Topic 5 – Compensation & Benefits (MGT340)

Definition of Compensation

  • Comprehensive term covering all forms of pay, reward and recognition an employee receives from employment.
  • Compensation package contains three broad elements:
    • Direct financial payment – immediate cash (wages, salaries, incentives, bonuses).
    • Indirect financial payment – monetary value delivered in a non-cash form (insurance, paid leave, etc.).
    • Non-financial payment – intangible rewards that generate satisfaction comparable to cash (flexible scheduling, onsite facilities).
  • Significance:
    • Aligns employee effort with organisational goals.
    • Shapes employer brand and talent attraction.
    • Serves as the tangible indicator of the psychological contract.

Types of Compensation

  • Direct Financial Payment
    • Wages / salaries (time-based or piece-based).
    • Incentives / commissions (performance-linked cash, e.g.
      salesperson bonuses, executive incentives).
    • Bonuses (lump-sum extra payments for exceptional performance or company success).
  • Indirect Financial Payment
    • Insurance coverage (medical, life, accident, disability).
    • Paid vacation, statutorily required leave.
  • Non-Financial Compensation
    • Job-centred: flexible work schedules, enrichment, recognition.
    • Facility-centred: onsite gyms, childcare, subsidised meals.

Direct Financial Payment

  • Wages / Salaries
    • Regular cash paid for labour input.
    • Two main payment architectures:
    • Time-related systems – pay is tied to hours, days, weeks or months worked. There is no direct link between output and pay.
    • Piece-rated systems – pay is tied to units produced or tasks completed (see Wage Systems section).
  • Incentive / Commission Schemes
    • "Pay-for-performance" plans rewarding individual contribution above base wage.
    • Typical examples: \text{Sales Commission} = \text{Gross Sales} \times \text{Commission Rate}.
    • Manager & executive incentives often mix quantitative (profit, ROI) and qualitative targets.
  • Bonus
    • One-off cash add-on for surpassing benchmarks, completing projects, or when firm‐wide profit milestones are met.

Indirect Financial Payment & Non-Financial Rewards

  • Represent most employee benefits.
  • Cost the employer money but may not appear as cash in the employee’s payslip (insurance premium, subsidised lunch, tuition reimbursement).
  • Provide strategic advantages: differentiate employer, improve loyalty, reduce turnover.

Working Hour Systems in Malaysia

Normal Working Hours

  • Pre-2023 maximum: 48\text{ hours/week} (≈ 8\text{ h/day} \times 6\text{ days}).
  • From 1\,\text{Jan}\,2023: capped at 45\text{ hours/week} (exclusive of meal breaks).
  • Protections under Employment Act:
    • Not more than 5 consecutive hours without a \ge 30-minute break.
    • Not more than 8 hours in any one day.
    • Entitled to one full rest day per week (Section 59(1)).

Overtime

  • Work performed beyond normal hours.
  • Statutory overtime premiums:
    • Ordinary working day: 1.5 \times normal hourly rate.
    • Rest day: 2 \times normal hourly rate.
    • Public holiday: 3 \times normal hourly rate.

Shift Work

  • Work pattern outside the conventional daytime block; multiple crews rotate.
  • Common designs: double-day shift, three-shift rotation, split shift, permanent night.
  • Improves asset utilisation but demands higher safety, health and communication protocols.

Flexitime

  • Employees choose start/finish times within employer-defined limits.
  • Key jargon:
    • Bandwidth – total span within which work can be scheduled.
    • Core hours – must-be-present block (e.g. 10:00–15:00).
    • Flexibands – earliest/latest permissible clock-in/out.
    • Settlement period – window (week/month) within which contracted hours must balance.

Part-Time Work

  • Contracted hours < normal full-time hours.
  • Employment Act: average must not exceed 70\% of full-time equivalent.
  • Can be permanent or temporary; often leveraged for seasonal peaks.

Types of Benefits

  • Statutory Benefits – mandated by Employment Act 1955, Sabah & Sarawak Labour Ordinances, EPF Act, SOCSO Act, Employment Insurance System Act 2017.
  • Non-Statutory Benefits – discretionary perks provided by employer policy.

Statutory Benefits (Malaysia)

Leave Entitlements

  • Maternity Leave – 98 consecutive days (was 60). Payable if employee
    • Has \le 5 surviving children, and
    • Has served \ge 90 days pre-delivery.
  • Paternity Leave – 7 consecutive days per confinement; cumulative ceiling of 5 children, legally married fathers only.
  • Weekly Rest Day – Minimum one whole day (Section 59).
  • Public Holidays (Section 60):
    • Peninsular: 11 paid days.
    • Sabah: 14 paid days.
    • Sarawak: 16 paid days.
    • Must include National Day, Yang di-Pertuan Agong’s Birthday, State Ruler’s Birthday, Labour Day, Malaysia Day.
  • Annual Leave
    • < 2 years service: 8 days/year.
    • 2–5 years: 12 days/year.
    • > 5 years: 16 days/year.
  • Sick Leave (Out-patient)
    • < 2 years: 14 days/year.
    • 2–5 years: 18 days/year.
    • > 5 years: 22 days/year.
    • Hospitalisation: up to 60 days/year (inclusive of outpatient days).

