Human Resource Management

12th Edition
Chapter 9
Direct Financial Compensation

Copyright 2012 Pearson Education, Inc. publishing as Prentice Hall

9-1

Are Top Executives

Paid Too Much?
Peter Drucker advised that a 20-to-1 salary
ratio between senior executives and rank-andfile white-collar workers is the limit beyond
which they cannot go if they don't want
resentment and falling morale to hit their
companies.
CEO pay has ballooned to about 344 times
average worker's pay in 2009.

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Compensation: An Overview
Compensation: Total rewards provided to
employees in return for services
Direct financial compensation: Wages,
salaries, bonuses, and commissions
Indirect financial compensation (benefits):
All other financial rewards
Nonfinancial compensation: Satisfaction
from job itself or from psychological and/or
physical environment in which employee works
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Components of Total Compensation Program

External Environment
Internal Environment

Compensation
Financial
Direct

Indirect (Benefits)
Legally Required Benefits
Wages
SSS
Salaries
Pag-ibig
Commissions
Philhealth
Bonuses
Discretionary Benefits
Health Care
Life Insurance
Retirement Plans
Disability Protection
Employee Stock Option
Plans
Voluntary Benefits

Nonfinancial
The Job
Meaningful and
Satisfying Job
Recognition for
Accomplishment
Feeling of
Achievement
Possibility of
Increased
Responsibility

Job Environment
Sound Policies
Capable Managers
Competent Employees
Congenial Coworkers
Working Conditions
Workplace Flexibility
Flexitime
Compressed Workweek

Opportunity for
Growth and
Advancement
Enjoy Doing the Job

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Equity Theory
A persons motivation is in proportion to
the perceived fairness of the rewards
received for the amount of effort
exerted.
This is then compared to what others
around the person receive for their
efforts, making equity and fairness
important in compensation.
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Equity in Financial Compensation

Financial equity: Perception of fair pay
External equity: Employees paid comparably to
workers who perform similar jobs in other firms
Internal equity: Employees paid according to
relative value of jobs within a single organization
Employee equity: Individuals performing similar
jobs for same firm paid according to factors such
as performance level or seniority
Team equity: More productive teams are
rewarded more than less productive groups
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Primary Determinants of
Direct Financial Compensation
Organization
Compensation Policies
Organizational Level
Ability to Pay

Employee
Job Performance
Skills
Competencies
Seniority
Experience
Organization Membership
Potential
Political Influence
Luck

Job
Direct Financial
Compensation

Pricing

Labor Market
Compensation Surveys
Expediency
Cost of Living
Labor Unions
Economy
Legislation

Job
Job Analysis
Job Descriptions
Job Evaluation

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9-7

Organization as a Determinant of
Direct Financial Compensation
Compensation
policies
Organizational
level
Ability to pay

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9-8

Compensation Policies
Pay leaders: Pay higher wages and salaries
to attract high-quality, productive employees
and thus achieve lower per-unit labor costs
Market rate, or going rate: Pay what most
employers pay for same job
Pay followers: Pay below market rate
because of firms poor financial condition or
belief that it does not require highly capable
employees
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9-9

Organizational Level
Upper management often makes
decisions to ensure consistency.
Extreme pressure to retain top
performers may override desire to
maintain consistency in pay structure.

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Ability to Pay
Organizations
assessment of its
ability to pay is an
important factor in
determining pay
levels.

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9-11

Labor Market as Determinant of

Direct Financial Compensation
Labor market: Potential employees
located within geographic area from
which employees are recruited
Pay for same jobs in different labor
markets may vary considerably

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9-12

Compensation Surveys
A means of obtaining data
regarding what other firms
are paying for specific
jobs or job classes within
a given labor market.
Market rates remain the
most important standard
for determining pay.
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9-13

Expediency
Managers in highly
technical and specialized
areas occasionally need to
use nontraditional means to
determine what constitutes
competitive compensation
for scarce talent and niche
positions.
They need real-time
information.
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9-14

Cost of Living
When prices rise over a
period of time and pay
does not, real pay is
actually lowered.
A pay increase must be
roughly equivalent to
the increased cost of
living.
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9-15

The Economy
Affects financial
compensation
decisions
Depressed economy
generally increases
labor supply
Cost of living often
rises as economy
expands
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9-16

Job as Determinant of Direct

Financial Compensation
Job itself is a factor, especially in
firms that have internal pay equity
as primary consideration.
Organizations pay for value they
attach to certain:
Duties
Responsibilities
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, they
must first define
content.
This is done by job
analysis and job
descriptions.
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Employee as Determinant of
Direct Financial Compensation

Performance (performance-based pay)

Seniority
Experience
Potential
Political influence
Luck

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9-19

Performance-Based Pay

Merit pay
Variable pay
Bonuses
Spot bonuses
Piecework

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Merit Pay
Pay increase given based on level of
performance, as indicated in appraisal
Historically a cost-of-living increase in
disguise
Increases the employees base pay
Some companies are freezing or cutting
pay for some so as to be able to reward
others
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9-21

Variable Pay (Bonuses)

Bonuses are the most common type of
variable pay for performance.
One-time financial award based on
productivity.
Based on productivity that is not added
to base pay.
Use of bonuses is a winwin situation.
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9-22

Spot Bonuses
Relatively small gifts to
employees for outstanding
work or effort
For work done in a relatively
short period of time

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9-23

Piecework
Employees paid for each unit they
produce
Especially prevalent in the
production/operations area
Need plan for developing output standards
Not feasible for many jobs

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9-24

Other Determinants of Pay

Seniority: Length of time employee has been
with the company
Experience: Has a significant impact on
performance
Potential: Used to attract prospective talent
Political influence: May sway pay and
promotion decisions (Its not what you know, but
who you know.)
Luck: Being in the right place at the right time
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Salary Compression: Why Is the New

Guy Making What I Am Making?
Occurs when less experienced employees are
paid as much as or more than employees who
have been with organization a long time
Caused by a gradual increase in starting salaries
and limited salary adjustment for long-term
employees
Occurs when there is only a minimum pay
differential with various skills and responsibility
levels
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Team-Based Pay
If a team is to function
effectively, firms should also
provide rewards based on the
overall team performance.
Firms find it easier to develop
performance standards for
groups than for individuals.
Potential disadvantage for
exemplary performers.
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Company-Wide Pay
Profit sharing

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9-28

Profit Sharing
Distribution of predetermined percentage of
firms profits (cash or stock) to employees
Kinds of plans:
Current profit sharing
Deferred profit sharing trust fund
(retirement, termination, death)
Combination plans

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Contingent Worker Compensation

In most cases,
contingent workers
earn less pay than
permanent
counterparts
Far less likely to
receive health or
retirement benefits
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Executive Compensation
Enormous pay gap between the most
affluent executives and the average
worker.

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Types of Executive Compensation

Base salary
Bonuses and
performance-based
pay
Stock option plans

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Base Salary
Factor in determining executives standard
of living.
Salary provides basis for other forms of
compensation; may determine amount of
bonuses and certain benefits.

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9-33

Bonuses and Performance-Based Pay

Trend toward more
performance-based
compensation
packages for
executives
Payment of bonuses
reflects a managerial
belief in their incentive
value
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Stock Option Plans

Options for managers to buy specified amount
of stock in the future at or below current
market price.

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America.

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