisational

goal.
8.2.1 Classifications of Employee Benefits

Employee benefits can be divided into seven main groups as follows:
(a) Continuity of Income for the Disabled

Disability could be classified as temporary or permanent. Continuous
payment will help disabled employees.
(b) Continuity of Income for Termination

Continuity of income for employees who have lost their job is designed to
help them with temporary measures until they find another job.
(c) Deferred Income

Employees will be given an amount of money to enable them to live
comfortably. (Refer to the discussion in Topic 7 for more information.)
(d) Income Protection Upon Retirement for Spouse and Family

Most employees want to ensure the financial welfare of their family. In the
event that an employee dies before his retirement, this benefit will offer
protection against the financial consequences of his death on his dependants.
(e) Income Protection for Accident and Sickness

Organisations provide coverage that will give employees a sum of money
when they are unable to work due to accident at the workplace or sickness
incurred during employment.

(f) Property and Liability Protection

This benefit offers monetary protection for any bodily injury or property
damage that employees may suffer.
(g) Services and Benefits for Special Group (Perks)

Perks are services and benefits offered to a selected group of people, usually
the senior management. Paying the cost of a major illness is often one of the
example of perks awarded.
Figure 8.1: Employee benefits classifications
ACTIVITY 8.1
List the benefits that you are entitled to from your organisation.
Compare them with the benefits offered by other organisations.

8.3 EMPLOYEE SERVICES

Nowadays, employers often offer various employee services to enhance the lives
of their employees. There are three main components of employee services. They
are as follows:
(a) Paid Leave

Employers try to reduce working hours by giving more paid leave and longer
holidays to employees. The components of paid leave are as follows:
(i) Annual leave
(ii) Paternity leave
(iii) Maternity leave
(iv) Court leave
(v) Election day leave
(vi) Witness leave
(vii) Blood donation leave
(viii) Civic duty leave
(ix) Contract consultation leave
(x) Military duty leave
(xi) Career refreshment leave
(xii) Bereavement leave
(xiii) Personal leave
(xiv) Compassionate Leave
(xv) Study leave
(xvi) Marriage leave
(xvii) Sports-related leave
In Malaysia, there are certain sections of the Employment Act 1955 and the
Malaysian labour laws that have to be adhered to when implementing an
employee benefits programme.

Some of the important sections of the Employment Act 1955, which relate to
general leave, annual leave and medical leave, are listed in Table 8.1.
Table 8.1: Employment Act 1955 in Relation to General Leave,

Annual Leave and Medical Leave
Section Explanation
Section 60D (1) Each employee is entitled to at least 10 days leave in any
calendar year.
Section 60D (1) If a statutory holiday falls on a rest day, a holiday should be
granted on the next working day as replacement.
Section 60D (1A) Employers, in agreement with the employees, can substitute
any other day or days for the remaining six gazetted public
holidays.
Section 60D (1B) An employee will be granted another day as a paid leave if a
gazetted holiday falls within a period during which the
employee is on sick leave or annual leave.
Section 60D (2) If an employee does not turn up to work on the working day
immediately before or after a public holiday without a
reasonable excuse, he is not eligible for any holiday pay for
such holiday.
Section 60E (1) An employee shall be entitled to paid annual leave as follows:
Number of Years Working Eligible Annual Leave

Under the Same Employer (Number of Days)
A year or more but less than
8
two years
Two years or more but less
12
than five years
Five years or more 16
Section 60E (1) If an employee terminates his service with fewer than 12
months of continuous service, his entitlement to paid annual
leave shall be in direct proportion to the number of
completed months of service.
Section 60E (2) An employee shall be entitled to payment in lieu of annual
leave not taken if at the request of his employer, he agrees in
writing not to take any or all of his annual leave entitlement.
Section 60E (1B) A female employee will have additional annual leave if
during the annual leave she is on maternity leave.

