COMPENSATION

Compensation: An Overview
Compensation - Total of all rewards provided employees in return for their services Direct financial compensation - Pay that a person receives in the form of wages, salaries, bonuses, and commissions Indirect financial compensation - All financial rewards that are not included in direct compensation Nonfinancial compensation - Satisfaction that a person receives from the job itself or from the work environment

Equity in Financial Compensation

Equity - Fair pay treatment for employees External equity - Jobs are fairly compensated in comparison to the similar jobs in the labour market. Internal equity - Exists when employees are paid according to the relative value of their jobs within the same organization

Equity in Financial Compensation (Continued)

Employee equity - Individuals performing similar jobs for the same firm are paid according to factors unique to the employee, such as performance level or seniority Team equity - More productive teams are rewarded more than less productive groups

Determinants of Individual Financial Compensation

Organization Labor market Job Employee

The Organization as a Determinant of Financial Compensation

Compensation policies Organizational politics Ability to pay

The Labor Market as a Determinant of Financial Compensation

Compensation surveys Cost of living Labor unions Society Economy Legislation

Compensation Surveys
What are other firms paying? Geographic area of survey Specific firms to contact Jobs to include

Cost of Living
When prices rise over a period of time and pay does not, real pay is actually lowered Some firms may index pay increases to the inflation rate

Labor Unions
Collective bargaining between management and unions as wages, hours, and other terms and conditions of employment. Unions may attempt to create, Pressure

Society
Government has sometimes responded to public opinion and stepped in to encourage businesses to hold down wages and prices Businesses in a local labor market are also concerned

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

Compensation Legislation
Minimum Wages Act 1948 Payment of Wages Act 1936 Bonus Act 1956 Wage Boards Pay Commissions

The Job as a Determinant of Financial Compensation Job itself continues to be a factor, especially in those firms that have internal pay equity as a primary consideration Organizations pay for the value they attach to certain duties, responsibilities, and other jobrelated factors such as working conditions

The Employee as a Determinant of Financial Compensation

Performance-Based Pay Seniority Experience Membership in the organization Potential Political influence Luck Special employee classes

Performance-Based Pay
Merit pay - Pay increase given to employees based on their level of performance as indicated in the appraisal Variable pay - Compensation based on performance (bonus) Skill-based pay - System that compensates employees on the basis of job-related skills and knowledge they possess Competency-based pay - Compensation plan that rewards employees for their demonstrated expertise

Seniority
Length of time an employee has been associated with the company, division, department, or job Labor unions tend to favor seniority

Experience
Has potential for enhancing a person's ability to perform Possibility can only be realized if the experience acquired is positive

Potential
Organizations do pay some individuals based on their potential Many young employees are paid well because of their potential

Political Influence
Should not be used to determine financial compensation To deny its existence would be unrealistic A person's pull or political influence may sway pay and promotion decisions

Special Employee Classes

Compensation for professionals Compensation for sales employees