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 2

Components of a Total Compensation Program External Environment Internal Environment Compensation Financial Non-Financial

Direct Indirect (Benefits)

Wages Salaries Social Security Commissions Bonuses Medical Leave

The Job

Skill Variety Task Sound Policies Identify Task Significance Competent Employees Congenial Coworkers Feedback

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

Job Environment

Suitable Status Symbols Working Conditions

Workplace Flexibility

Flextime Compressed Work Week Job Sharing Flexible Compensation Telecommuting Part-time Work Modified Retirement 3

Equity Theory

 Input:Outcome ratio for self  Input:Outcome ratio for referen  Perception of ratios affects future performance 4

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 5

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 6

Determinants of Individual Financial Compensation  Organization  Labor market  Job  Employee 7

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 8

The Labor Market as a Determinant of Financial Compensation  Compensation surveys  Expediency   Cost of living Labor unions  Society   Economy Legislation 9

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 11

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 12

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 13

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 14

Job Pricing (Continued)

  

Broadbanding

– Collapses many pay grades into a few wide bands or improve effectiveness

Single rate system

not appropriate for some workplace conditions such as some assembly line Pay ranges are

Adjusting pay rates

and underpaid jobs Overpaid 15

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

2 Pay Ranges for Pay Grades 14.60

14.00

13.30

12.90

1 12.00

1 100 200 300 2 Evaluated Points 3 4 Pay Grades 400 5 500 Summary Evaluated Points Pay Grade Minimum Midpoint Maximum 0- 99 100-199 1 2 $12.00

13.30

$13.30

14.60

$14.60 15.90 200-299 300-399 400-500 3 4 5 14.60

15.90

17.20

15.90

17.20

18.50

17.20 18.50 19.80

Broadbanding and Its Relationship to Traditional Pay Grades and Ranges

Grade 1 Grade 2 Band A Grade 3 Low Job Worth Grade 5 Grade 4 Band B High

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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 18

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

Job

Individual Financial Compensation

Pricing The Job

Job Analysis Job Descriptions Job Evaluation Collective Bargaining

The Labor Market

Compensation Surveys Expediency Cost of Living Labor Unions Society The Economy Legislation 19

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 20

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 21

Competency-Based Pay

Compensates on basis of demonstrated expertise 22

Seniority

 Length of time an employee has been associated with the company, division, department, or job  Labor unions tend to favor seniority 23

Experience

Regardless of nature of job, very few factors have a more significant impact on performance than experience 24

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 25

More factors affecting individual pay       Membership in the organization Potential Political influence Luck Compensation for special groups Team-based pay 26

Group-based pay for performance  

Profit sharing

– distribution of predetermined percentage of firm’s 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 27

Executive Compensation

Critical factor in attracting and retaining best managers 28

Determining Executive Compensation Firms typically prefer to relate salary growth for the highest-level managers to overall corporate performance 29

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 30

HR’s Role in Executive Compensation

HR executives who know their company’s business must play key role in assuring reasonable and ethical behavior 31