Section 60E (1B) An employee will obtain additional leave if during the
annual leave he is on medical leave.
Section 60E (2) Employers shall grant annual leave to employees after the
Forfeiting annual end of every 12 months of continuous service.
leave
Section 60E (2A) An employee could use his annual leave balance to offset the
notice period for resignation.
Section 60F (1) An employee is entitled to medical leave only under certain
(1A) & (2) circumstances (please refer to Section 60F (1) (1A) and (2) in
the Employment Act 1955).
Section 60F (1) The number of paid medical leave an employee is entitled to
(AA) & (BB) in one calendar year is as follows:
Number of Medical Leave

Period of Service Entitled in One Calendar Year
(Number of Days)
Less than two years 14
Two years but less than five
18
years
Five years and more 22
If hospitalisation is necessary, the number of paid medical

leave could be extended up to 60 days in one calendar year.
Section 60F (3) Payment during medical leave for daily-rated employees
should be according to his normal wage rate. However,
employees on a monthly rate of pay will receive their
monthly payment without any deduction. This section was
amended in 1998; wage payment is limited to the basic salary
to determine the normal rate of pay when employees are on
medical leave. Applies to employees on daily rate and piece
rate only.
Payment rate for Medical Leave:

Number of Days × Normal Rate
(b) Personal Protection

Even though employees will not be paid for absenteeism at work due to ill
health or work-related injuries, they are still protected by disability, life and
medical insurance paid by their employers for them.

(c) Income Equivalent Payment and Expenditure Repayment

Most compensation components react to economic changes in tax
requisition. Parts of the components contributed by the employer are as
follows:
(i) Donation
(ii) Counselling fee
(iii) Tax preparation fees
(iv) Education subsidy
(v) Child adoption fee
(vi) Childcare expense
(vii) Eldercare expense
(viii) Food subsidy
(ix) Health and physical fitness programme fee
(x) Transportation allowance
(xi) Travelling expense
(xii) Apparel (uniform) allowance
(xiii) Relocation allowance
(xiv) Housing allowance
(xv) Emergency loan
Employees can refer to the Employment Act 1955 and the Malaysian labour laws
to check that the benefits and services given by their employers are in accordance
with legal requirements. These employment laws are amended from time to time,
thus, employers and employees are advised to contact the Labour Department
periodically for any labour law changes or revisions.
By contributing to employee welfare, organisations are usually given an

exemption from certain taxes. For example, in Malaysia, tax are exempted for
companies providing childcare allowances for children up to 12 years up to
RM2,400 per year. However, this also includes payment by the employer directly
to the childcare.

SELF-CHECK 8.2
How can an organisation improve its employeesÊ standard of living?
8.4 FLEXIBLE BENEFITS COMPENSATION

PLAN
Flexible benefits compensation plan is designed according to individual needs.
Nowadays, organisations are keen to do the following when planning for and
implementing employee benefits:
(a) To deduct the cost of benefits package;
(b) To allocate their employeesÊ desired benefits after reviewing the effects of
basic effective tax;
(c) To let employees decide what they think is beneficial and meaningful to
them.
A flexible benefits plan enables an employee to choose his own benefits and
services. Before allowing the employee to modify his own benefits package, the
employer must first identify the readiness of benefits and services alternatives,
determine the cost of every one of the benefits and services, and finally, add up the
total cost to make sure that it is within the dollar limit of the package offered to the
employee.
Generally, the flexible benefits compensation plan achieves four important goals
as illustrated in Figure 8.2.

Figure 8.2: Goals of a flexible benefits compensation plan
Indeed, the number of organisations that offer continuous flexible benefits are
increasing each year.
8.4.1 Appreciation towards Employer’s Interest

Organisations spend a lot of time and money improving their benefits plan or
programme. Therefore, it is not sufficient to merely inform employees of the efforts
made and the implications of the benefits programme upon their lives. Instead,
employers should give their employees a platform to voice their opinions on how
they should perform their job and the rewards that they should get as compared
to their contributions. The employers should then develop the benefits programme
based on the employeesÊ views.
It is only through such engagement or involvement in well-received compensation

programmes that employees can appreciate what their employers have done, and
are doing, to improve their quality of life.
SELF-CHECK 8.3
Why are employers prepared to spend a lot of money on employee

benefits?

