Human Resource Management – Chapter 8: Compensation System

1. Concept

1.1. Nominal Wages:

• Is the amount of money an employee receives according to the agreement with the employer.
• It is expressed in a specific amount of money in the employment contract or payslip.

1.2. Real Wages:

• Is the amount of goods and services that an employee can obtain through their nominal wages.
• It depends on the price level of goods and services in the market.
• Real wages reflect the employee’s actual purchasing power.

2. Objectives of the Compensation System

The compensation system is designed to achieve the following objectives:

• Attract Employees:
  • Build competitive salaries to attract talented candidates who meet the job requirements.
• Retain Top Performers:
  • Ensure salaries are commensurate with the abilities and contributions of employees, helping them stay committed to the company in the long term.
• Motivate Employees:
  • Design a compensation system based on work results, productivity, and dedication, to motivate employees to strive for better performance.
• Meet Legal Requirements:
  • Fully comply with labor laws, minimum wage, social insurance, health insurance, etc.
• Cost-effectiveness:
  • Build an effective compensation system, optimize personnel costs, ensuring a balance between employee income and company profits.

3. Compensation System

3.1. Classification of the Compensation System:

• Financial Compensation: Includes salaries, bonuses, allowances, etc.
• Non-financial Compensation: Includes benefits, privileges, and non-monetary incentives such as:
  • Promotion opportunities
  • Interesting, meaningful work
  • Professional work environment
  • Good welfare programs
  • Training and career development opportunities, etc.

3.2. Classification of Financial Compensation:

• Base Salary: Is the fixed amount of money an employee receives monthly, calculated based on the number of working hours according to regulations or the number of products produced.
• Allowances: Are additional amounts added to the base salary to compensate for special conditions of the job or workplace.
  • Allowances calculated on the minimum wage:
    • Regional allowance: Calculated on the minimum wage, applied to areas with special socio-economic conditions.
    • Hazardous allowance: Calculated on the minimum wage, applied to jobs with dangerous working conditions or that affect health.
  • Allowances calculated on the base salary:
    • Responsibility allowance: Applied to job positions with high responsibilities.
    • Overtime allowance: Calculated on the base salary, applied to those who work beyond the stipulated hours.
    • Seniority allowance: Calculated on the base salary, applied to those who have been working for the company for many years.
• Bonuses: Are amounts paid to employees based on work results, productivity, dedication, etc.
• Benefits: Are benefits, privileges, and incentives provided to employees to improve their lives and welfare, including:
  • Lunch meals
  • Transportation
  • Supplementary health insurance
  • Vacation trips
  • Gifts, etc.

Note: The base salary, allowances, bonuses, and benefits are stipulated in the employment contract or the company’s compensation policy.

4. Types of Compensation

4.1. Classification by calculation method:

• Time-based compensation:
  • Calculated based on the employee’s actual working hours.
  • Often applied to office jobs, services, etc.
• Merit-based compensation:
  • Calculated based on the employee’s abilities, skills, expertise, and contributions.
  • Often applied to jobs with high requirements for expertise, technical skills, creativity, etc.
• Performance-based compensation:
  • Calculated based on work results, products produced, revenue generated, etc.
  • Often applied to production, business jobs, etc.

Note:

• The type of compensation chosen should be suitable to the specific characteristics of the job, the size of the business, and management objectives.
• Combining different types of compensation can create motivation for employees.

4.2. Classification by implementation method:

4.2.1. Performance-based Compensation:

• Piece-rate:
  • Individual piece-rate: Compensation is calculated based on the number of products that the employee produces.
  • Progressive piece-rate: Compensation is calculated based on the number of products produced and the wage increase at each stage.
  • Team piece-rate: Compensation is calculated based on the group’s total output.
• Commission: Compensation is calculated based on the revenue that the employee generates.

Note:

• Performance-based compensation can motivate employees to increase their productivity but needs to consider the balance between compensation levels and production costs.
• It should be combined with other types of compensation to ensure fairness and avoid unfairness in compensation.

5. Factors Affecting the Compensation System

• The demand for labor in the job market
• Employees’ skills and experience
• Difficulty and danger levels of the job
• Job performance
• Size, industry, and business field of the company
• Company’s business operations
• The people’s living standard

Note:

• The compensation system needs to be adjusted regularly to suit the actual situation.
• It is necessary to refer to the salary levels of companies in the same industry to ensure competitiveness.

6. Note when designing the compensation system:

• Clearly define the objectives of the compensation system.
• Choose a compensation method suitable for the specific characteristics of the job, the size of the company.
• Develop a clear, transparent, and fair salary scale and payslip.
• Ensure competitive salaries, attracting and retaining talent.
• Regularly evaluate the effectiveness of the compensation system and adjust it accordingly.

7. Conclusion

The compensation system plays an important role in attracting, retaining, and motivating employees.

• Designing and managing an effective compensation system is one of the factors determining the company’s success.
• Companies need to focus on building and managing the compensation system scientifically, suitable to the characteristics of the industry, size, objectives, and strategies of the company.