7/29/2019 3.2- Compensation Concepts
1/40
COMPENSATIONCONCEPTSProf. John Kammeyer-Mueller
MGT 4301
Unit 4, Lecture 1: Compensation Concepts
7/29/2019 3.2- Compensation Concepts
2/40
Plan
Where we are Understand the legal framework for compensationHave a few principles related to compensation
known Where we want to beUnderstand some of the basic ideas underlying
compensation plans
How we know how were doingHow can we figure out how much a job should be
paid?How does justice factor into the compensation
system? Unit 4, Lecture 1: Compensation Concepts
7/29/2019 3.2- Compensation Concepts
3/40
Major Principles in SettingWages
Market pay Employees should be paid what other people in
similar jobs in the external labor market arebeing paid
Job analysisEmployees should be paid based on difficulty of
a job, the demands on workers, and the level ofqualifications required
Distributive justice and social comparisonEmployees judge how much they should be paid
based on their subjective assessment of whatother people like them are being paid
Unit 4, Lecture 1: Compensation Concepts
7/29/2019 3.2- Compensation Concepts
4/40
Market Pay and Wages
Why compare to market wages? If firms are wage takers, they cannot afford
to pay less than competitors
If firms are in a highly competitive industry,they cannot afford to pay more thancompetitors
Salary surveys
Sent out (usually by consulting firms) askingemployers to tell how much they pay workers.Results are sold on the open market. If you want a raise, check out this link
Unit 4, Lecture 1: Compensation Concepts
http://jobstar.org/tools/salary/sal-prof.cfmhttp://jobstar.org/tools/salary/sal-prof.cfm7/29/2019 3.2- Compensation Concepts
5/40
Trends in Wages
Average Hourly Earnings, 1982 Dollars
7
7.2
7.4
7.6
7.8
8
8.2
8.4
8.6
8.8
9
1968
1971
1974
1977
1980
1983
1986
1989
1992
1995
1998
2001
2004
2007
Unit 4, Lecture 1: Compensation Concepts
7/29/2019 3.2- Compensation Concepts
6/40
Factors that Change MarketWages
Supply side changesEducation level
Demographic shifts (baby booms and busts)
Immigration Demand side changesTechnology
Market for domestic goods and services International markets for goods and services
Unit 4, Lecture 1: Compensation Concepts
7/29/2019 3.2- Compensation Concepts
7/40
Technology and EmployerDemand
Complements in productionComplementary technology makes workers
more productive, and therefore increases
employer demand (MRP of labor increasesalong with MRP of capital)
Substitutes in productionSubstitute technology replaces workers
because the MRP of capital becomes greaterthan the MRP of labor
Unit 4, Lecture 1: Compensation Concepts
7/29/2019 3.2- Compensation Concepts
8/40
Technology and EmployerDemand
Complements and substitutes in actionComputers complement the skills of
professionals and creative workers by makingtheir productive activities faster and lessexpensive to accomplish
Computers substitute the skills of clericalworkers by making it possible to completelyeliminate jobs like typists, filing clerks, andphone operators
Result: increasing wage gap based on skills
Unit 4, Lecture 1: Compensation Concepts
7/29/2019 3.2- Compensation Concepts
9/40
International Perspectives onTechnology
Why do some countries specialize in low-wage laborand others specialize in high-skill labor? Increasing levels of industrialization increase the need for
education, which reduces birth rates Reductions in birth rates reduce the supply of labor
Drops in the supply of labor increase the MRP of laborrelative to capital
Higher capital investments favor skilled workers
The movement of low-wage manufacturing acrossAsia during industrialization shows this process atwork
Unit 4, Lecture 1: Compensation Concepts
7/29/2019 3.2- Compensation Concepts
10/40
Supporting Evidence
Unit 4, Lecture 1: Compensation Concepts
7/29/2019 3.2- Compensation Concepts
11/40
Efficiency Wage Theory andAbove Market Wages
Above market wages are rational for somefirms
Reduces shirking with imperfect monitoring managers cant watch you all the time to pressure you to
work harder, but the threat of firing motivates workers tonever be caught goofing off
Minimizes turnover and replacement costs
Ability to attract more qualified candidates Shown in A. Barber, 1998, Recruiting Employees; Barker
and Bretz, 2000, Compensation in Organizations
Unit 4, Lecture 1: Compensation Concepts
7/29/2019 3.2- Compensation Concepts
12/40
Issues for the Market WageApproach
How do you define the market for a job?New England, California, Hawaii and Alaska have
the highest cost of living; the South andMidwestern states are lowest.