ACTIVITY 8.2
As an employer, what do you think should be done to inform

employees of the benefits plan that has been implemented in your
organisation?
Share your suggestions in the myINSPIRE forum.
8.4.2 Employee Expectation and Priority

As a result of the surge in interest among employers in identifying benefits and
services needed by employees, researchers have developed new and better
methods to evaluate the behaviour, expectations and priorities of employees.
The new methods focus on the following:
(a) Employee expectation of the benefits;
(b) Opinion on benefits received and comparing the benefits to those offered by
other employers;
(c) Utilisation and understanding of existing benefits; and
(d) Benefits that employees desire but are currently not available to them.
A good tool to determine employee needs is the priority survey.
SELF-CHECK 8.4
Are the benefits offered by your organisation (such as medical and

accident protection plan, and deferred payment plan) up to your
expectations? Justify your answer.

8.4.3 Developing a Flexible Benefits Plan

Detailed planning and lengthy discussions have to be conducted before a flexible
benefits plan can be developed. Three groups of people are involved in developing
a flexible benefits plan (see Figure 8.3).
Figure 8.3: Groups of people involved in developing a flexible benefits plan
(a) Senior Management

This group is responsible for determining and developing the flexible
benefits plan.
(b) Compensation and Human Resource Experts

This group is responsible for providing guidance on developing and
structuring a programme that fits the organisationÊs objectives and the
employeeÊs needs.
(c) Employees
This group plays an important role in developing the flexible benefits plan.
They are responsible for suggesting the benefits that should be in the benefits
programme, assigning values according to the priority of the benefits and
making the final choice.
SELF-CHECK 8.5
Who are the individuals involved in developing a flexible benefits plan?

ACTIVITY 8.3
1. As an employee, what inputs can you contribute to the

development of a flexible benefits plan?
2. Differentiate between the importance of an employerÊs interest in

preparing the benefits and services for his employees and his
employeesÊ interests in selecting the best benefits offered by the
employer.
8.5 ISSUES FOR CONSIDERATION IN

DESIGNING A FLEXIBLE BENEFITS PLAN
Senior managers should determine the overall value of benefits and approve the
percentage distribution of this value according to selected items and non-selected
items.
The following are some of the most frequently asked questions about the flexible
benefits plan that managers have to consider when designing a flexible benefits
plan.
(a) Does the plan recognise the change in the basic wage level during the flexible
benefits plan year?
(b) Does the plan recognise the change in the number of family members and
marital status of the employee?
(c) Does the plan recognise the change in benefits and premium costs?
(d) When (during the flexible benefits plan year) is the employee given a chance
to make a change in the benefits plan?
ACTIVITY 8.4
You may also want to visit the following website:

http://www.benefitslink.com/index.shtml
You will find information on the various types of benefits as well as

questions discussed.

• Benefits obtained by employees from their organisation come in various forms.
• Employee benefits is a compensation component which contributes to

employeeÊs welfare by fulfilling certain needs and demands for the sake of the
employeeÊs convenience and comfort.
• Employee benefits can be classified into seven main groups - continuity of

income for the disabled, continuity of income for termination, deferred income,
income protection upon retirement for spouse and family, income protection
for accident and sickness, property and liability protection, and services and
benefits for special group (perks).
• The three main components of employee services are paid leave, personal
protection, and income equivalent payment and expenditure repayment.
• Flexible benefits compensation plans are designed according to individual

needs.
• Detailed planning and lengthy discussions have to be conducted before a

flexible benefits plan can be developed.
• The three groups of people who are involved in developing flexible benefits
plans are senior management, compensation and human resource experts, and
employees.
Deferred income Employee services

