Transcript MANAGING CULTURE - Middle East Technical University

BA 2204 and BAS 324
Human Resource Management
Managing compensation
Instructor: Çağrı Topal
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Compensation

Package of quantifiable rewards an employee
receives for his or her labor
Base compensation
 Pay incentives
 Benefits

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Compensation system
Internal vs. external equity
Internal equity: perceived fairness of the pay
structure within a firm
 External equity: perceived fairness of pay
relative to what other employers are paying
for the same type of labor

Distributive justice (internal equity)
 Labor market (external equity)
 Individual equity
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Compensation system
Fixed vs. variable pay
Fixed: pay that is fixed
• No risk for employees
 Variable: pay that fluctuates according to
some pre-established criterion
• Risk for both company and employees

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Compensation system
Performance vs. membership
Performance: substantial portion of
employees’ pay tied to individual or group
contributions
• Mostly flat organizations
 Membership: same or similar wage to every
employee in a given job as long as satisfactory
performance achieved
• Mostly hierarchical organizations

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Compensation system
Job vs. individual pay
Job-based: pay based on the value or
contribution of a job
• Limited scope for meaningful difference by
an employee
 Individual-based: pay based on the knowledge
and skills of an employee
• Large scope for meaningful difference by an
employee
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Compensation system
Elitism vs. egalitarianism
Elitist: pay system with different compensation
plans by organizational level and/or employee
group and incentives offered only to specific
employee groups
 Egalitarian: pay system with the same
compensation plan for most employees and
incentives offered to most employees as well

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Compensation system
Below-market vs. above-market
Below-market: pay level below the going rate
for a particular job in the labor market
• Commonly used for lower level employees
and in small/young firms
 Above-market: pay level above the going rate
for a particular job in the labor market
• Used only for critical employee groups and
in large/mature firms
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Compensation system
Monetary vs. nonmonetary rewards
Monetary rewards: cash or payments that can
be converted into cash at some future point
such as stock or pension plans
• Emphasizing individual achievement and
responsibility
 Nonmonetary rewards: intangibles such as
interesting work, challenging assignments,
public recognition, flexible work hours, fitness
centers, and day care services
• Emphasizing organizational commitment

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Compensation system
Open vs. secret pay
Open pay: pay information open to all
employees
 Secret pay: pay information known only to the
employee concerned and to those
responsible for administering the
compensation system
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Compensation system
Centralization vs. decentralization
Centralized pay: pay decisions tightly
controlled in a central location, normally in
the HR department at corporate
headquarters
 Decentralized pay: pay decisions delegated
throughout the firm, normally to unit
managers at different locations and serving
different markets
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Compensation tools or plans
Job-based plans-1
Dominant approach
 Not all jobs are equally important to a firm
 The most important jobs pay the most
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Internal equity
 External equity
 Individual equity

Rational, objective, and systematic
 Easy and economical to set up and administer
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Compensation tools or plans
Job-based plans-2
Not specific
 More or less subjective and arbitrary
 Less applicable to higher organizational levels
 Less applicable to service jobs
 Mechanistic and inflexible
 Biased against so-called woman occupations
 Based on employers’ not employees’ views
 Not much applicable to freelancers
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Compensation tools or plans
Skill-based plans-1
Less common approach
 Workers should be paid by how flexible or
capable they are at performing multiple tasks
 The greater the variety of job-related skills
workers possess, the more they get paid

Depth skills
 Horizontal or breadth skills
 Vertical skills
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Compensation tools or plans
Skill-based plans-2
Creating more flexible workforce
 Promoting cross-training and substitutability
 Necessitating fewer supervisors
 Increasing employees’ control over their
compensation
 Higher compensation and training costs
 Loss of skills
 Limited opportunity for pay raise
 Difficulty in determining skill value
 Additional bureaucracy and inflexibility
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