COMPENSATIONPart I

1

Chapter Objectives• Describe the various forms of compensation.• Explain the concept of equity in financial

compensation.• Identify the determinants of financial

compensation.• Discuss compensation legislations• Describe factors that should be considered

when the labor market is a determinant of financial compensation.

2

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

3

Components of a Total Compensation Program External Environment

Internal Environment

4

Compensation

Direct

Wages Salaries Commissions Bonuses

Indirect (Benefits)

Legally Required Benefits Social Security Unemployment Compensation Workers’ Compensation Family & Medical Leave

Voluntary Benefits Payment for Time Not Worked Health Care Life Insurance Retirement Plans Employee Stock Option Plans Supplemental Unemployment Benefits Employee Services Premium Pay Unique Benefits

The Job

Skill Variety Task Identify Task Significance Autonomy Feedback

Job Environment

Sound Policies Competent Employees Congenial Coworkers Suitable Status Symbols Working Conditions

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

Financial Non-Financial

Equity in Financial Compensation

• Equity - Fair pay treatment for employees• External equity - Employees are paid

comparably to workers who perform similar jobs in other firms

• Internal equity - Employees are paid according to relative value of their jobs within same organization

5

Equity in Financial Compensation (Continued)

• Employee equity - Paid according to factors unique to employee, such as performance level or seniority

• Team equity – Reward based on teams productivity

6

Primary Determinants of Individual Financial Compensation

7

The Organization Compensation Policies Organizational Politics Ability to Pay

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

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

Job

Pricing

Individual Financial

Compensation

The Job Job Analysis Job Descriptions Job Evaluation Collective Bargaining

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

8

The Labor Market as a Determinant of Financial Compensation

• Compensation surveys• Expediency• Cost of living• Labor unions• Society• Economy• Legislation

9

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

20

Job Evaluation

• Firm determines the relative value of one job in relation to another– Ranking – Classification– Factor comparison

21

Classification Method

• Define number of classes or grades to describe group of jobs

• Compare job description with class description• Class description that most closely agrees with

job description determines job classification

23

Job PricingPlacing a dollar value on worth of a job • Pay grades - Grouping of similar jobs to simplify

pricing jobs• Pay ranges - Minimum and maximum pay rate with

enough variance between the two to allow for a significant pay difference

• Broadbanding – Collapses many pay grades into a few wide bands or improve effectiveness

• Adjusting pay rates - Overpaid and underpaid jobs

25

Employee as a Determinant of Financial Compensation

• Performance-based Pay• Skilled-based Pay• Competency-based Pay• Seniority• Experience• Potential• Political Influence• Luck

29