Employee benefits Flexible benefits compensation plan

Essay Questions
1. Define employee benefits and services in the context of compensation

administration.
2. List type of the medium of communication that can be used to communicate

the benefits programme.
1. Research shows that employees have a high level of consciousness and could
accurately evaluate the benefits given by employers. ( )
2. Employers have to realise that the reduction in satisfaction towards given

benefits is the result of long-term changes at the workplace. ( )
3. Research shows that employee benefits priority is influenced by factors such

as age, level of pay and marital status. ( )
4. Any evaluation of employee benefits should be in the context of human

resource allocation. ( )
5. Group employee benefits are cost effective since it can be obtained at a lower
rate compared to individual benefits. ( )
Essay Questions
1. Describe three groups of people who should be involved in developing a

flexible benefits plan for the organisation.
2. Explain the three important aspects that organisations are keen to do to when
planning for and implementing employee benefits compensation.
3. Elaborate on the four important goals of a flexible benefits plan.

Milkovich, G., Newman, J., & Gerhart, B. (2017). Compensation. McGraw Hill:
Canada.

170  ANSWERS
Answers
TOPIC 1: INTRODUCTION TO COMPENSATION
SYSTEM
Self-Test 1
1. A 2. D 3. B
Essay Question
1. The five compensation dimensions in compensation system:
(a) Payment based on work done and performance
(b) Paid leave
(c) Wage loss benefits
(d) Disability benefits
(e) Deferred Income
(f) Spouse/family benefits
(g) Health, accident and liability protection
(h) Income equivalent payment
(Choose any five answers from the above)

ANSWERS  171
Self-Test 2
1. D 2. C
Essay Question
1. (a) Basic salary is a financial compensation received by employees for tasks
that they have perform.
(b) Six factors that determine basic salary:

(i) Type and level of knowledge and skills
(ii) Capital or labour intensity
(iii) Business size
(iv) Management philosophy
(v) Compensation package
(vi) Geographical location
(vii) Labour supply and demand
(viii) Company profit
(ix) Job security
(x) Gender difference
(xi) Working period and work performance
(Choose any six answers from the above)
Matching Exercise
1. 1. B 2. D 3. E 4. C 5. A
2. 1. D 2. C 3. B 4. E 5. A

172  ANSWERS
TOPIC 2: ROLE OF LEGISLATION IN

COMPENSATION MANAGEMENT
Self-Test 1
1. D 2. D 3. C
Essay Question
1. Three acts which are used as main guidelines by employers in developing a

compensation management system:
(a) Employment Act 1955;
(b) WorkmenÊs Compensation Act 1952; and
(c) Industrial Relations Act 1967.
Self-Test 2
1. D 2. D
Essay Questions
1. Four roles of legislation in compensation management system:

(a) Achieving fairness and equality
(b) Preventing oppression and discrimination
(c) Maintaining good relationships among workers in the work
environment
(d) Preserving the rights of employers and employees

ANSWERS  173
2. Explain the role of legislation in determining wage rate.
Begins when there is a tight labour market with low unemployment rate amid
rising worker expectations. As a consequence, employers have to offer
attractive compensation packages to recruit employees. This situation will
result in a general increase in product prices. Thus, in order to protect the
welfare of employers and employees, the government has to control the wage
rate. This control is implemented through related acts, which have been
passed. However, employers have the right to determine the final wage rate
although they must comply with the guidelines set out in the related acts.
TOPIC 3: JOB ANALYSIS
Self-Test 1
Essay Questions
1. Five importance of executing job analysis:

(a) To redesign jobs, which means changing the components of a job.
(b) To assess job content, which means that a value will be assigned to a
job to form a fair internal wage structure.
(c) To adjust the companyÊs practices to meet changing needs.
(d) To identify qualified applicants for a job.
(e) To conduct performance analysis which is to obtain information on the
level of competency exhibited by employees in executing their job.
(f) To identify the skills, abilities and knowledge of individual employees
whose position can then be upgraded or promoted.
2. Three objectives of job analysis:

(a) To explain the importance of a position that has been identified in terms
of status, field and work scope.
(b) To form a better, clearer and correct understanding of work skills,
knowledge and abilities.
(c) To determine a performance measurement that could be accepted by
the jobholder.
(d) To determine the job description and job specification.

