Direct Financial Compensation
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Transcript of Direct Financial Compensation
Human Resource Management 12th Edition
Chapter 9Direct Financial Compensation
Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall 9-1
Are Top Executives Paid Too Much?
• Peter Drucker advised that a 20-to-1 salary ratio between senior executives and rank-and-file white-collar workers is the limit beyond which they cannot go if they don't want resentment and falling morale to hit their companies.
• CEO pay has ballooned to about 344 times average worker's pay in 2009.
Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall 9-2
Compensation: An Overview
• Compensation: Total rewards provided to employees in return for services
• Direct financial compensation: Wages, salaries, bonuses, and commissions
• Indirect financial compensation (benefits): All other financial rewards
• Nonfinancial compensation: Satisfaction from job itself or from psychological and/or physical environment in which employee works
Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall 9-3
Components of Total Compensation Program External EnvironmentInternal Environment
Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall 9-4
Compensation
Direct
Wages Salaries Commissions Bonuses
Indirect (Benefits) Legally Required Benefits SSSPag-ibig Philhealth
Discretionary Benefits Health Care Life Insurance Retirement Plans Disability Protection Employee Stock Option Plans
Voluntary Benefits
The JobMeaningful and Satisfying Job
Recognition for Accomplishment
Feeling of Achievement
Possibility of Increased Responsibility
Opportunity for Growth and Advancement
Enjoy Doing the Job
Job EnvironmentSound Policies Capable Managers Competent Employees Congenial Coworkers Working Conditions
Workplace Flexibility Flexitime Compressed Workweek
Financial Nonfinancial
Equity Theory
• A person’s motivation is in proportion to the perceived fairness of the rewards received for the amount of effort exerted.
• This is then compared to what others around the person receive for their efforts, making equity and fairness important in compensation.
Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall 9-5
Equity in Financial Compensation
• Financial equity: Perception of fair pay • External equity: Employees paid comparably to
workers who perform similar jobs in other firms• Internal equity: Employees paid according to
relative value of jobs within a single organization• Employee equity: Individuals performing similar
jobs for same firm paid according to factors such as performance level or seniority
• Team equity: More productive teams are rewarded more than less productive groups
Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall 9-6
Primary Determinants of Direct Financial Compensation
Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall 9-7
Organization Compensation Policies Organizational Level Ability to Pay
Labor Market Compensation Surveys Expediency Cost of Living Labor Unions Economy Legislation
Employee Job Performance Skills Competencies Seniority Experience Organization Membership Potential Political Influence Luck
Job
Pricing
Direct Financial Compensation
Job Job Analysis Job Descriptions Job Evaluation
Organization as a Determinant of Direct Financial Compensation
• Compensation policies
• Organizational level
• Ability to pay
Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall 9-8
Compensation Policies
• Pay leaders: Pay higher wages and salaries to attract high-quality, productive employees and thus achieve lower per-unit labor costs
• Market rate, or going rate: Pay what most employers pay for same job
• Pay followers: Pay below market rate because of firm’s poor financial condition or belief that it does not require highly capable employees
Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall 9-9
Organizational Level
• Upper management often makes decisions to ensure consistency.
• Extreme pressure to retain top performers may override desire to maintain consistency in pay structure.
Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall 9-10
Ability to Pay
Organization’s assessment of its ability to pay is an important factor in determining pay levels.
Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall 9-11
Labor Market as Determinant of Direct Financial Compensation
• Labor market: Potential employees located within geographic area from which employees are recruited
• Pay for same jobs in different labor markets may vary considerably
Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall 9-12
Compensation Surveys
• A means of obtaining data regarding what other firms are paying for specific jobs or job classes within a given labor market.
• Market rates remain the most important standard for determining pay.
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Expediency
• Managers in highly technical and specialized areas occasionally need to use nontraditional means to determine what constitutes competitive compensation for scarce talent and niche positions.
• They need real-time information.
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Cost of Living
• When prices rise over a period of time and pay does not, real pay is actually lowered.
• A pay increase must be roughly equivalent to the increased cost of living.
Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall 9-15
The Economy
• Affects financial compensation decisions
• Depressed economy generally increases labor supply
• Cost of living often rises as economy expands
Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall 9-16
Job as Determinant of Direct Financial Compensation
• Job itself is a factor, especially in firms that have internal pay equity as primary consideration.
• Organizations pay for value they attach to certain: – Duties– Responsibilities– Other job-related factors, such
as working conditions
Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall 9-17
Job Analysis and Job Descriptions
• Before organization can determine relative difficulty or value of jobs, they must first define content.
• This is done by job analysis and job descriptions.
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Employee as Determinant of Direct Financial Compensation
• Performance (performance-based pay)• Seniority• Experience• Potential• Political influence• Luck
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Performance-Based Pay
• Merit pay• Variable pay• Bonuses• Spot bonuses• Piecework
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Merit Pay
• Pay increase given based on level of performance, as indicated in appraisal
• Historically a cost-of-living increase in disguise
• Increases the employee’s base pay
• Some companies are freezing or cutting pay for some so as to be able to reward others
Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall 9-21
Variable Pay (Bonuses)
• Bonuses are the most common type of variable pay for performance.
• One-time financial award based on productivity.
• Based on productivity that is not added to base pay.
• Use of bonuses is a win–win situation.
Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall 9-22
Spot Bonuses
• Relatively small gifts to employees for outstanding work or effort
• For work done in a relatively short period of time
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Piecework
• Employees paid for each unit they produce
• Especially prevalent in the production/operations area
• Need plan for developing output standards
• Not feasible for many jobs
Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall 9-24
Other Determinants of Pay
• Seniority: Length of time employee has been with the company
• Experience: Has a significant impact on performance
• Potential: Used to attract prospective talent• Political influence: May sway pay and
promotion decisions (It’s not what you know, but who you know.)
• Luck: Being in the right place at the right time
Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall 9-25
Salary Compression: Why Is the New Guy Making What I Am Making?
• Occurs when less experienced employees are paid as much as or more than employees who have been with organization a long time
• Caused by a gradual increase in starting salaries and limited salary adjustment for long-term employees
• Occurs when there is only a minimum pay differential with various skills and responsibility levels
Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall 9-26
Team-Based Pay
• If a team is to function effectively, firms should also provide rewards based on the overall team performance.
• Firms find it easier to develop performance standards for groups than for individuals.
• Potential disadvantage for exemplary performers.
Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall 9-27
Company-Wide Pay
• Profit sharing
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Profit Sharing
• Distribution of predetermined percentage of firm’s profits (cash or stock) to employees
• Kinds of plans: – Current profit sharing– Deferred profit sharing – trust fund
(retirement, termination, death)– Combination plans
Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall 9-29
Contingent Worker Compensation
• In most cases, contingent workers earn less pay than permanent counterparts
• Far less likely to receive health or retirement benefits
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Executive Compensation
• Enormous pay gap between the most affluent executives and the average worker.
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Types of Executive Compensation
• Base salary
• Bonuses and performance-based pay
• Stock option plans
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Base Salary
• Factor in determining executive’s standard of living.
• Salary provides basis for other forms of compensation; may determine amount of bonuses and certain benefits.
Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall 9-33
Bonuses and Performance-Based Pay
• Trend toward more performance-based compensation packages for executives
• Payment of bonuses reflects a managerial belief in their incentive value
Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall 9-34
Stock Option Plans
• Options for managers to buy specified amount of stock in the future at or below current market price.
Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall 9-35
Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall 9-36
All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Printed in the United States of America.