In some fields, relocation is expectedA survey of 35 compensation specialists said that
the most important factor for evaluating therelevance of a salary survey was the region of the
country where the firm was located; workingconditions, industry, or size were less important
Viswesvaran & Barrick, Journal of Applied Psychology, 1992
Unit 4, Lecture 1: Compensation Concepts
7/29/2019 3.2- Compensation Concepts
13/40
Issues for the Market WageApproach
How do you define the market for a job?The market of other jobs in the same industry
or from different industries?
Nonprofit industry jobs pay less Some industries require more qualifications or
work of the same job title than others As noted earlier, profitable firms do tend to pay
quite a bit more
Large firms usually pay more, and will comparethemselves to other large firms
Unit 4, Lecture 1: Compensation Concepts
7/29/2019 3.2- Compensation Concepts
14/40
Issues for the Market WageApproach
What if your jobs are unlike themarket?
Job titles are seldom sufficient toestablish similarityWorth of a job to a company varies
considerablyAuthority based on company structureImportance of tasks based on niche and
strategyPossibility for advancement effects
wages Unit 4, Lecture 1: Compensation Concepts
7/29/2019 3.2- Compensation Concepts
15/40
Job Evaluation Approach
Focus is on the value of the job to thiscompanyEvaluate jobs using job analysis
Estimate the worth of various KSAOs, decisionmaking requirements, and working conditionsfor jobs
Considering the job of an employee in yourfinal project company, what does thisinternal approach add?
Unit 4, Lecture 1: Compensation Concepts
7/29/2019 3.2- Compensation Concepts
16/40
Determining compensiblefactors
Compensible factor: a feature of a job thatyou believe should be compensated
What sorts of things lead to increased payfor most workers?KSAOs
Decision making authority
Working conditions
Unit 4, Lecture 1: Compensation Concepts
7/29/2019 3.2- Compensation Concepts
17/40
Compensible Factors From anEconomic Angle
Employees and employers derive equal utility from any point alongthe indifference curve
The equilibrium stress/wage level is s* and q*
Workers with different indifference curves will not work at this
company Unit 4, Lecture 1: Compensation Concepts
employee
indifference curve
employer
indifference curve
wages
stresss*
q*
7/29/2019 3.2- Compensation Concepts
18/40
A Small Danger in Doing JobEvaluations
Unit 4, Lecture 1: Compensation Concepts
7/29/2019 3.2- Compensation Concepts
19/40
Determining compensiblefactors
Concerns with compensible factorsEvidence suggests that compensation
committees can stereotype jobsPolitical processesManagers argue to increase wages for their
division
Desire to increase average qualifications Powerful divisions of a company may be overpaid
Unit 4, Lecture 1: Compensation Concepts
7/29/2019 3.2- Compensation Concepts
20/40
look like in the market
overall
Unstandardized
Coefficients
Percentage
ImportanceWeight
Control variables
Percent female -.004 ** 9.84%Percent unemployed -.025 ** 23.65%
Percent unionized .006 ** 2.81%
Jobcharacteristics
Physical Demands -0.065 ** 4.11%CognitiveDemands 0.326 ** 56.59%Emotional Labor Demands -0.078 ** 3.01%
Model R 2 0.777 **
Unit 4, Lecture 1: Compensation Concepts
Source: Glomb, T.M., Kammeyer-Mueller, J.D., & Rotundo, M. (2005).Emotional labor and compensating wage differentials.Journal of Applied
Psychology
7/29/2019 3.2- Compensation Concepts
21/40
Distributive justice concepts
Equity: a persons perceptions that they are paidcomparable to individuals in other similar jobs
OS/IS:OO/IO
Example: dollars per hour workedThis is robust across species:
Monkeys and distributive justice
This appears to be robust across cultures: Ancient Israel examples
!Kung people divide their hunt Concepts of justice in Ancient Greece Indian concept of karma is related
Unit 4, Lecture 1: Compensation Concepts
7/29/2019 3.2- Compensation Concepts
22/40
Distributive Justice Concepts:Conceptual Difficulties
Simplest Case
Hours Pay Ratio Result
Chris 8 $80 1 : 1 Fair
Gene 8 $80 1 : 1 Fair
Relatively Simple Case
Hours Pay Ratio Result
Chris 8 $80 1 : 2 Underpaid; reducehours
Gene 4 $80 2 : 1 Overpaid; changecomparitor
Complicated Case # 2
Educ. Pay Ratio Result
Chris 12 yrs. $12/hr 12 : 16 (money) Fair?
