Compensation Administration

1
Compensation Administration

• Series of decisions the
  organization makes in the design, implementation,
  and control of the compensation system

2
Compensation

• All financial and tangible services employees
  receive in exchange for their labor services

3
Pay Mix

• Base Pay Job or Individual Focus Salary
  or Wage
• Variable Pay Incentives or
  Merit Individual or Group
• Services and Benefits
• Non-monetary and psychological rewards

4
Overall Basic Premise

• There is no one best pay system
• should reflect the organizations
• strategy and values
• be responsive to both external and internal
  considerations

5
Important for Several Reasons

• Reward behavior and performance consistent with
  strategic objectives
• Different forms of pay have a differential effect
  on various employee behaviors and labor costs
• Signaling- the type and level of behavior and
  performance that is desired
• Attract and maintain a qualified work force

6
Theoretical Basis of Traditional Compensation
Design

• Equity Theory
• Pay system should be fair to employees
• Internal, External and Individual Equity
  Comparisons

7
Theoretical Basis of Traditional Compensation
Design

• Neoclassical Labor Market Theory
• Supply and Demand of Labor Set Wage Rate
• Firm is a price taker

8
Traditional Design Tools

• Internal Equity
• job evaluation to determine relative value of
  jobs
• External Equity
• pay surveys to ascertain market value and
  reconcile them with internal value
• Individual Equity
• performance and seniority based
• increases

9
Fair to Employer

• Pay as a cost of production
• Sets pay maximum
• Pay as an inducement
• Sets pay minimum

10
Problems with traditional systems

• Deterministic vs Discretionary/ Contingency Based
  Decisions
• Job based vs Individual based
• Inappropriate for higher level managerial and
  professional jobs
• Lack flexibility to pay for work outside of job
• Lack of flexibility to changing economic
  conditions
• Socially Induced Inequities
• More than one market rate

11
Competitive Strategy Perspective

• Adaptive Compensation System
• Capitalizing on a firms distinctive competence
• Erecting barriers to entry

12
Strategic Choices in Compensation

• Bases for Pay
• Design Issues
• Administrative Framework

13
Basis for Pay

• Job vs Skill Based Pay
• Advantages of skill based pay
• Greater flexibility, Motivation to learn new
  skills, Higher productivity and quality, Increase
  in self-esteem, greater task variety, greater job
  security
• Disadvantages
• Topping out in skills
• Insufficient funds for training

14
Basis for Pay

• Performance vs Membership Pay Increases
• Performance based appropriate when
• Meaningful output measures
• can be attributed to individual or group
• job (group) interdependencies are lows

15
Basis for Pay

• Individual vs Aggregate Performance
• Advantage of Aggregate Plans
• Foster group cohesiveness
• Facilitate performance measurement
• Disadvantages of Aggregate Plans
• Free Riders
• reduced when task is intrinsically rewarding
• Inter-group competition

16
Basis for Pay

• Short vs Long term Orientation
• Behavior Reinforcement vs Long Term Success
• Risk Aversion vs Risk Taking
• Rewarding vs punishing risk-taking behavior
• extent of job security provided after failure
• Corporate vs Division Performance
• External vs Internal Equity
• Balance need to be fair to employees and
  organization

17
Basis for Pay

• Hierarchical vs Egalitarian
• Broad Banding
• not a stand alone system but used with
  restructuring, teams, etc.
• Extent to which all employees partake in the
  same reward system
• exp. Stock options

18
Design Issues

• Compensation Level vs Market
• Lead, match, lag, hybrid
• Fixed pay vs Incentives
• Agency Theory
• Variable Pay
• At risk pay
• Add-on bonuses

19
Design Issue

• Monetary vs Non-monetary rewards
• Participation vs Non-participation

20
Administrative Framework

• Centralization vs Decentralization
• Open vs Secret Pay
• Employee Participation vs Non-participation
• Bureaucratic vs Flexible Pay Policies