COMPENSATION

Importance
Importance of
of Compensation
Compensation

•• Impacts
Impacts employer’s
employer’s ability
ability to
to attract
attract &
& retain
retain
employees
employees
•• Ensure
Ensure optimal
optimal levels
levels of
of employee
employee performance
performance in
in
meeting
meeting organization’s
organization’s strategic
strategic objectives
objectives
•• Compensation’s
Compensation’s components
components
–– Direct
Directcompensation
compensationininwages
wagesororsalary
salary
•• Base
Basepay
pay(hourly,
(hourly,weekly,
weekly,monthly)
monthly)
•• Incentives
Incentives(sales
(salesbonuses
bonuses&/or
&/orcommissions)
commissions)
–– Indirect
Indirectcompensation
compensationininform
formofofbenefits
benefits
•• Legally
Legallyrequired
requiredbenefits
benefits(e.g.,
(e.g.,Social
SocialSecurity)
Security)
•• Optional
Optional(e.g.,
(e.g.,group
grouphealth
healthbenefits)
benefits)
 Internal
Internal Equity
Equity

•• Fairness
Fairness of
of pay
pay differentials
differentials
between
between different
different jobs
jobs in
in
organization
organization
•• Established
Established byby job
job ranking,
ranking, job
job
classification,
classification, point
point systems
systems oror
factor
factor comparisons
comparisons
 External
External Equity
Equity
•• Fairness
Fairness of
of organizational
organizational
compensation
compensation levels
levels relative
relative to
to
external
external compensation
compensation
•• Assessed
Assessed byby collecting
collecting wage
wage & & salary
salary
information
information to to guide
guide in
in setting
setting
organization’s
organization’s pay pay strategy
strategy toto lead,
lead,
meet
meet or
or lag
lag labor
labor market
market wages
wages
 Individual
Individual Equity
Equity
•• Fairness
Fairness about
about pay
pay differentials
differentials among
among individuals
individuals
in
in same
same job
job
•• Established
Established byby using
using
–– Seniority-based
Seniority-basedpay
paysystems:
systems:Reward
Rewardlongevity
longevity
–– Merit-based
Merit-basedpay
paysystems:
systems:Reward
Rewardemployee
employeeperformance
performance
–– Incentive
Incentiveplans:
plans:Employees
Employeesreceive
receivepart
partofofcompensation
compensation
based
basedon onperformance
performance
–– Skills-based
Skills-basedpay
paysystems:
systems:Compensation
Compensationbased basedonon
employees
employeespossessing
possessingskills
skillsthat
thatfirm
firmvalues
values
–– Team-based
Team-basedpay payplans:
plans:Encourage
Encouragecooperation
cooperation&&flexibility
flexibility
 External
External Equity
Equity

•• Collect
Collect wage
wage && salary
salary information
information to to
determine
determine market
market wage
wage rates
rates
•• Also
Also consider
consider other
other forms
forms ofof compensation
compensation
•• Determine
Determine pay
pay strategy
strategy relative
relative to
to market
market
 External
External Equity
Equity

•• Lag
Lag policy
policy •• Market
Market policy
policy
–– Lower
Lowerwages
wagesthan
than –– Wages
Wagesequal
equaltoto
competitors,
competitors, competitors
competitors
compensates
compensatesemployees
employees –– Neutralizes
Neutralizespay
payas asfactor
factor
through
throughother
othermeans
means
•• Opportunity
•• Lead
Lead policy
policy
Opportunityfor
for
advancement
advancement –– Higher
Higherwages
wagesthan
than
•• Incentive
Incentiveplans
plans competitors
competitorstotoensure
ensure
•• Good
Goodlocation
location organization
organizationbecomes
becomes
•• Good
Goodworking
working employer
employerofofchoice
choice
conditions
conditions
•• Employment
Employmentsecurity
security
 Individual
Individual Equity
Equity

•• Basing
Basing pay
pay on
on seniority
seniority
•• Merit
Merit pay
pay systems
systems
•• Incentive
Incentive pay
pay
–– Returns
Returnsfinancial
financialrewards
rewardstotoemployees
employeesresponsible
responsiblefor
for
creating
creatingthem
them
–– Allows
Allowsorganizations
organizationstotoadjust
adjustcompensation
compensationexpenses
expenses
based
basedon onorganization
organizationperformance
performance
–– Variety
Varietyofofforms
forms
–– Tied
Tiedtotoemployee’s,
employee’s,work
workunit’s,
unit’s,orororganization’s
organization’sresults
results
 Individual
Individual Equity
Equity