Gene 16 yrs. $16/hr 1 : 1 (money & educ.) Fair
Unit 4, Lecture 1: Compensation Concepts
Complicated Case # 1
Hours Pay Production Ratio Result
Chris 8 $80 50 units 6 : 8 (hours) Unfair
Gene 6 $80 50 units 50 : 50 (output) Fair
7/29/2019 3.2- Compensation Concepts
23/40
A Humorous Perspective onDistributive Justice
Unit 4, Lecture 1: Compensation Concepts
7/29/2019 3.2- Compensation Concepts
24/40
External Equity
Comparisons
Unit 4, Lecture 1: Compensation Concepts
Regents Hospital
Dr. Worrell
Nurse DeVoid
Director Clinton
Dr. Collins
internal
internal
internal
Mount Sinai Hospital
St. James Hospital
Dr. Hayes
Dr. Brownexternal
external
i ib i j i d
7/29/2019 3.2- Compensation Concepts
25/40
Distributive justice andcompensation systems
External equity: employeeperceptions that they are paid
comparable to individuals inother similar jobs Results of underpaymentinequity?Results of overpayment
inequity?Unit 4, Lecture 1: Compensation Concepts
i ib i j i d
7/29/2019 3.2- Compensation Concepts
26/40
Distributive justice andcompensation systems
Internal equity: employeeperceptions that they are paid
comparable to individuals inother jobs in the sameorganizationResults of underpaymentinequity?
Results of overpaymentUnit 4, Lecture 1: Compensation Concepts
en ar ng us ce an
7/29/2019 3.2- Compensation Concepts
27/40
en ar ng, us ce, anWages: Implications for Payand Firm Profit
Consider a highly profitable pharmaceuticalcompany like MerckThey need to pay their research scientists a high
wage because they lead directly to firmprofitability and having an above-average base ofscientists is directly related to how profitable theycan be
An accountant at Merck may receive more thanthe market wage simply because the desire tocreate an internally consistent wage policy leadsthe firm to pay everyone commensurate withother above-market wages
Unit 4, Lecture 1: Compensation Concepts
7/29/2019 3.2- Compensation Concepts
28/40
Trends in Wage Dispersion (fromSocial Security data)
Unit 4, Lecture 1: Compensation Concepts
P t ti l E l ti f
7/29/2019 3.2- Compensation Concepts
29/40
Potential Explanations forWage Dispersion
Declines in unionization
Increased need for skilled workers becauseof computerization (as noted earlier)
The service sector tends to generate lowskilled jobs with short duration ofemployment
The increased dispersion is seen both acrossand within organizationsCappelli, Bassi, Katz, Knoke, Osterman, and
Useem, Change at Work, 1997
Unit 4, Lecture 1: Compensation Concepts
7/29/2019 3.2- Compensation Concepts
30/40
Compensation and Internal
Equity I think it is unconscionable when the guy who is the head ofCountrywide and his co-conspirators make huge amounts ofmoney when Americans face the threat of losing their homes.If there's ways we can motivate shareholders and boards ofdirectors to punish these people we should do it. John McCain
I cannot imagine a position more selfish and greedy at a timeof national crisis. So, I would like to speak directly to thoseCEOs right now: Do not make that mistake. The enormousrewards that you've reaped come with serious responsibilitiesto your workers, to your shareholders, to the American people.And we expect and demand that you live up to thoseresponsibilities. Barack Obama
Unit 4, Lecture 1: Compensation Concepts
i h ll
7/29/2019 3.2- Compensation Concepts
31/40
HR in the News: College SportsCoach Salaries
QUESTION- Do coaches deserve such large salaries? EXAMPLE- At least 23 college football coaches now earn $1 million. REASON- The rapid increase of bowl money and television contracts
has powered the escalation in salaries. Is it wrong to pay a coach more than the president of the university? YES!-
Hurts the integrity of the American university. A person coaching football makes more than professors teaching future
doctors and lawyers
NO!- Programs generate lots of money. Must pay coaches top dollar to keep them from going to the NFL. Students and Alumni love athletics. Coaches work many hours and there are intense expectations.