174  ANSWERS
Self-Test 2
1. D 2. D 3. A 4. A 5. C
Essay Question
1. The process of job analysis involves three stages:
(a) Choosing the job that needs to be evaluated. Normally, jobs whose
structure has undergone considerable changes should be analysed so
that the organisation knows what qualifications, abilities, knowledge
and skills are needed in order to execute the jobs smoothly.
(b) Identifying the appropriate job analysis method to use to ensure that
information collected is clear and accurate. Job analysis methods
include questionnaire, observation, interview and the incumbentÊs
work log.
(c) Performing job evaluation includes preparing written report with
regard to job description, job specification and job performance
standard.
TOPIC 4: JOB DESCRIPTION
Self-Test 1
Essay Questions
1. Job description is a written document that identifies, clarifies and elaborates

every detail of a job in terms of the tasks, scope, functions and
responsibilities.
2. Four important reasons for creating job descriptions in an organisation:

(a) To clarify the scope of the job and responsibilities of employees.
(b) To clarify the employment contract between the organisation and
employees.
(c) To inform employees of their work activities. Through their job
description, employees could re-evaluate their work activities to see
whether they are as they should be.

ANSWERS  175
(d) To design organisational structure and new tasks or to modify existing

tasks.
3. The following are brief descriptions of components covered in a job

description:
(a) Job Specification

A statement that elaborates on employee characteristics and
qualifications for satisfactory performance of defined duties and tasks.
(b) Accountability
This refers to the assumption of responsibility by an employee for job
performance. It is stated in the job description without which it is
impossible for an employee to properly commit to, or be held
accountable, for his job.
(c) Performance Measurement

A standard measurement that is used to determine the level of job
performance expected of an employee.
(d) Job Summary

A part of job description that describes briefly the overall functions and
responsibilities of a job. It also identifies the immediate subordinate(s)
and superior.
Self-Test 2
1. D 2. C
True (T) or False (F) Statements

1. T
2. T
3. T
4. T
5. T

176  ANSWERS
Essay Question
1. The job description process involves six steps:

(a) Step 1 – The human resources department appoints the job analyst to
develop a questionnaire in order to gather information related to job
description.
(b) Step 2 – The human resources department will distribute copies of the
questionnaire once it is ready and ask all employees to return the
completed questionnaires within a given period of time.
(c) Step 3 – Each employee will fill in the questionnaires distributed by the
human resources department.
(d) Step 4 – Questionnaires completed by jobholders are reviewed and
approved by the job analyst.
(e) Step 5 – The job analystswill interview jobholders to get a better idea of
what the jobholders are doing. The information gleaned will then be
recorded by the job analyst.
(f) Step 6 – The job analyst will analyse the information collected and
transform it into a job description.
TOPIC 5: JOB EVALUATION
Self-Test 1
Essay Questions
1. According to Henderson (2005), job evaluation is a systematic process in

determining the relative value of all positions or jobs in an organisation. Job
evaluation accounts for all criteria stated in a job description and job
specification. Every task and responsibility related to knowledge, skills,
experience and abilities in executing the job has to be identified to determine
the value in the form of wage rate for each type of job.

ANSWERS  177
2. There are six steps in job evaluation:

(a) Forming a team to perform the job evaluation. Normally, job evaluation
is conducted by a well-trained team.
(b) Choosing the benchmark jobs to be evaluated. The job evaluation
system is often based on a representative sample of jobs, which are the
most commonly occurring jobs.
(c) Choosing compensable factors. Compensable factors are broad
categories of job content that provide a common measurement link
between jobs. They are used to determine the worth of jobs.
(d) Forming the measurement dimensions of organisational job value.
These dimensions help the organisation identify the contributions
made by employees in performing their tasks and responsibilities.
(e) Choosing a suitable job evaluation which can either be a quantitative
method or a non-quantitative method.
(f) Determining the value of every job evaluated. After the relative value
of each job has been determined, a dollar amount for the job is set
through job pricing.
Self-Test 2
1. D 2. B 3. B 4. B
Essay Questions
1. (a) Point Factor Method

Point factor method uses points to evaluate job factors. Points given to
each factor will be accumulated to obtain the total amount of points for
the job. The total point score will be used to determine the wage rate
for each and every job.
(b) Job Classification Method

This method categorises jobs into certain groups called job class or
grade. Each job is grouped according to the compensable factors used.
Any job that is evaluated at similar level in terms of the compensable
factors are assigned to the same pay grade.

