COMPENSATION

Muhammad Adam Hikmawan

Tedi Gunawan

MAP Linkage Batch 4

Outline
• Market-Based Pay in Action : Municipal Strategies and Concerns in the Cities of
Hampton Roads By William M. Leavitt & John C. Morris
• Working Hard for More Money or Working Hard to Make a Difference? Efficiency
Wages, Public Service Motivation, and Effort By Jeannette Taylor & Ranald Taylor
 Market-Based Pay in Action:
Municipal Strategies and Concerns in the Cities of Hampton Roads
By William M. Leavitt & John C. Morris
Compensation
Definition:
• Compensation (also known as Total Rewards) can be defined as all of the rewards
earned by employees in return for their labor
• Total Compensation is an individual’s complete pay package that includes cash,
benefits, services and other perquisites
Purposes:
• To attract, retain, and motivate employees
• Competitive compensation system can help the organization attract qualified human
resources ( talented ) and productive
Compensation

Direct Indirect Non-financial

Wages
Insurance Praise
Salary
Vacation Self-esteem
Bonuses
Childcare Recognition
Commissions
Facility Award
Incentives
Market-Based Pay in Action: Municipal Strategies and
Concerns in the Cities of Hampton Roads By William M.
Leavitt & John C. Morris
• In 1999, Risher observed that a significant number of public sector organizations
across the country were experimenting with new pay concepts including a focus
on external pay levels or market pricing.
• This article examines the current compensation strategies and practices of local
governments in the Hampton Roads region of southeastern Virginia. Specifically,
the focus is on the movement of these municipalities toward a new emphasis on
external equity in their compensation strategies and the barriers they face in
implementing market-based pay systems.
The importance of this study
• It provides empirical, observational data on local government practices and
experiences with market-based pay systems.
• The authors highlight several theoretical and practical consequences of market-
based pay.
• Analyze the use of market-based pay through the examination of several themes;
these themes can serve as a checklist for those considering the implementation
of a market-based pay system.
Market-based pay
• Premis: Organizations undertake to compensate employees at a competitive
level when their wages are compared with employee compensation levels in
similar positions in other comparable organizations.
• The equity concept based on fairness and consistency felt by the employee.
• The equity includes internal and external aspects in the organization.
• The goal of a market-based pay from an organization's point of view is to
determine how much pay is needed to attract and retain a sufficient number of
qualified employees. This condition leads to form of salary which responsive to
competitive market.
The advantages
• Easy to be explained to the employee
• Not too complicated
• A market-based approach requires less training time for compensation staff
• More responsive to the local market than other pay systems
Case study on Hampton Road

• Background and method

• The Hampton Roads metropolitan region of southeastern Virginia is made up of
15 local jurisdictions with a total population of approximately 1.6 million. There
are seven major cities in the region: Norfolk, Virginia Beach, Chesapeake,
Portsmouth, Suffolk, Hampton, and Newport News. Federal, state, and local
governments represent approximately 32% of the region’s total employment.
• The approach of The approach of research through interviews to human
resource directors in 7 cities.
Case study on Hampton Road

CHALLENGES
• There are several concerns with developing and implementing market-based pay
systems that need to be addressed by any organization in the public sector
considering adopting this type of pay system.

• Defining Appropriate Labor Markets

• The cities of Hampton Roads did not encounter the types of recruitment or turnover
problems that would require a redefinition of their labor market.
• For the cities of Hampton Roads, the definition of the labor market has been relatively
straightforward.
• The Hampton Roads cities further define their market as public sector organizations
within the region.
• The Challenge of Obtaining Market Data
• Perform a market pay (wage & salary) survey: Identify a sample of organizations in
the relevant labor market that have the job title.
• Is the comparison “apples to apples?”
• For the most part, Hampton Roads cities have solved the challenges involved in
obtaining accurate market data through the formation of a cooperative network to
share salary data.
• How to determine the competitive salary
• Determining the proper pay scale is essential for productivity, and it’s also necessary
for cost control. Setting the pay scale too low causes recruiting challenges, and setting
the scale too high adds costs to replace employees.
• Each of the Hampton Roads cities has its own approach or strategy with regard to
establishing its competitive level in relation to the market.
• Control employee turnover
• One of the primary advantages of a market-based pay strategy is that it enhances an
organization’s ability to control employee turnover. None of the managers of human
resources in Hampton Road reported significant employee turnover problems.
• The Influence of Unions on the Use of Market-Based Pay
• Public sector unions, are capable of exerting tremendous pressure on pay systems.
The market-based pay structures in several of the Hampton Roads cities have been
affected by the considerable clout of the public safety employees.
Conclusion

• It is difficult to balance external equity (market-based pay) with internal equity

(based on job content).
• Political interference makes it largely impossible to implement fully a market-
based pay system.
• City budgets play an enormous role in the use of market-based pay.