Unit 4, Lecture 1: Compensation Concepts
7/29/2019 3.2- Compensation Concepts
32/40
Compensation and Internal
Equity Why are CEOs popular targets?They have a lot of money and power
Beliefs that markets should be consistent withprinciples of justice and fairness
They are a psychological outgroup Few people personally know CEOs
Their background and life stories are atypical Few people really know quite what they do
Unit 4, Lecture 1: Compensation Concepts
7/29/2019 3.2- Compensation Concepts
33/40
Variations in Job Structure:Executive Compensation
CEO compensation as a
proportion of log annual
salary of factory workers
10
100
1000
1980
1985
1990
1995
2000
From BusinessWeek The average CEO of a
major corporation made42 times the pay of anaverage American factory
worker in 1980. By 2000 the ratio was 458times the typical factoryworkers pay.
This is clearly exponentialgrowth (because the chart
has a log transformationon the outcome axis) Why is this happening?
Unit 4, Lecture 1: Compensation Concepts
Th P C t Vi
7/29/2019 3.2- Compensation Concepts
34/40
Those Poor Corporate VicePresidents
Unit 4, Lecture 1: Compensation Concepts
ompar son o xecu ve
7/29/2019 3.2- Compensation Concepts
35/40
ompar son o xecu veCompensation (not just largecorporations)
0
10
20
30
40
50
60
Brazil
Mexico
Brita
in
Cana
da Italy
Spain
Fran
ce
Taiw
an
Germ
any
SouthKo
rea
Japa
n
CEO
CompensationasaMultipleofLo
westPaidEmployee
Salary
Unit 4, Lecture 1: Compensation Concepts
xecu ve ompensa on n
7/29/2019 3.2- Compensation Concepts
36/40
xecu ve ompensa on nBad Times: An EmployeePerspective
Unit 4, Lecture 1: Compensation Concepts
n e ews:
7/29/2019 3.2- Compensation Concepts
37/40
n e ews:Shareholders Perspective onInternal Inequity
Proposal- Limit the Chiefs pay at seven companies to a figure that is100 times that of the average worker. Proposed by- Daniel J. Steininger, chairman of the Catholic Funds, a $30
million fund company
Idea- Shareholders be allowed to vote on the compensation
If the C.E.O. is making more than 100 times the salary of the averageworker, then the C.E.O. must be able to justify this salary.
"We're trying to get at the notion of economic injustice in what theC.E.O. is making compared to the average worker," he said.
Similar proposals are before congress currently
Unit 4, Lecture 1: Compensation Concepts
7/29/2019 3.2- Compensation Concepts
38/40
Who Sticks up for CEO Pay?
Compensation analysts and someeconomists argue Fairness and efficiency are sometimes opposed
Some economists (e.g., Kevin Murphy) even arguethat CEO pay is insufficientto serve as amotivator
Murphy also has argued that regulating CEO pay
seldom works because they find other waysaround the system
CEOs manage an enormous amount of financialrisk and most compensation is based directly onfirm value
Determinin how much is enou h becomesUnit 4, Lecture 1: Compensation Concepts
Tournament Theory and
7/29/2019 3.2- Compensation Concepts
39/40
Tournament Theory andCEO Pay
Top executives earn extraordinary wagepremiums at the expense of other executivesReaching the CEO post is like winning the
Superbowl or the Masters Golf TournamentThe huge incentive to come in first (and the fact
that second place is the first loser in a very realsense) means that everyone works extremelyhard to get the job
Ongoing competition keeps a constant threat onthe CEO, who constantly risks being knocked offthe top post
Lazear, Personnel Economics, 1998Unit 4, Lecture 1: Compensation Concepts
7/29/2019 3.2- Compensation Concepts
40/40
Wrap Up
Where we are Understand the basics of organizational socialization Understand performance appraisal processes
Where we want to be Understand some of the basic ideas underlying
compensation plans
How we know how were doing What is the Fair Labor Standards Act and how does it apply
to compensation? How does justice factor into the compensation system? How can we figure out how much a job should be paid?
U it 4 L t 1 C ti C t
Top Related