178  ANSWERS
2. Two issues to consider in job evaluation:
(a) What is the most suitable method to use in job evaluation?

Do we need to use more than one method of job evaluation?
(b) How effective and valid is job evaluation?

Is job evaluation capable of minimising unfair pay practices?
TOPIC 6: FORMATION OF WAGE STRUCTURE
Self-Test 1
Essay Questions
1. The compensation administration process involves seven steps:

(a) Firstly, identifying and understanding organisational structure.
Organisational structure is explained through the position hierarchy of
an organisation.
(b) Secondly, determining the job description and job specification for
every position in the organisation.
(c) Thirdly, determining the grade of a job. This will ease the process of
wage setting and payment.
(d) Fourthly, obtaining information regarding the wage rate of every
position in the market. The market rate is compared between
organisational pay rate and market pay rate.
(e) Fifthly, designing the organisational wage scale. This could be done by
using information obtained through market surveys and forming the
lowest and highest wage that could be achieved for the same position.
(f) Sixthly, determining the employeeÊs performance measurement
through individual job performance, which serves to differentiate
individual achievement based on the performance measurement set.
(g) Finally, developing individual wage payment for the employees.

ANSWERS  179
2. The six steps in forming a wage structure:

(a) Determining a wage policy line or wage trend line. The organisation
can use either the line-of-sight method or the two-point method.
(b) Deciding if the organisation needs more than one wage structure for
each category of position.
(c) Obtaining data through market surveys. The organisation should be
careful in interpreting the data.
(d) Identifying the lowest and highest wage rate for each wage grade
employees.
(e) Determining the lowest to the highest incremental wage rate. This
means that the organisation has to set the annual wage increment for
each of the wage grade.
(f) Developing the wage grade in the organisation. In forming the wage
structure, the organisation should clarify the number of wage increments
it will take for a particular grade to reach the maximum rate and the width,
which is the period of time before the maximum level is reached.
Self-Test 2
Compensation Administration Items Order
Job Description and Job Specification are created 2
A wage grade is determined 3
A wage scale is set 5
Performance evaluation is made 6
Compensation rate is compared with the market rate 4
The organisational hierarchy is determined 1
Employees are paid 7
1. C 2. A 3. B

180  ANSWERS
Essay Question
1. Explain the wage payment based on skills and efficiency.
The organisation will form a wage structure that could attract, satisfy and
retain employees in its organisation. Wage payment based on skills is an
approach used to identify the type and level of skills possessed by
employees. This method will pay employees based on the skills they
possessed. Normally, the higher the skills possessed by an employee, the
higher the salary that will be paid to him. However, the reverse is true if he
possesses lesser skills. In addition, he will be classified to a lower salary
grade even though he and his high-skilled colleague are holding the same
position.
Wage payment based on efficiency is an approach that emphasise employee

efficiency. The more efficient the employee, the higher his salary. The
organisation should set efficiency standards that could be evaluated and
achieved by their workers. For example, technical workers who are assigned
to install car engines. The faster and more efficient the installation process is,
the higher the wage earned by the workers. The high wage commensurate
with the efficiency shown by the workers in executing their task. Efficiency
is measured based on knowledge efficiency, efficiency in problem solving
and efficiency in making decisions to solve problems.
TOPIC 7: SHORT-TERM AND LONG-TERM

INCENTIVE PLANS
Self-Test 1
Essay Questions
1. Three assumptions that should be considered in developing effective

incentive payment system:
(a) Individual employees and work teams differ in their contributions to

the organisation. Not only are they being evaluated by what they do
but also how well they execute the job.
(b) OrganisationÊs overall performance depends on individual and group

performance in the organisation.

