Summarizing our Learning

Society’s Views

Stockholders’ Views

Employees’ Views

Managers’ Views

The word compensation may be defined as • all forms of financial returns and tangible services and benefits, which an employee receive in his/her tenure of employment. • a system of rewards to motivate employees, so that organizations can achieve its intended goals and objectives.

Considers both intrinsic (psychological) and extrinsic (tangible) components of compensation. Extrinsic compensation covers both the monetary and non-monetary rewards, intrinsic compensation reflects employees’ psychic satisfaction through job accomplishment.

Compensation refers to all forms of financial returns and tangible services and

benefits employees receive as part of an

employment relationship

• Acquire qualif ied personnel• Retain current employees• Reward desired behaviour• Control costs• Comply with legal regulations• Further administrative efficiency

Enhance Dignity and Satisfaction from Work Performed

Enhance Physiological Health, Intellectual Growth, and Emotional Maturity

Promote Constructive Social Relationships with Co-workers

Design Jobs that Require Adequate Attention and Effort

Allocate Sufficient Resources to Perform Work Assignments

Grant Sufficient Control over the Jobs to Meet Personal Demands

Offer Supportive Leadership and Management

Non-financial Compensation Non-financial Compensation SystemSystem

Three basic building blocks:• Compensation objectives• Policies that form the foundation of the

compensation system• Techniques that make up the compensation

system

Internal alignment, often called internal equity, refers to the pay relationships

among different jobs/skills/competencies within a single organization.

Pay structure refers to the array of pay rates for different work or skills within a single organization.

The number of levels, the differentials in pay between the levels, and the criteria

used to determine those differences describe the structure.

An internal pay structure can be defined by • Number of levels of work• Pay differentials between the levels• Criteria or basis used to determine those levels

and differentials

Pay structure is hierarchical in nature, based on:• Number of levels• Reporting relationships

The pay differences among levels Pay is determined by:

• Knowledge/ skills involved• Working conditions• Valued addition to the company

Intention of these differentials:• To motivate people to strive for promotion to a

higher-paying level

Job-based structures relies on the work content – tasks, behaviors, responsibilities

Person-based structure shifts the focus to the employee• Skills, knowledge, or competencies the

employee possesses• Whether or not they are used in the particular

job In reality, both job-and-person-based

structures are included

The systematic process of collecting information that identifies

similarities and differences in the work.

Job-based structures look at what people are doing and the expected outcomes

Skill- and competency based structures look at the person

Job evaluation – process of systematically determining the relative worth of jobs to create a job structure for the organization

The evaluation is based on a combination of:• Job content• Skills required• Value to the organization• Organizational culture• External market

Skill-based structures link pay to the depth or breadth of the skills, abilities, and knowledge person acquires that

are relevant to the work.

In contrast, a job-based plan pays employees for the job to which they are assigned, regardless of the skills they

possess.

Skill plans can focus on • Depth based

Specialist• Breadth based:

Generalist/ multiskilled based

Systematic process of identifying and

collecting information about skills required to

perform work in an organization.

Several perspectives on what competencies are and what they are meant to accomplish• Skill that can be learned and developed or a trait

that includes attitudes and motives?• Focus on the minimum requirements that the

organization needs to stay in business or focus on outstanding performance?

• Characteristics of the organization or of the employee?

Core competencies• Related to mission statements expressing

organization’s philosophy, values, business strategies, and plans

Competency sets• Translate each core competency into action

Competency indicators• Observable behaviors that indicate the level of

competency within each set

Organizations seem to be moving away from the vagueness of self-concepts, traits, and motives

Greater emphasis on business-related descriptions of behaviors “that excellent performers exhibit much more consistently than average performers”

Competencies are becoming “a collection of observable behaviors that require no inference, assumption or interpretation”

External competitiveness refers to pay relationships among organizations - an

organization’s pay relative to its competitors.

Pay level refers to the average of the array of rates paid by an employer: (base + bonuses + benefits + value of stocks) /

number of employees.

Pay forms are the various types of payments, or pay mix,

that make up total compensation.

Control Costs

Attract and Retain Employees

EXTERNAL COMPETITIVENESS EXTERNAL COMPETITIVENESS

LABOR MARKET FACTORS

Nature of Demand

Nature of Supply

LABOR MARKET FACTORS

Nature of Demand

Nature of Supply

PRODUCT MARKET FACTORS

Degree of Competition

Level of Product Demand

PRODUCT MARKET FACTORS

Degree of Competition

Level of Product Demand

ORGANIZATION FACTORS

Industry, Strategy, Size

Individual Manager

ORGANIZATION FACTORS

Industry, Strategy, Size

Individual Manager

Three conventional pay-level policies:• To lead• To meet• To follow competition

Newer policies emphasize flexibility among:• Policies for different employee groups• Pay forms for individual employees• Elements of the employee relationship that

company wishes to emphasize in its external competitiveness policy

Employer of Choice

Lead Policy

Lag Policy

Flexible Policies

Pay with Competition

(Match)

Shared Choice

A survey is the systematic process of collecting and making judgments about the compensation paid by other employers

Surveys provide the data for translating policy into pay levels, pay mix, and structures

An employer conducts or participates in a survey for a number of reasons: • Adjust the pay level in response to changing

rates paid by competitors • Set the mix of pay forms relative to that paid by

competitors• Establish or price a pay structure• Analyze pay-related problems • Estimate the labor costs of product/service

market competitors

Who should be involved?

How many employers?• Publicly Available Data• “Word-of-mouse”• Where are the standards?

Which Jobs to include?• Benchmark-job approach• Low-High approach• Benchmark conversion approach

What information to collect?• Organization data• Total compensation data

Employers want employees to perform in ways that lead to better organizational performance

Organizational strategy is the guiding force that determines what kinds of employee behaviors are needed

Do people join a firm because of pay?

Do people stay in a firm (or leave) because of pay?

Do employees more readily agree to develop job skills because of pay?

Do employees perform better on their jobs because of pay?

Efficiency• Strategy• Structure• Standards

Objectives Measures Eligibility Funding

Equity/Fairness• Distributive justice• Procedural justice

Compliance• Comply with existing laws• Enhance and maintain firm’s reputation

Pay for performance plans signal a movement away from

entitlements

Pay will vary with some measure of individual, team, or

organizational performance

Merit Pay Lump-Sum Bonuses Individual Spot Awards Individual Incentive Plans

Uses a constellation of measures• Pinpoints areas of success• Indicates areas to improve

Categories of measures• Financial results• Process improvements• Customer service• Innovation

Forces discussions about priorities among different measures

Outcome – Objectives with different weights in terms of importance

Employee Stock Ownership Plans Employee Stock Ownership Plans (ESOPs)(ESOPs)

Performance Plans (Performance Performance Plans (Performance Share and Performance Unit)Share and Performance Unit)

Broad-Based Option Plans (BBOPs)Broad-Based Option Plans (BBOPs)

Used for several organizational decisions• To guide allocation of merit increases

Performance ratings are influenced by:• Employee behaviors observed by raters• Organization values• Competition among departments• Differences in status between departments• Economic conditions

Employees often frustrated about the appraisal process• Appraisals are too subjective• Possibility of unfair treatment by a supervisor

Experts argue that rather than throwing out the entire performance appraisal process, total-quality-management principles should be applied to improving it

Ranking - Rater compares employees against each other

Rating - Rater evaluates employees on some absolute

standard (measured on a continuum scale)

Essay - Rater answers open-ended questions in essay form

describing employee performance

Categories