There are two schools of thought regarding the pay of public employees according
to Kaatz and Morris (2000). In one view, governments are too big, and government
employees are overpaid, undermotivated, and underworked. In the other school of
thought, governments are not too big, and employees should be paid at levels that
are competitive with the private sector that would allow the attraction of the “best
and brightest” workers to public service.
Working Hard for More Money or Working Hard to Make a Difference?
Efficiency Wages, Public Service Motivation, and Effort
By Jeannette Taylor & Ranald Taylor
 Research Objectives
• To provide a better understanding of the complex relationships between wages, Public
Service Motivation (PSM), and the effort of government workers.
• Investigate whether the effort levels of government employees are influenced more by
efficiency wages or PSM.

HOW?

• Estimating how much change in the effort levels of government employees is related to a
change in their wages
• Estimating how much change in the effort level of workers is associated with a change in
their level of PSM
 Organization of the Article

Reviewing two strands of literature: the efficiency wage model and PSM literature;
each investigates the impact of their preferred determinant of effort
Easy to change colors, photos and Text.

Formulating a framework that combines these two perspectives together to explain the relationships
between wages, PSM, and effort.

Piloting the model using a small group (9,961) of full-time government employees from 15 countries in
the 2005 ISSP dataset.

Analyzing the data of the public sector respondents from each country at two levels: aggregate and
organizational rank
 An Efficiency Wage Perspective on Wages and Effort

• The efficiency wage literature states that firms should offer their employees a wage rate that is
above the market clearing rate.
Easy to change colors, photos and Text.
• Paying employees a wage premium raises productivity, workplace cohesiveness, employee
responsibility and loyalty, and reduces shirking (Westley & Schmidt, 2006).

• A wage that is below the prevailing market rate can contribute to employee dissatisfaction and
other negative attitudes, which can lead to more shirking or sabotage activities, and ultimately a
high turnover (Akerlof & Yellen, 1986; Solow, 1979).
 An Efficiency Wage Perspective on Wages and Effort
Efficiency Wage Models:
1. Shirking Model (Foster & Wan, 1984; Shapiro & Stiglitz, 1984)
a. firms require effort from their employees to produce goods and services
b. employees’ effort is imperfectly observable
Easy
c. toemployees
change colors,
who photos andtoText.
are found be providing less than their contractual level of effort would lose their jobs
d. Shirking Model (Foster & Wan, 1984; Shapiro & Stiglitz, 1984)
2. The Gift Exchange Model (Akerlof, 1982)
Firms pay high-relative wages to elicit feelings of gratitude from employees and high effor levels
3. The Labour Turnover Model (Salop, 1979; Stiglitz, 1985)
Firms should offer high-relative wages to make current job more attractive than alternative jobs to employees,
and reduce turnover.
4. The Adverse Selection Model (Weiss, 1980)
firms that offer low wages will attract predominantly low-ability employees. By increasing wages, these firms
can attract higher ability employees

Efficiency wage models thus claim that a firm can raise employees’ effort and lower its production costs by
increasing the wage rate above the market rate.
 A PSM Perspective on Wages and Effort
• Some people in public sector have the strong norms and emotions about performing public services,
indicates their high level of PSM (Brewer, 2000; Pattakos, 2004)
• High level PSM workers put large effort into their work (Alonso & Kewis, 2001)
Easy to change colors, photos and Text.
• Some researches conducted between the public and private sector workforce tend to report that
many public sector employees are less driven by monetary rewards, but more driven by intrinsic
rewards, such as an opportunity to help others (Lawler, 1971; Rainey, 1982, 1991; compare Gabris &
Simo, 1995)
• However, monetary rewards are relevant to some individuals with high levels of PSM (Brewer et al.,
2000). Monetary rewards were significantly related to two of the four conceptions of PSM that they
studied.
• Monetary rewards are relevant to some individuals with high levels of PSM but not to others, based
primarily on their conceptions of public service and the public interest.
 A PSM Perspective on Wages and Effort

Dual impact of monetary rewards:(Frey, 1997; Frey & Jegen, 2001):

As Controlling
• Easy
monetary rewards
to change can eliminate
colors, photos and Text. employees’ intrinsic motivation and reduce employees’ effort if
they see the reward as a device to control their behavior
• high wages at the expense of an employee’s PSM can cause him or her to experience alienation.

