IPPTChap001 (1) 1

Chapter 1
The Pay Model
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Learning Objectives
Compensation - Definition
Forms of pay
A pay model
1-2
Perspectives of
Compensation
Societys
Views
Stockholders
Views
Employees
Views
Managers
Views
1-3
Perspectives of
Compensation
Society
Considers pay as a measure of justice
Job benefits- Reflection of justice in
society
Stockholders
Using stock to pay employees creates a
sense of ownership
Linking executive pay to company
performance increases stockholders'
returns
1-4
Perspectives of
Compensation
Managers
Major expense
Can be used to:
Influence employee behaviors

Improve organizational performance
Employees
Major source of financial security
Entitlement for being an employee of
the company
Reward for a job well done
1-5
Incentive and Sorting Effects of

Pay on Employers Behaviors
Pay affects motivational intensity,
direction, and persistence
Incentive effect: Degree to which pay
influences individual and aggregate
motivation
Sorting effect: Effect that pay can
have on the composition of the
workforce
How an organization pays, can result in
sorting effects
1-6
What is Compensation?
All forms of financial returns and
tangible services and benefits
employees receive as part of an
employment relationship
1-7
Forms of Pay
Total compensation
Pay received directly as cash and
indirectly as benefits
Relational returns
Are psychological
1-8
Exhibit 1.4 - Total Returns

for Work
1-9
Forms of Pay
Base wage
Cash that an employer pays in return
for the work performed
A function of the skill or education an
employee possesses
Salary-Pay for employees:
Who are exempt from regulations of the

Fair Labor Standards Act (FLSA)
Is calculated at an annual or monthly rate
1-10
Forms of Pay
Wage-Pay for workers:

Covered by overtime and reporting
provisions of the Fair Labor Standards Act
Is calculated on hourly basis
Merit pay/Cost-of-living adjustments

Periodic adjustments to base wages on
the basis of changes in:
What other employers are paying for same
work
Overall cost of living
Experience or skill
1-11
Forms of Pay
Pay increases are given in recognition
of past work behavior
Same increases given to everyone,
regardless of performance
Incentives (Variable pay)

Related to performance
Do not increase base wage
Potential size of the payment will
generally be known beforehand
1-12
Forms of Pay
Are one-time payments
May be long-term (stock options) or shortterm
Benefits
Income protection
Medical insurance, retirement programs, and
life insurance
Work/life balance
Vacations, financial planning, referrals for child
and elder care, and telecommuting
Allowances
1-13
Forms of Pay
Total earning opportunities
Comparison of today's initial offers to

consideration of future
Relational returns from work
Nonfinancial returns that substantially

impact employee behavior
Network of returns
Created by different forms of pay

Useful if bonuses and development
opportunities work together
1-14
A Pay Model
Basic building blocks
Compensation objectives
Policies that form the foundation of the
compensation system
Techniques that make up the
compensation system
1-15
Exhibit 1.5 - The Pay Model
1-16
Compensation Objectives
Guide the design of the pay system
Serve as standards for judging the
success of the pay system
Compliance - Conforming to federal
and state compensation regulations
1-17
Four Policy Choices

Internal alignment
Compares jobs or skill levels inside a
single organization
Pertains to the pay rates for employees
doing:
Equal work
Dissimilar work
1-18
Four Policy Choices

Pay relationships affect employee
decisions to:
Stay with the organization
Become more flexible by investing in
additional training
Seek greater responsibility
1-19
Four Policy Choices

External competitiveness
Pay comparisons with competitors
Pay is market driven
Objective:
To ensure that pay is sufficient to attract
and retain employees
To control labor costs to ensure competitive
pricing of products/ services
1-20
Four Policy Choices

Employee contributions
Understanding the basis for judging

performance, helps perceive pay as fair
Management
Right people get the right pay for

achieving the right objectives in the
right way
1-21
Pay Techniques
Tie the four basic policies to the pay
objectives
Many variations exist
1-22

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Chapter 1

The Pay Model

Influence employee behaviors

Incentive and Sorting Effects of

Exhibit 1.4 - Total Returns

Who are exempt from regulations of the

Wage-Pay for workers:

Merit pay/Cost-of-living adjustments

Incentives (Variable pay)

Comparison of today's initial offers to

Relational returns from work

Nonfinancial returns that substantially

Created by different forms of pay

Exhibit 1.5 - The Pay Model

Four Policy Choices

Four Policy Choices

Four Policy Choices

Four Policy Choices

Understanding the basis for judging

Right people get the right pay for

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