COMPENSATION

Compensation: An OverviewCompensation - Total of all rewards provided employees in return for servicesDirect financial compensation - Pay received in the form of wages, salaries, bonuses, and commissionsIndirect financial compensation - All financial rewards not included in direct compensationNonfinancial compensation - Satisfaction a person receives from job itself or from work environment

Components of a Total Compensation Program External EnvironmentInternal EnvironmentCompensationDirectWages Salaries Commissions BonusesIndirect (Benefits) Legally Required Benefits Social Security Unemployment Compensation Workers Compensation Family & Medical LeaveVoluntary Benefits Payment for Time Not Worked Health Care Life Insurance Retirement Plans Employee Stock Option Plans Supplemental Unemployment Benefits Employee Services Premium Pay Unique BenefitsThe JobSkill Variety Task Identify Task Significance Autonomy Feedback

Job EnvironmentSound Policies Competent Employees Congenial Coworkers Suitable Status Symbols Working ConditionsWorkplace Flexibility Flextime Compressed Work Week Job Sharing Flexible Compensation Telecommuting Part-time Work Modified RetirementFinancialNon-Financial

Equity TheoryInput:Outcome ratio for self

Input:Outcome ratio for referen

Perception of ratios affects future performance

Equity in Financial CompensationEquity - Fair pay treatment for employeesExternal equity - Firm's employees are paid comparably to workers who perform similar jobs in other firmsInternal equity - Exists when employees are paid according to relative value of their jobs within same organization

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 seniorityTeam equity - More productive teams are rewarded more than less productive groups

Determinants of Individual Financial CompensationOrganizationLabor marketJobEmployee

Compensation PoliciesPay leaders pay higher wages and salariesMarket rate, or going rate pay what most employers pay for same jobPay followers pay below market rate because poor financial condition or believe they do not require highly capable employees

The Labor Market as a Determinant of Financial CompensationCompensation surveysExpediencyCost of livingLabor unionsSocietyEconomyLegislation

Determining internal equity

The Job as a Determinant of Financial CompensationJob itself continues to be a factor, especially in those firms that have internal pay equity as a primary considerationOrganizations pay for value they attach to certain duties, responsibilities, and other job-related factors such as working conditions

Job Analysis and Job DescriptionsBefore organization can determine relative difficulty or value of jobs, must first define contentThis is done by analyzing jobs

Job EvaluationFirm determines the relative value of one job in relation to anotherPoint factor system most widely usedDetermine compensible factorsSet weights for eachAssign pointsDecide pay classifications

Job PricingPlacing a dollar value on worth of a job Pay grades - Grouping of similar jobs to simplify pricing jobsWage curve - Fitting of plotted points to create a smooth progression between pay gradesPay ranges - Minimum and maximum pay rate with enough variance between the two to allow for a significant pay difference

Job Pricing (Continued)Broadbanding Collapses many pay grades into a few wide bands or improve effectivenessSingle rate system - Pay ranges are not appropriate for some workplace conditions such as some assembly line Adjusting pay rates - Overpaid and underpaid jobs

Scatter Diagram of Evaluated Jobs Illustrating the Wage Curve, Pay Grades, and Pay Ranges100200300400500 17.20$19.80 18.50 15.90 14.60 14.00 13.30 12.90 12.00Average Pay per Hour (Current Rates or Market Rates)Wage CurveEvaluated Points12345Pay Grades12345Pay Ranges for Pay Grades 0- 991$12.00$13.30$14.60 100-1992 13.30 14.60 15.90 200-2993 14.60 15.90 17.20 300-3994 15.90 17.20 18.50 400-5005 17.20 18.50 19.80Evaluated Points Pay Grade Minimum Midpoint MaximumSummary

Broadbanding and Its Relationship to Traditional Pay Grades and RangesAverage Pay Per HourGrade 5Grade 4Grade 1Grade 2Grade 3Job WorthLowHighBand ABand B

Employee as a Determinant of Financial CompensationPerformance-based PaySkilled-based PayCompetency-based PaySeniorityExperienceMembership in the organizationPotentialPolitical InfluenceLuck

Primary Determinants of Individual Financial CompensationThe Organization Compensation Policies Organizational Politics Ability to PayThe Labor Market Compensation Surveys Expediency Cost of Living Labor Unions Society The Economy Legislation The Employee Job Performance Merit Pay Variable Pay Competency-Based Pay Seniority Experience Organization Membership Potential Political Influence LuckJob

Pricing Individual Financial CompensationThe Job Job Analysis Job Descriptions Job Evaluation Collective Bargaining

Performance-Based PayMerit pay - Pay increase given to employees based on their level of performance as indicated in the appraisalVariable pay - Compensation based on performance (bonus)Piecework Employees paid for each unit they produce

Skill-Based PayCompensates on basis of job-related skills and knowledgeEmployees and departments benefit when employees obtain additional skillsAppropriate where work tends to be routine and less variedMust provide adequate training opportunities or system becomes a demotivator

Competency-Based Pay Compensates on basis of demonstrated expertise

SeniorityLength of time an employee has been associated with the company, division, department, or jobLabor unions tend to favor seniority

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

Membership in the OrganizationSome components of individual financial compensation are given to employees regardless of particular job they perform or their level of productivityIntended to maintain a high degree of stability in the workforce and to recognize loyalty

More factors affecting individual payMembership in the organizationPotentialPolitical influenceLuckCompensation for special groupsTeam-based pay

Group-based pay for performanceProfit sharing distribution of predetermined percentage of firms profits to employeesGainsharing incentive payment based upon improved company performanceScanlon plan reward to employees for savings in labor costs resulting from employees suggestions

Executive Compensation Critical factor in attracting and retaining best managers

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

Types of Executive CompensationBase salaryShort-term (annual) incentives or bonusesLong-term incentives and capital appreciation plansStock option plansIndexed stock option plansExecutive benefits (Perks)Golden parachutes

HRs Role in Executive Compensation HR executives who know their companys business must play key role in assuring reasonable and ethical behavior