As Supportive
• monetary rewards can enhance employees’ intrinsic motivation when they perceive the rewards as
supportive that is, an acknowledgement of their work effort and their high intrinsic work motivation
 The Research Framework

Efficiency Wage Model

Ei = Wn / We
E = Effort per employee
Easyi to change colors, photos and Text.
Wn = employee’s wage in
the organization
We = prevailing wage
outside
the organization

• A ratio above 1 implies that workers will exert full effort in performing their job duties because they are paid wages
higher than their counterparts outside their organization. And suggest that the efficiency wage is being paid
• The larger the wage premium, the greater the effort exerted
• After reach wage efficiency, effort decrease due to backward bending labor supply curve. Another reason is the
perception that high performance bonus systems are more likely to encourage misrepresentation of performance and
other strategic behaviors than to recognize and motivate exceptional performance or performance improvements
 The Research Framework

Elasticity Concept
• The elasticity concept is basically a mechanism that is used to measure the responsiveness of a change
(Δ) in one variable on another variable (Marshall, 1920). It will determine how much a change in one
variable (e.g., wages) affects the change in another variable (effort).
• The relationship between wages and effort as well as the change in PSM contributes to effort will be
measured using the elasticity concept

The elasticity of effort with The elasticity of effort with

respect to wage (e) respect to PSM (ef)

e= Δ log Ei / Δ log Wn ef = Δ log PSMi / Δ log Ei

 Method
Sample
Representative Random Sample, using data from the 2005
International Social Survey Programme (ISSP): Work
Orientations
15 countries : United States, Canada, Great Britain, Denmark,
France, Germany, Spain, Bulgaria, Slovenia, Russia, Israel,
Japan, Taiwan, Australia, and New Zealand
Number of Respondent : 9.961
Full-time employees
Work in the Public Sector and Private Sector
Measures
Employee Effort
• Using a proxy in the form of the ratio between internal wages
and external wages
• A mean annual wage is calculated for each country’s full-time
workforce by sector; one for public sector workers and another
for private sector workers
Employee PSM
• Using 2 items in the dataset :
• A job that allows someone to help other people
• A job that is useful to society
• Using 5-point Likert-type scale, ranging from 1 (not at all
important) to 5 (very important),
Employee Organizational Level
• Using a proxy
• Supervisory roles = higher organizational level
• Nonsupervisory roles = lower organizational level
 Results
Aggregate Findings • The mean value of 1.02 suggests that in average,
government wages in 15 countries slightly above the
market rate.

• A mean value of .24 signifies that a rise in

government wages by .24% is associated with a 1%
rise in the effort levels of government workers, and
vice versa.
• A small e value signifies that a small change in
government wages is required to change the effort
level of the public sector workforce by 1%.

• A change in the level of PSM by .61% is related to

1% change in the effort level.
• A higher ef value points to the greater importance
of PSM in bringing about a change in effort level by
1%.

PSM contributes to a larger change in the effort

levels of government workers than wages.
 Results
Findings by Organizational Level

• A comparison of the efficiency wage ratio across

countries shows different patterns.
• The findings are differentiated between the
respondents in a supervisory role and those in a
nonsupervisory role.
• There are slight variations in the e and ef values of the
public sector workforce as one progresses from
nonsupervisory to supervisory positions.
• In the US, for example, the relatively lower e value at
supervisory positions suggests that employees in
nonsupervisory positions required a slightly greater
change in wages to bring about 1% change in their
effort level compared to those in supervisory positions.
• The higher ef value at the supervisory than
nonsupervisory positions implies that PSM accounts for
a greater change in the effort level for those in
supervisory than nonsupervisory positions.
 Discussion
The model, which was piloted on government employees from 15 countries,
presents five prominent findings:

1. Government employees from many countries are found to receive an efficiency wage. Moreover,
PSM appears to be more important to the respondents at supervisory or higher levels than those at
nonsupervisory or lower levels
2. the positive relationship between wages and effort supports the literature on the motivating effects
of wages on performance among government workers
3. The high value in the elasticity of PSM with respect to effort confirms the significance of PSM in
shaping effort.
4. Despite the finding of the motivating properties of wages, this study shows the relative importance
of PSM in raising the effort levels of government employees. PSM presents an attractive
complementary mechanism that can be used to motivate staff to higher performance.
5. The different values of e and ef across the 15 countries highlight the varying emphasis placed on
wages and PSM as a driver of effort by the public sector workforce in different countries
THANK YOU