ANSWERS  181
(c) To attract, motivate and secure high performance employees and to be

fair to every employee, an organisation has to reward its employees
based on their relative performance.
2. The individual incentive payment plan works well when the job is based on
the number of units produced and sales amount.
3. Two types of piecework plan:
(a) Plan Based on Working Hours and Piece Rate

The incentive plan based on working hours is often used in the
manufacturing industry such as the garment and textile sectors.
Employees are given rewards based on their individual total working
hours.
(b) Plan Based on Output

The incentive plan based on output units will need to develop
individual performance standard, which covers two important
elements:
(i) Objective standard takes into account output per worker.
(ii) Subjective criteria views the overall work quality based on the
supervisorÊs interpretation and evaluation.
4. Five factors that should be considered by human resource professionals and

managers when designing an incentive payment plan:
(i) Whether the plan should be based on individual or group performance.
(ii) Level of employeeÊs acceptable or tolerable risk in the overall
compensation package.
(iii) Whether the incentive payment should replace or complete the
traditional salary.
(iv) Criteria for evaluating performance.
(v) Duration to achieve the goal (long-term, short-term or a combination of
both).

182  ANSWERS

1. T
2. T
3. T
4. T
5. F
6. T
Self-Test 2
Essay Questions
1. Three stages in developing long-term incentive plans according to Chingos

(2004):
(a) Establishing the foundation
(b) Building a super-structure
(c) Completing the internal structure
2. Organisations are keen on finding ways to improve their employeesÊ take-

home pay or income while at the same time decreasing the employerÊs tax
obligation. One of the ways is the implementation of a progressive income
tax programme of which the main components are:
(a) Deduction from the gross income to determine the adjustment in gross
income and the income that will be taxed.
(b) Rate of income tax and tax payable to determine the tax needed to be
paid.
(c) Credit or deduction from the estimated tax to determine the actual tax.

ANSWERS  183
3. Five aspects that should be considered in all pension plans:

(a) Retirement age
(b) Size of benefits
(c) Discrimination in compensation plan
(d) Early retirement
(e) Vested needs

1. T
2. F
3. F
4. F
5. F
6. T
TOPIC 8: BENEFITS AND SERVICES
Self-Test 1
Essay Questions
1. The definition of benefits and services in the context of compensation

administration:
Employee benefits and services is a programme which lists the alternative

forms of payments which include paid leave (statutory holidays, jury duty,
annual leave, etc.), services (counselling service, financial planning, etc.) and
protection (medical and life insurance, retirement, etc.).

184  ANSWERS
2. The type of medium of communication that could be used in employee

benefits communication programme:
(a) Leaflets
(b) Visual presentation
(c) Written updates regarding changes in benefits

1. F
2. T
3. T
4. T
5. T
Self-Test 2
Essay Questions
1. Three groups of people who should be involved in developing a flexible

benefits plan for the organisation are:
(a) Senior management
(b) Compensation and Human Resource experts
(c) Employees
2. Three important aspects that organisations are keen to do in providing

benefits:
(a) To deduct the cost of benefits package;
(b) To allocate their employeesÊ desired benefits after reviewing the effects
of basic effective tax;
(c) To let employees decide what they think is beneficial and meaningful
to them.

ANSWERS  185
3. Four important goals of a flexible benefits plan:

(a) To demonstrate an employerÊs interest in his employeesÊ welfare.
(b) To build loyalty and boost motivation, which in turn will boost
productivity.
(c) To foster an understanding towards the value and cost of each benefits
and compensation component.
(d) To foster an understanding towards the value and cost of the benefits
programme as a whole.

184  REFERENCES
References
Aminuddin, Maimunah. (2014). Human resource management (3rd ed). Shah
Alam: Oxford University Press

Bohlander, G. W., Snell, S., & Sherman, A. (2001). Managing human resources
(12th ed.). Ohio: South-Western College Publishing.