Employees Provident Fund (EPF)

  • Goal: ensure post-retirement financial security until minimum retirement age 60.
  • Withdrawal permitted at 55.
  • Mandatory contributions (below 60 yrs):
    • Employee: 11\% of monthly wage (credited to 2nd account).
    • Employer: 12\% (credited to 1st account).
  • Exempt persons: domestic servants, foreign workers, public-sector pensioners.
  • Voluntary contributors (self-employed etc.) may remit RM50 – RM5000 /month.
  • Example Calculation:
    • Basic salary: RM1000.
    • Employee EPF: 0.11 \times 1000 = RM110.
    • Employer EPF: 0.12 \times 1000 = RM120 (not deducted from employee).
    • SOCSO (employee share 0.5\%): RM5.
    • Net take-home: 1000 - 110 - 5 = RM885.

Social Security Organisation (SOCSO)

  • Provides compensation for work injury, occupational disease, invalidity.
  • Below 60 yrs (Employment Injury & Invalidity Scheme):
    • Employer: 1.75\% of wage.
    • Employee: 0.5\% of wage.
  • \ge 60 yrs still employed: Employer alone pays 1.25\% (Employment Injury Scheme only).

Non-Statutory Benefits

  • Time-Off Payments – marriage, emergency, pilgrimage (e.g. Hajj), study leave, bereavement.
  • Health-Care – employer-funded medical bills, hospitalisation cover, optical & dental reimbursement.
  • Additional Insurance – group life/accident policies beyond SOCSO.
  • Financial Services – low-interest loans for houses, cars, computers.
  • Retirement Enhancements – employer top-up of EPF or corporate pension funds.
  • Educational Assistance – corporate libraries, tuition subsidies, scholarships.
  • Subsidies & On-Site Services
    • Canteens, transport, childcare, staff quarters or hostels.
    • Club memberships, holiday accommodation.
    • Travel perks (e.g. free flight tickets at AirAsia & MAS).

Importance of Benefits

  • Attraction – differentiates firm in competitive labour markets.
  • Retention – lowers turnover by increasing perceived total reward value.
  • Motivation & Morale – better wellbeing translates into higher productivity, reduced absenteeism.
  • Aligns with corporate social responsibility and employer-of-choice positioning.

Reward Systems

Objectives

  • Drive behaviour to higher performance.
  • Encourage healthy internal competition.
  • Retain top talent.
  • Allow many employees to win, be perceived as fair, attractive and behaviour-aligned.

Types of Rewards

  • Financial Rewards
    • Wage Increments – permanent salary step-ups for sustained good performance.
    • Bonuses – lump sums for outstanding achievements.
    • Profit-Sharing – employees receive a % of company profits; formula example: \text{Payout} = \alpha \times \text{Profit}_{\text{annual}}.
    • Commissions – primarily for sales roles; may be straight commission or base-plus.​
  • Non-Financial Rewards
    • Performance Awards – plaques, certificates (e.g. “Worker of the Month”).
    • Letters of Appreciation – written or public praise.
    • Long Service Awards – tokens for loyalty (gold watch, trip, dinner).
    • Conference Sponsorships – attendance at seminars/overseas tours for high achievers.

Wage Systems

Time-Related System

  • Pay is tied to time spent, not output.
  • Formats: hourly, weekly, monthly.
  • Advantage: simplicity, income stability.
  • Disadvantage: may reward presence over productivity (hard worker and slacker both receive same wage).
  • Example: Full-time worker earning RM4000/month continues to be paid even if productivity fluctuates.

Piece-Work / Payment by Results

  • Earnings = units produced \times piece-rate.
  • Straight Piece-Rate
    • \text{Pay} = R \times Q.
    • E.g. R = RM20 per blouse; Q = 100 blouses → RM2000.
  • Differential Piece-Rate
    • Two-tier rate to stimulate output beyond standard.
    • Example:
    • Standard quota = 300 units/month at RM5 per unit.
    • Above quota rate = RM10 per extra unit.
    • If output Q = 400 units ⇒ \text{Pay} = (300 \times 5) + (100 \times 10) = RM2500.
  • Benefits: strong output–pay linkage, encourages efficiency.
  • Risks: quality compromise, worker fatigue, output fluctuation.

Integrative Insights & Practical Implications

  • Crafting an optimal compensation mix demands balancing direct cash costs against motivational gains and compliance duties.
  • Over-reliance on financial rewards may crowd out intrinsic motivation; hence inclusion of non-financial elements like recognition and flexible working is pivotal.
  • Malaysia’s regulatory context (EPF, SOCSO, Employment Act) sets minimum floors; competitive employers layer discretionary benefits on top to achieve strategic HR objectives.
  • Shifts towards flexible hours and hybrid work post-pandemic underscore the rising importance of non-financial rewards (autonomy, work-life balance).
  • Transparent communication of how each reward component works (e.g. overtime multipliers, EPF allocations) enhances perceived fairness.