•• Skill-based
Skill-based pay
pay systems
systems
–– Base
Basecompensation
compensationon onacquisition
acquisition&&mastery
masteryofof
skills
skills
–– Give
Giveemployees
employeesincentives
incentivestotolearn
learn
–– Promote
Promoteflexibility
flexibility
–– Easily
Easilylinked
linkedwith
withtraining
trainingprograms
programs&&strategic
strategic
needs
needs
 Individual
Individual Equity
Equity

•• Team-based
Team-based pay
pay plans
plans
–– Can
Canbe
beless
lesstime-consuming
time-consumingthan thanadministering
administeringindividual
individual
reward
rewardsystems
systems
–– May
Mayimpact
impactgroup
groupdynamics
dynamics
–– Can
Canadversely
adverselyimpact
impact&&intensify
intensifyconflict
conflict
–– Need
Needdecentralized
decentralizeddecision-making
decision-makingsystem
system
–– Need
Needhigh
highlevel
levelofofcommunication
communicationwithwithemployees
employees
–– Employees
Employeesshould
shouldhave
havevoice
voice&&provide
provideinput
inputinto
intodesign
design
–– Team
Teammembers
membersneedneedtotofeel
feelsystem
systemisisfair
fair&&equitable
equitable
 Legal
Legal Issues
Issues in
in Compensation
Compensation

•• Title
Title VII
VII of
of Civil
Civil Rights
Rights Act
Act of
of 1964
1964
–– Protects
Protectsworkers
workersrights
rightstotofair
fairtreatment
treatment
•• Equal
Equal Pay
Pay Act
Act of
of 1963
1963
–– Requires
Requiresequal
equalpay
payfor
forequal
equalwork
work
•• Comparable
Comparable worth
worth
–– Argues
Arguesthatthatstandards
standardsofofequal
equalpaypayfor
forequal
equalwork
workshould
shouldbe
be
replaced
replacedwithwithdoctrine
doctrineofofequal
equalpaypayfor
forequal
equalvalue
value
–– Objective,
Objective,measurable
measurabledata datatotosupport
supportassessment
assessmentofofvalue
value
ofofdifferent
differentjobs
jobsisislacking
lacking
–– No
Nobasis
basisinincurrent
currentlawlawfor
forarguments
argumentsofofcomparable
comparableworth
worth
 Legal
Legal Issues
Issues in
in Compensation
Compensation

••Fair
Fair Labor
Labor Standards
Standards Act
Act of
of 1938
1938
––Regulates
Regulates minimum
minimum wage
wage
––Sets
Sets overtime
overtime policy
policy
––Establishes
Establishes exempt
exempt classes
classes for
for managers
managers &&
other
other professional
professional employees
employees
 Executive
Executive Compensation
Compensation

•• No
No real
real average
average or
or standard
standard
•• Typical
Typical annual
annual compensation
compensation for
for senior
senior
executives
executives
–– 20%
20%salary
salary
–– 30%
30%annual
annualincentives
incentives
–– 50%
50%long-term
long-termincentives
incentives
 Executive
Executive Compensation
Compensation

•• Stock
Stock Grants
Grants
–– Require
Requireorganization
organizationmeet
meetspecific
specificfinancial
financialgoals
goals
•• Stock
Stock Options
Options
–– Provide
Provideopportunity
opportunitytotopurchase
purchaseshares
sharesatatsome
somefuture
futuredate,
date,
atatprice
pricedetermined
determinedwhen
whenoptions
optionsare
areawarded
awarded
–– Focus
Focusemployee
employeeattention
attentionon
oncreating
creatingshareholder
shareholdervalue
value
–– Do
Donotnothave
havetotobe
bereported
reportedasasexpenses
expenses
–– Can
Cancreate
createculture
cultureobsessed
obsessedwith
withimproving
improvingstock
stock
performance
performanceatatexpense
expenseofofother
otherconcerns
concerns
–– Can
Canprompt
promptexecutives
executivestotoengage
engageinincreative
creativeaccounting
accounting
practices
practices
 Key
Key Strategic
Strategic Issues
Issues in
in Compensation
Compensation

•• Determining
Determining compensation
compensation relative
relative to
to market
market
•• Balance
Balance between
between fixed
fixed && variable
variable compensation
compensation
•• Deciding
Deciding whether
whether oror not
not to
to utilize
utilize team-based
team-based
versus
versus individual
individual pay
pay
•• Creating
Creating appropriate
appropriate mix
mix ofof financial
financial &&non-
non-
financial
financial compensation
compensation
•• Developing
Developing cost-effective
cost-effective compensation
compensation program
program
resulting
resulting in
in high
high performance
performance
 Reading
Reading11.1
11.1
Exposing
Exposing Pay
Pay Secrecy
Secrecy
•• Pay
Paysecrecy
secrecyessentially
essentiallyisisaapolicy
policywhich
whichrestricts
restrictsthe
theamount
amountofof
information
informationemployees
employeesare areprovided
providedabout
aboutregarding
regardingwhat
whattheir
theirco-
co-
workers
workersare
arepaid
paid

