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COMPENSATION

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

Components of a Total Compensation Program


External Environment
Internal Environment
Compensation

Financial

Non-Financial

Direct

Indirect (Benefits)

Wages
Salaries
Commissions
Bonuses

Legally Required Benefits


Skill Variety Task Sound Policies
Social Security
Identify Task
Competent Employees
Unemployment Compensation Significance
Workers
Congenial Coworkers
Compensation
Family Autonomy
&
Suitable Status Symbols
Medical Leave
Feedback
Working Conditions
Voluntary Benefits
for Time Not Worked

The Job

Payment
Health Care
Life Insurance
Retirement Plans
Employee Stock Option Plans
Supplemental Unemployment Benefits
Employee Services
Premium Pay
Unique Benefits

Job Environment

Workplace Flexibility
Flextime
Compressed Work Week
Job Sharing
Flexible Compensation
Telecommuting
Part-time Work
Modified Retirement

Equity Theory

Input:Outcome ratio for self

Input:Outcome ratio for referen

Perception of ratios affects future


performance

Equity in Financial Compensation


Equity - Fair pay treatment for
employees
External equity - Firm's employees are
paid comparably to workers who
perform similar jobs in other firms
Internal 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
seniority
Team equity - More productive teams
are rewarded more than less productive
groups

Determinants of Individual Financial


Compensation
Organization
Labor market
Job
Employee

Compensation Policies
Pay leaders pay higher wages and
salaries
Market rate, or going rate pay what
most employers pay for same job
Pay 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 Compensation

Compensation surveys
Expediency
Cost of living
Labor unions
Society
Economy
Legislation
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Determining internal
equity

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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 value they attach
to certain duties, responsibilities, and
other job-related factors such as
working conditions

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Job Analysis and Job


Descriptions
Before organization can determine
relative difficulty or value of jobs,
must first define content
This is done by analyzing jobs

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Job Evaluation

Firm determines the relative value of one


job in relation to another
Point factor system most widely used
Determine compensible factors
Set weights for each
Assign points
Decide pay classifications

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

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Job Pricing (Continued)


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

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Scatter Diagram of Evaluated Jobs Illustrating the Wage


Curve, Pay Grades, and Pay Ranges
Average Pay per Hour (Current Rates or Market Rates)
$19.80

18.50

17.20

15.90
ag
W

14.60
14.00
13.30
12.90
12.00

100
1

Summary
Evaluated Points
0- 99
100-199
200-299
300-399
400-500

rve
u
eC

Pay Ranges for


Pay Grades

2
1

200
300
400
500
Evaluated Points
2
3
4
5
Pay Grades
Pay Grade
1
2
3
4
5

Minimum
$12.00
13.30
14.60
15.90
17.20

Midpoint
$13.30
14.60
15.90
17.20
18.50

Maximum
$14.60
15.90
17.20
18.50
16
19.80

Average Pay Per Hour

Broadbanding and Its Relationship to Traditional


Pay Grades and Ranges
Grade 5
Grade 4
Grade 3
Band B

Grade 2
Grade 1
Band A
Low

High
Job Worth

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Employee as a Determinant of
Financial Compensation
Performance-based Pay
Skilled-based Pay
Competency-based Pay
Seniority
Experience
Membership in the organization
Potential
Political Influence
Luck

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Primary Determinants of Individual Financial


Compensation
The Organization
Compensation Policies
Organizational Politics
Ability to Pay

The Employee
Job Performance
Merit
Pay
Variable Pay
Competency-Based
Pay Seniority
Experience
Organization Membership
Potential
Political Influence
Luck

Job
Individual
Financial
Compensation
Pricing

The Labor Market


Compensation Surveys
Expediency
Cost of Living
Labor Unions
Society
The Economy
Legislation

The Job
Job Analysis
Job Descriptions
Job Evaluation
Collective Bargaining

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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)
Piecework Employees paid for each
unit they produce

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Skill-Based Pay
Compensates on basis of job-related skills
and knowledge
Employees and departments benefit when
employees obtain additional skills
Appropriate where work tends to be
routine and less varied
Must provide adequate training
opportunities or system becomes a
demotivator
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Competency-Based Pay
Compensates on
basis of
demonstrated
expertise

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

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


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

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More factors affecting individual


pay

Membership in the organization


Potential
Political influence
Luck
Compensation for special groups
Team-based pay

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Group-based pay for performance


Profit sharing distribution of
predetermined percentage of firms
profits to employees
Gainsharing incentive payment based
upon improved company performance

Scanlon plan reward to employees for


savings in labor costs resulting from
employees suggestions

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Executive Compensation
Critical factor in
attracting and
retaining best
managers

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

Base salary
Short-term (annual) incentives
or bonuses
Long-term incentives and
capital appreciation plans
Stock option plans
Indexed stock option plans
Executive benefits (Perks)
Golden parachutes
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HRs Role in Executive


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

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