COMPENSATION

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COMPENSATION
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Compensation An Overview

• Compensation - Total of all rewards provided
  employees in return for services
• Direct financial compensation - Pay received in
  the form of wages, salaries, bonuses, and
  commissions
• Indirect financial compensation - All financial
  rewards not included in direct compensation
• Nonfinancial compensation - Satisfaction a person
  receives from job itself or from work environment

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Components of a Total Compensation Program
External EnvironmentInternal Environment
Compensation
Financial
Non-Financial
Direct Wages Salaries Commissions
Bonuses
Indirect (Benefits) Legally Required Benefits
Social Security
Unemployment Compensation Workers Compensation
Family Medical Leave Voluntary
Benefits Payment for Time Not
Worked Health Care
Life Insurance
Retirement Plans
Employee Stock Option Plans Supplemental
Unemployment Benefits Employee Services
Premium Pay
Unique Benefits
The Job Skill Variety Task Identify Task
Significance Autonomy Feedback
Job Environment Sound Policies
Competent Employees Congenial Coworkers
Suitable Status Symbols Working
Conditions Workplace Flexibility Flextime
Compressed Work Week Job Sharing
Flexible Compensation
Telecommuting Part-time Work
Modified Retirement
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Equity Theory

• InputOutcome ratio for self
• InputOutcome ratio for referen
• Perception of ratios affects future performance

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Equity in Financial Compensation

• Equity - Fair pay treatment for employees
• External equity - Firm's employees are paid
  comparably to workers who perform similar jobs in
  other firms
• Internal equity - Exists when employees are paid
  according to relative value of their jobs within
  same organization

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Equity in Financial Compensation (Continued)

• Employee equity - Individuals performing similar
  jobs for same firm are paid according to factors
  unique to employee, such as performance level or
  seniority
• Team equity - More productive teams are rewarded
  more than less productive groups

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Determinants of Individual Financial Compensation

• Organization
• Labor market
• Job
• Employee

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Compensation Policies

• Pay leaders pay higher wages and salaries
• Market rate, or going rate pay what most
  employers pay for same job
• Pay followers pay below market rate because
  poor financial condition or believe they do not
  require highly capable employees

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The Labor Market as a Determinant of Financial
Compensation

• Compensation surveys
• Expediency
• Cost of living
• Labor unions
• Society
• Economy
• Legislation

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Determining internal equity
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The Job as a Determinant of Financial Compensation

• Job itself continues to be a factor, especially
  in those firms that have internal pay equity as a
  primary consideration
• Organizations pay for value they attach to
  certain duties, responsibilities, and other
  job-related factors such as working conditions

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Job Analysis and Job Descriptions

• Before organization can determine relative
  difficulty or value of jobs, must first define
  content
• This is done by analyzing jobs

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Job Evaluation

• Firm determines the relative value of one job in
  relation to another
• Point factor system most widely used
• Determine compensible factors
• Set weights for each
• Assign points
• Decide pay classifications

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Job Pricing

• Placing a dollar value on worth of a job
• Pay grades - Grouping of similar jobs to simplify
  pricing jobs
• Wage curve - Fitting of plotted points to create
  a smooth progression between pay grades
• Pay ranges - Minimum and maximum pay rate with
  enough variance between the two to allow for a
  significant pay difference

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Job Pricing (Continued)

• Broadbanding Collapses many pay grades into a
  few wide bands or improve effectiveness
• Single rate system - Pay ranges are not
  appropriate for some workplace conditions such as
  some assembly line
• Adjusting pay rates - Overpaid and underpaid jobs

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Scatter Diagram of Evaluated Jobs Illustrating
the Wage Curve, Pay Grades, and Pay Ranges
Average Pay per Hour (Current Rates or Market
Rates)
19.80
5
18.50
4
17.20
3
15.90
Wage Curve
Pay Ranges for Pay Grades
2
14.60
14.00
1
13.30
12.90
12.00
100
200
300
400
500
Evaluated Points
1
2
3
4
5
Pay Grades
Summary
Evaluated Points Pay Grade
Minimum
Midpoint Maximum
0- 99 1 12.00 13.30 14.60
100-199 2 13.30 14.60 15.90
200-299 3 14.60 15.90 17.20
300-399 4 15.90 17.20 18.50
400-500 5 17.20 18.50 19.80
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Broadbanding and Its Relationship to Traditional
Pay Grades and Ranges
Grade 5
Grade 4
Grade 3
Average Pay Per Hour
Grade 2
Band B
Grade 1
Band A
Low
High
Job Worth
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Employee as a Determinant of Financial
Compensation

• Performance-based Pay
• Skilled-based Pay
• Competency-based Pay
• Seniority
• Experience
• Membership in the organization
• Potential
• Political Influence
• Luck

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Primary Determinants of Individual Financial
Compensation
The Organization Compensation Policies
Organizational Politics Ability to Pay
The Employee Job Performance Merit
Pay Variable Pay
Competency-Based Pay Seniority
Experience Organization Membership
Potential Political Influence
Luck
The Labor Market Compensation Surveys
Expediency Cost of Living
Labor Unions Society
The Economy Legislation
Job Pricing
Individual Financial Compensation
The Job Job Analysis
Job Descriptions Job Evaluation
Collective Bargaining
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Performance-Based Pay

• Merit pay - Pay increase given to employees based
  on their level of performance as indicated in the
  appraisal
• Variable pay - Compensation based on performance
  (bonus)
• Piecework Employees paid for each unit they
  produce

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Skill-Based Pay

• Compensates on basis of job-related skills and
  knowledge
• Employees and departments benefit when employees
  obtain additional skills
• Appropriate where work tends to be routine and
  less varied
• Must provide adequate training opportunities or
  system becomes a demotivator

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Competency-Based Pay

• Compensates on basis of demonstrated expertise

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Seniority

• Length of time an employee has been associated
  with the company, division, department, or job
• Labor unions tend to favor seniority

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Experience

• Regardless of nature of job, very few factors
  have a more significant impact on performance
  than experience

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Membership in the Organization

• Some components of individual financial
  compensation are given to employees regardless
  of particular job they perform or their level of
  productivity
• Intended to maintain a high degree of stability
  in the workforce and to recognize loyalty

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More factors affecting individual pay

• Membership in the organization
• Potential
• Political influence
• Luck
• Compensation for special groups
• Team-based pay

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Group-based pay for performance

• Profit sharing distribution of predetermined
  percentage of firms profits to employees
• Gainsharing incentive payment based upon
  improved company performance
• Scanlon plan reward to employees for savings in
  labor costs resulting from employees suggestions

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Executive Compensation

• Critical factor in attracting and retaining
  best managers

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Determining Executive Compensation

• Firms typically prefer to relate salary growth
  for the highest-level managers to overall
  corporate performance

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Types of Executive Compensation

• Base salary
• Short-term (annual) incentives or bonuses
• Long-term incentives and capital appreciation
  plans
• Stock option plans
• Indexed stock option plans
• Executive benefits (Perks)
• Golden parachutes

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HRs Role in Executive Compensation

• HR executives who know their companys
  business must play key role in assuring
  reasonable and ethical behavior