By

Michael Oyelere
 What is meant by compensation
 Does it matter? If yes, why?
 Forms of payment
 A pay model
 Motivation and financial and non-financial

rewards
 Factors affecting levels of pay
 Evaluating reward process
 It is concerned with the formulation and
implementation of strategies and policies that
aim to reward people fairly, equitably and
consistently in accordance with their value to
the organisation
 Armstrong and Murlis (2007)
 Other views about compensation
management
 It does not mean the same for everybody (eg)

◦ Member of the society

◦ A stockholder
◦ A manager
◦ An employee
 All have different interpretation of the term
 Societal view

◦ Compensation is the measure of justice.

◦ Benefits given may be regarded as equity and
justice in society.
◦ Job losses are attributed to labour cost.
◦ Pay increase may lead to price increase
 Stockholders

◦ Stockholder have interest in employees pay

◦ Stockholders have particular interest in executive
pay.
◦ Does firms with high paid executive perform better?
◦ Are firms with lesser paid executives worse-off?
◦ What implication for firms where executive hold
substantial share?
 Manager

◦ Compensation influence managers success in two

ways:
 1. first it is a major expense
 2. may lead to competitive advantage

◦ Is there relationship between employees

productivity level and compensation?
◦ Research reveal that government establishments
are high paying organisation, are they highly
productive?
 Employees

◦ Compensation received for work done is the main

source of financial security for most employees.
◦ Therefore, employees regards compensation as a
return in exchange between their employer and
themselves. An entitlement for being an employee
of the company or a reward for job well done.
 How do you decide the amount due for specific job or
position?
 Is government legislation on minimum wage
justifiable?
  Effects of pay on employees’ behaviours
 Pay can influence employee motivation and
behaviour in two ways
◦ 1.incentive effect-
◦ motivational intensity, direction and persistence of
employees. This is because motivation, with
employees ability and work design determines
employees behaviour such as performance.
◦ Incentive effect is actually the degree to which pay
influences individual and aggregate motivation
among the employees organisations have at any
point in time
 2. sorting effect-

◦ This normally takes an indirect form. For example,

different types of pay strategies may cause different type
of people to apply and stay with an organisation.
◦ Researches shows that higher pay level help to attract
more high-quality applicants and may improve retention.
◦ Would people who are highly capable and have a strong
work ethic and interest in earning a lot of money prefer to
work in an organisation that pays employees doing the
same job more or less the same amount, regardless of
their performance? Or would they prefer to work in
organisation where there pay can be much higher (or
lower) depending on how they perform?
◦ Read case provided
 Compensation –

◦ Refers to all forms of financial returns and tangible

services and benefits employees receive as part of
an employment relationship
 Milkovich, Newman and Gerhart (2011)
 Forms of pay

 Milovich et al (2011) categories all the

different types of return employees receive in
to two:

 Total compensation
 Relational returns

◦ See exhibit 1.4 (p11) for detail

 Total compensation returns are more
transactional.
 They include pay received directly as cash

(e.g. Base, merit, incentive, cost-of-living

adjustments) and indirectly as benefits (e.g.
Pensions, medical insurance, programmes to
help balance work and life demands brightly
coloured uniforms).
 Cash compensation- base
◦ This is the cash compensation that an employer
pays for the work performed.
◦ It tends to reflect the value of work or skills and
generally ignores differences attributable to
individual employee. (e.g. A mail deliverer may be
£15 an hour. However, some individual mail
deliverer may receive more because of their
experience and/or performance.

◦ Using the USA, can you explain the distinction

between wage and salary?
 Cash compensation- Merit pay/cost-of-living
adjustment
◦ Merit increase are given as increment to the base
pay, normally in recognition of past work
behaviour.
◦ Periodic adjustments to base wages may be made
on the basis of changes in what other employers
are paying for the same work, changes in the
overall cost of living, or changes in experience or
skills.
 Cash compensation- incentives
 Incentives tie pay increase to performance.
 It can be tied to the performance of an

individual employee, a team of employees, a

total business unit, or some combination of
individual, team, and unit. The performance
objective may be expense reduction, volume
increases, customer satisfaction, revenue
growth, return on investments, increase in
stock value.
 Cash compensation- incentives
◦ Because incentives are one-time payments, they do
not permanently increase labour costs. When
performance decline, incentive pay automatically
declines. Consequently, incentives are frequently
referred to as variable pay

Types of incentives
 Short term
 Long term
 Benefits- income protection

 Benefits comes in different form. Some

includes income protection, work/life
services, and allowances are part of total
compensation.
 Medical insurance, retirement programme,

life insurance, and savings plans are common

benefits. They help protect employees from
the financial risks inherent in daily life
 Benefits- work/life balance

◦ These are programmes that help employees better

integrate their work life responsibilities include
time away from work (vacation, jury duty), access to
services to meet specific needs (drug counselling,
financial planning, referrals for child and elder care)
and flexible work arrangements ( non-traditional
telecommunicating, nonpaid time off)
 Benefits- allowances

 Allowances often grow out of what is in short

supply. In most developing countries housing
and transportation allowances are frequently
part of pay package. In developed countries,
manages assume that a car will be provided –
only the make and model are negotiable.
 Relational returns from work

 This includes recognition and status,

employment security, challenging work, and
opportunity to learn.
 Other forms of relational return might include

personal satisfaction from successfully facing

new challenges, teaming with great co-
workers, and receiving new uniforms.
  A pay model

 See exhibit 1.5 (p 16)

 What are the four policy issue in the pay

model?
 What purposes do the objectives in the pay

model serve?
  Pay objectives

◦ Efficiency

◦ Fairness

◦ Compliance with laws and regulations

◦ Ethics
  Medtronic
 Support Medtronic mission
and increase complexity of
business
 Minimize increases in fixed
costs
 Attract and engage top
talent
 Emphasize personal, team,
and Medtronic performance
 Recognise personal and
family total well-being
 Ensure fair treatment
 Whole Food
 We are committed to
increasing long-term
shareholder value
 Profits are earned every day
through voluntary exchange
with our customers
 Profits are essential to
create capital for growth,
prosperity, opportunity, job
satisfaction, and job
security
 Support team member
happiness and excellence
 We share together in our
collective fate
 Pay objectives

 Efficiency is aimed toward the followings:

◦ Performance improvement,
◦ increase quality,
◦ delighting customer and
◦ stockholder, controlling labour costs
 Payment objectives
 Fairness is a fundamental objective of pay
system. For example, in the Medtronic’s
objectives, fairness means “ensure fair treatment”
and “recognise personal and family well-being”.
Whole Food pay objectives discussed a “shared
fate”.
 The fairness objective calls for fair treatment for
all employees by recognising both employee
contributions (e.g. Higher pay for greater
performance, experience, or training) and
employee needs (e.g. A fair wage as well as fair
procedures).
 Pay objectives

 Compliance means conforming to national

compensation law and regulations. It laws
change, pay systems may need to change,
too, ensure continued compliance. As
companies go global, they must comply with
the laws of all the countries in which the
operate
 Pay objectives

 Ethics means the organisation cares about

how its results are achieved.
 Objectives serves several purposes-

◦ They guide the design of the pay system

◦ They serve as a standard for judging the success
of the pay system

◦ See exhibit 1.7 Enron’s Ethics Statement (p18)

 Policy Choice

 Every organisation must address the

following four policy decisions –
◦ Internal alignment
◦ External competitiveness
◦ Employees contributions
◦ management
 Pay techniques

 Techniques tie the four basic policies to the

pay objectives