COMPENSATION: Introduction

Nancy Brown Johnson 1/05

Why is compensation important?

Society
Firm Individual

What are the elements of compensation?

Base pay
Incentives Fringe benefits

What are different forms of payment?

Cash
Benefits

Payment for time not worked Non-pecuniary benefits (gym memberships, child care) Intrinsic

Exchange Theory
Pay is an exchange for efforts
Implicit Social Contract

beliefs about mutual obligations Implicit Psychological Contract Temporal Quality amount of time in job & career

Equity Theory
Pay, benefits, opportunities, etc.

the same more or less

OUTCOME INPUTS
effort, ability, experience etc.

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OUTCOME INPUTS

A person evaluates fairness by comparing their ratio with others.

IRWIN a Times Mirror Higher Education Group, Inc., company, 1997

Equity Theory
Workers compare their compensation with others If unequal workers attempt to restore equity

Workers Restore Equity by:

Reducing input
Attempting to get raise Quitting

Psychological Adjustment

Compensation Model
Equity Individual (Pay for Perf.) Internal (Pay Structure) External (Pay Level) Procedural Justice (Pay Administration) Compensation Tool Seniority, Performance Job Evaluation Market Surveys Communication, Appeals Objective Motivation Retention Attraction Organization Citizenship, Commitment

Internal Equity
Comparison of Jobs
Jobs worth to the Employer

Similarities and differences in work content Relative contribution to organization objectives Accomplished through job evaluation

External Equity
Value of the job to

the labor market

Assessed through

wage surveys

Individual Equity
Relative pay between

individuals doing the same job Influences motivation

Organizational Justice
Perceived fairness of the pay

system Outcomes Process Issues Interactions Influences Commitment, Organization Citizenship

Strategic Perspectives
The strategy balances 4 types of equity Best Practice Contingency:

organizations will have pay systems that fit with their business strategy organizations that have fit will outperform those without fit Strategic Decisions include: pay level, pay structure, individual rewards, team rewards, pay administration

Best Practice v. Strategy Debate

Best practice - there are a set of

compensation practices that are good for all firms. Strategy - the set of compensation practices that are good for firms will vary based upon the firms goals.

Best Practice Examples*

High wages
Guarantee of Employment Security Use incentives; share gains

Employee Ownership
Participation & Empowerment

Teams
Smaller pay differences
*Source: Pfeffer, Competitive Advantage Through People, 1994

Summary
There are four key elements to equity
The strategic contingency view is that some

firms may weight those elements differently depending on firm objectives The best practice view is that there are good practices that all firms should engage in no matter what their strategy.

Summary (continued)
Equity forms the basis for compensation

management Strategy guides the organization in the balancing of equity components The test is whether the compensation system reinforces sustained competitive advantage