Faizuniah, Aini Hayati, Daratul, Khulida Kirana, Norazuwa & Norsiah (2002).
Pengurusan sumber manusia. Mc Graw-Hill, Malaysia.

Hall, Inc.
June, M. L. Poon. (1994). Pengurusan sumber manusia. Kuala Lumpur: Dewan

Bahasa dan Pustaka.
Inc.
Milkovich, G. T., & Newman J. M. (2017). Compensation (11th ed.). Singapore:

Mc Graw Hill.
Muhammad Ali EL-Hajji, (2012). Protocol of Job Evaluation: A BirdÊs Eye View.
International Journal of Human Resource Studies, 2(1).

MODULE FEEDBACK
MAKLUM BALAS MODUL
If you have any comment or feedback, you are welcome to:
1. E-mail your comment or feedback to modulefeedback@oum.edu.my
OR
2. Fill in the Print Module online evaluation form available on myINSPIRE.
Thank you.
Centre for Instructional Design and Technology

(Pusat Reka Bentuk Pengajaran dan Teknologi )
Tel No.: 03-78012140
Fax No.: 03-78875911 / 03-78875966


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BDCM4103

Introductory Compensation Management

Copyright © Open University Malaysia (OUM)

Copyright © Open University Malaysia (OUM)

Module Writers: Mohd Faizal Mohd Isa

Moderators: Prof Dr Shaari Abd Hamid

Enhancer: Dr Zabedah Othman

Developed by: Centre for Instructional Design and Technology

First Edition, April 2008

Copyright © Open University Malaysia (OUM)

Topic 1 Introduction to Compensation System 1

Topic 2 Role of Legislation in Compensation Management 30

Copyright © Open University Malaysia (OUM)

Topic 3 Job Analysis 54

Topic 4 Job Description 70

Copyright © Open University Malaysia (OUM)

Topic 5 Job Evaluation 90

Topic 6 Formation of Wage Structure 109

Topic 7 Short-term and Long-term Incentive Plans 126

Copyright © Open University Malaysia (OUM)

Topic 8 Benefits and Services 154

Copyright © Open University Malaysia (OUM)

Copyright © Open University Malaysia (OUM)

COURSE GUIDE DESCRIPTION

As an open and distance learner, you should be acquainted with learning

Copyright © Open University Malaysia (OUM)

Table 1: Estimation of Time Accumulation of Study Hours

COURSE LEARNING OUTCOMES

1. Describe the functions of compensation management in an organisation;

2. Analyse the importance of job evaluation in the process of implementing

3. Illustrate the wage structure and types of wage payment.

Topic 2 covers legislation in compensation administration. You will also be

Copyright © Open University Malaysia (OUM)

Topic 5 discusses job evaluation as well as its importance in an organisation.

TEXT ARRANGEMENT GUIDE

Copyright © Open University Malaysia (OUM)

Self-Check: This component of the module is inserted at strategic locations

Activity: Like Self-Check, the Activity component is also placed at various

Copyright © Open University Malaysia (OUM)

Chingos, P. T. (2004). Responsible compensation for a new era of accountability.

Henderson, R. I. (2005). Compensation management (8th ed.). New Jersey: Prentice

Milkovich, G. T., & Newman, J. M. (2007). Compensation (9th ed.). Singapore:

TAN SRI DR ABDULLAH SANUSI (TSDAS)

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By the end of this topic, you should be able to:

To attract employees and to retain best performers, employees need to have a

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Thus, it is important for an employer to establish an attractive, fair and systematic

1.1 DEFINITION OF COMPENSATION

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The goals of compensation are as follows:

(a) Motivate Employees to Perform Effectively

Figure 1.1: A cash reward as an incentive favoured by employees

(b) Encourage Desired Behaviour at the Workplace

Figure 1.2: Bonus boosts work attendance

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(c) Attract Potential Employees to Work in the Organisation

(d) Retain Efficient Employees