Compensation is the total of all rewards provided to employees in return of their

services. It attracts, retains and motivates employees.

Direct Financial Compensation  wages, salaries commissions and bonuses

Indirect Financial Compensation  financial rewards that are not in direct
compensation
Nonfinancial Compensation  satisfaction that a person receives from the job
itself

When individuals are hard pressed to provide food, shelter and clothing, money may
be the best reward.

Adequate compensation is in the mind of the receiver.

Equity in Financial Compensation

Equity means fair pay treatment for employees.

External equity  employees receive pay comparable to workers who perform

similar jobs in other firms
Internal equity  employees receive pay according to the relative value of
their jobs within the same organization.
Employee equity  individuals performing the same jobs for the same firm
receive pay according to the factors unique to the employee.
Team equity  teams are rewarded based on their group’s productivity,

1) Determinants of individual financial compensation

1.1 The organization

1.1 A) Compensation policies

Pay leaders  org. that pay higher wages & salaries than competing firms
The market rate  avg. pay that most employers provide for a similar job in a
particular area or industry
Pay followers  cias that choose to pay below the market rate

1.1 B) Organizational level

Upper mgmt. often makes these decisions. Adv. of making these decisions at
lower level because there is better information regarding employee performance.

1.1 C) Organizational politics

Org. politics are able to destroy a sound, objective compensation system.

Managers should become aware of this danger and take appropriate action.

1.1 D) Ability to pay

 Financially successful firms tend to provide higher-than- avg. compensation.
However, to arrive at a specific pay level, mgmt. must consider other factors.

1.2 The labor market

1.2 A) Compensation survey

A mean of obtaining data regarding what other firms are paying for specific
jobs or job classes within a given labor market. It often includes only benchmark jobs
which are well known jobs in the company & industry & one performed by a large
number of employees.

1.2 B) Expediency

1.2 C) Cost of living

A pay increase must be roughly equivalent to the increased cost of living if a
person is maintain a previous level of real wages. Inflation and location are factors
that affect cost of living.

1.2 D) Labor unions

Unions may pressure mgmt. into including a cost-of-living allowance which is
an escalator clause agreement that automatically increases wages as the U.S..
bureau of labor statistics’ cost of living index rises.

1.2 E) Society
Consumers and businesses in a local labor market are also concerned with
the pay practices of new firms locating in their area.

1.2 F) The economy

1.2 G) Legislation

1.3 The job

1.3 A) Job analysis & job descriptions

People work better when they understand their job descriptions.

1.3B) Job evaluation

A process that determines the relative value of one job in relation to another.
There are 5 methods of job evaluation:
Ranking  the raters examine the description of each job being
evaluated and arrange the jobs in order according to their value to the cia.
Classification  classes or grades are defined to describe a group of
jobs.
 Factor comparison  raters need to keep an entire job in mind as they
evaluate it; instead, they make decisions based on separate aspects or factors
of the job (mental & physical requirements, skills, responsibilities & working
conditions).
Point  numerical values are assigned to specific job components, and
the sum of these values provides a quantitative assessment of a job’s relative
worth.
Hay guide chart-profile  a refined version of the point method of job
evaluation that uses the factors of know-how, problem solving, accountability,
and additional compensable elements. It’s probably the most widely used
evaluation system.

1.3C) Job pricing

Placing a dollar value on the worth of a job. Firms often use pay grades & pay
ranges in their job pricing process.
Pay grade  the grouping of similar jobs to simplify the job-pricing
process.
Pay range  a minimum & maximum pay rate for a job, with enough
variance between the two to allow for a significant pay difference.

1.3D) Broadbanding
A compensation technique that collapses many pay grades into a few wide
bands in order to improve organizational effectiveness. It encourages employees to
make cross functional moves to jobs that are on the same or even a lower level
because their pay rate would remain unchanged. It also minimizes the problem
concerning employees at the top of their pay grade.

1.4 The employee

1.4 A) Performance-based pay

Its objective is to improve productivity. There are 3 types:
Merit pay  pay increase given to employees based on their level of
performance as indicated in the appraisal. The increase is added to the
employee’s base pay.
Variable pay (Bonus)  A one-time award that is not added to
employee’s base pay. It’s cost effective.
Piecework  an incentive pay plan in which employees are paid for
each unit produced.

1.4 B) Skill-based pay

A system that compensates employees on the basis of job-related skills
and the knowledge they possess. It encourages employees to gain additional skills
that will increase their value to the organization and improve its competitive position.

1.4C) Competency-based pay

A compensation plan that rewards employees for their demonstrated
expertise.
 1.4D) Seniority
The length of time a employee has worked in various capacities with
the firm.

1.4E) Membership in the organization

It maintains a high degree of stability in the workforce and recognize
loyalty.

1.4F) Potential

1.4G) Political influence

1.4H) Luck
“Be in the right place at the right time”

1.5) Compensation for special groups

1.5A) Team based pay

A firm can improve efficiency, productivity and profitability. Advantages::
easier to develop standards for groups than for individuals; employees may be more
inclined to assist others and collaborate. Disadvantages: if individuals perceive they
are contributing more than other employees they might become disgruntled and
leave.

1.5B) Company-Wide plans

Profit sharing  a compensation plan that results in the distribution of a
predetermined % of the firm’s profit to employees. There are 3 basic types of this
plan: Current plan (provide pmt to employees in cash or stock as soon as profits
have been determined), Deferred plans (Funds are invested in securities and
become available to the employee at retirement, termination, or death),
Combination plans (combines current and deferred).

Gain sharing  plans designed to bind employees the firm’s

productivity and provide an incentive pmt based on improved cia performance.

Scanlon plan  a gain sharing plan that provides a financial reward to

employees for savings in labor costs that result from their suggestions.

1.5C) Compensation for sales employees

Straight salary  fixed salary
Straight commission  determined as a % of sales
Past salary, part commission  combination of both

1.5D) Executive compensation

Market pricing may be the best general approach to use in determining
executive compensation. There are 7 types of executive compensation:
Base salary, Short-term incentives or bonuses, long-term incentives & capital
appreciation, stock option plan (managers can buy a specified amount of stock in
the future at or below the current market price), Indexed stock option plans (stock
compensation is tied to outperforming), Executive benefits or perquisites (special
benefits provided by a firm to a small group of key executives and designed to
give the executives something extra) & Golden parachute contract (a perquisite
that protects executives in the event that another cia acquires their firm or the
executive is forced to leave the firm for other reasons.

HR’s role in Executive Compensation

Assure reasonable & ethical behavior. Make sure that this group has relevant, fair
and accurate information for decision making, in collaboration with consultants
and mgmt.