•• Whether
Whetherpay
paysecrecy
secrecybenefits
benefitsororisisdetrimental
detrimentaltotoan
anorganization
organization
depends
dependson
onaavariety
varietyof
offactors
factors

•• ItItisisbest
bestunderstood
understoodas
asaacontinuum
continuumrather
ratherthan
thanan
anall-or-nothing
all-or-nothing
construct
construct

•• Employers
Employerscould
couldhave
havevarying
varyinglevels
levelsof
ofpay
paysecrecy
secrecy

•• ItItalso
alsoisisrelated
relatedtotoemployee
employeeprivacy
privacyissues,
issues,which
whichhave
havebecome
become
much
muchmoremoreprevalent
prevalentininrecent
recentyears
years
 Reading
Reading11.1
11.1
Exposing
Exposing Pay
Pay Secrecy
Secrecy
Costs
Costsof
ofpay
paysecrecy
secrecyinclude
include

1)
1)employee
employeejudgments
judgmentsabout
aboutfairness
fairnessand
andtheir
theirperceptions
perceptions
of
oftrust
trustmay
maybebesacrificed
sacrificed
2)
2)employee
employeeperformance
performancemotivation
motivationcan
canbe
beexpected
expectedto to
decrease
decrease
3)
3)from
fromananeconomics
economicsperspective,
perspective,the
thelabor
labormarket
marketmay
maybe be
less
lessefficient
efficientbecause
becauseemployees
employeeswill
willnot
notmove
movetototheir
their
highest
highestvalued
valueduse
use
 Reading
Reading11.1
11.1
Exposing
Exposing Pay
Pay Secrecy
Secrecy
Benefits
Benefits of
of pay
pay secrecy
secrecy include
include

•• organizational
organizational control
control
•• protection
protection of
of privacy
privacy
•• decreased
decreased labor
labor mobility
mobility
 Reading
Reading11.1
11.1
Exposing
Exposing Pay
Pay Secrecy
Secrecy
Factors
Factorswhich
whichinfluence
influencethe
thecost-benefit
cost-benefittradeoff
tradeoffof
ofpay
paysecrecy
secrecyfor
foran
an
individual
individualemployer:
employer:

1)
1)nature
natureof
ofhuman
humancapital
capital(firm-specific
(firm-specificversus
versusgeneral)
general)

2)
2)criteria
criteriafor
forpay
payallocation
allocation(objective
(objectiveversus
versussubjective)
subjective)

3)
3)gauging
gaugingofofrelative
relativepay
paystatus
status(individual
(individualemployee
employee“guesses”
“guesses”where
where
they
theystand
standor
orrank
rankininthe
theorganization’s
organization’srelative
relativepay
paydistribution)
distribution)
 Reading
Reading11.2
11.2–The
–TheDevelopment
DevelopmentofofaaPay-for-Performance
Pay-for-Performance
Appraisal
AppraisalSystem
Systemfor
forMunicipal
MunicipalAgencies
Agencies::AACase
CaseStudy
Study

Despite
Despiteits
itsimportance,
importance,both
bothemployees
employeesandandmanagement
management
often
oftenview
viewthetheperformance
performanceappraisal
appraisalprocess
processas
asfrustrating
frustrating
and
andunfair.
unfair.These
Thesefrustrations
frustrationsare
arelargely
largelyattributed
attributedto
toaa
reliance
relianceon
onperformance
performanceappraisal
appraisalinstruments
instrumentsthat
that

••are
arenot
notjob
jobrelated
related
••have
haveconfusing
confusingororunclear
unclearrating
ratinglevels,
levels,and
and
••are
areviewed
viewedasassubjective
subjectiveand
andbiased
biased
 Reading
Reading11.2
11.2–The
–TheDevelopment
DevelopmentofofaaPay-for-Performance
Pay-for-Performance
Appraisal
AppraisalSystem
Systemfor
forMunicipal
MunicipalAgencies
Agencies::AACase
CaseStudy
Study

Steps
Steps Taken
Taken in
in Defining
Defining Job
Job Performance
Performance and
and the
the
Creation
Creation of
of an
an Appraisal
Appraisal Instrument
Instrument

Step
Step #1:
#1: Job
Job analysis
analysis
Step
Step #2:
#2: Rating
Rating ofof tasks
tasks
Step
Step #3:
#3: Creation
Creation ofof appraisal
appraisal instrument
instrument
Step
Step #4:
#4: Identifying
Identifying raters
raters
Step
Step #5:
#5: Rater
Rater training
training
Step
Step #6:
#6: Performance
Performance appraisal
appraisal interview
interview