You are on page 1of 44

Strategic Compensation

Chapter # 4 , 5 & 6

Human Resource
Societal Strategies Corporate Affecting Compensation Business Decision Making Functional
Governmental Decisions Organizational Management Decisions Function Level Decisions


Total Compensation

Direct Wages / Salaries Commissions Bonuses Gainsharing

Vacations Breaks Holidays

Time Not Worked

Insurance Plans
Medical Dental Life

Security Plans

Employee Services
Educational assistance Recreational programs

What Is the Strategic Compensation Perspective?

The strategic perspective involves thinking about how pay can assist in achieving organization success.

The Relationship between Business Unit Strategy to Compensation Goals

Strategy A fundamental pattern of present and past deployments and environmental interactions that indicates how an organization will achieve its objectives.

Compensation Goals Attract,

Retain, Motivate and Develop the Human Resources necessary to accomplish the Organization's goals

HR Strategy Acquiring the Quantity

and Quality of human resources the possess the necessary knowledge, skills and abilities within relevant time constraints, to achieve organization goals

Compensation Strategy Decisions

to Environmental Threats and Opportunities and linked or at least support the overall direction of the organization

Compensation Management and Other HRM Functions

Aid or impair recruitment


Supply of applicants affects wage rates Selection standards affect level of pay required Increased knowledge leads to higher pay A basis for determining employees rate of pay Pay rates determined through negotiation

Pay rates affect selectivity

Selection Training and Development Compensation Management Labor Relations

Pay can motivate training Training and development may lead to higher pay Low pay encourages unionization

Common Strategic Compensation Goals

1. To reward employees past performance 2. To remain competitive in the labor market 3. To maintain salary equity among employees 4. To mesh employees future performance with organizational goals 5. To control the compensation budget 6. To attract new employees 7. To reduce unnecessary turnover & motivate employees

Compensation System

Key Strategic Issues in Compensation

 Determining compensation relative to market  Balance between fixed and variable compensation  Deciding whether or not to utilize team-based versus individual pay  Creating appropriate mix of financial and non-financial compensation  Developing a cost-effective compensation program resulting in high performance

Compensation Policy Issues


Pay for performance Pay for seniority Salary increases and promotions Overtime and shift pay Probationary pay Paid and unpaid leaves Paid holidays Salary compression Geographic costs of living differences

Forms of Equity

External equity
How a jobs pay rate in one company compares to the jobs pay rate in other companies.


Internal equity
How fair the jobs pay rate is, when compared to other jobs within the same company

Individual equity
How fair an individuals pay as compared with what his or her co-workers are earning for the same or very similar jobs within the company.

Procedural equity
The perceived fairness of the process and procedures to make decisions regarding the allocation of pay.

Equity Theory

Equity and Its Impact on Pay Rates

The equity theory of motivation

- States that if a person perceives an inequity, the person will be motivated to reduce or eliminate the tension and perceived inequity.

Expectancy Theory and Pay

 Expectancy Theory
A theory of motivation that holds that employees should exert greater work effort if they have reason to expect that it will result in a reward that they value. Employees also must believe that good performance is valued by their employer and will result in their receiving the expected reward.

Perceived Equity of a Pay Structure

MY PAY My qualifications My work performed My product value

OTHERS PAY Their qualifications Their work performed Their product value

Relationship between Pay Equity and Motivation

50 45 40 35 30 25 20 15 10 5 0 I nequity Equity I nequity My I nput/ Output Ratio Comparison Person's I nput/ Output Ratio

(Feeling of Being Underpaid)

(Feeling of Being Paid Fairly)

(Feeling of Being Overpaid)

Relationship between Pay Equity and Motivation

Doing More and Receiving Less

Doing the Same and Receiving the Same

Doing Less and Receiving More

The greater the perceived disparity between my input/output ratio and the comparison persons input/output ratio, the greater the motivation to reduce the inequity.

Individual Equity

 Fairness about pay differentials among individuals in same job  Established by using
- Seniority-based pay systems: Reward longevity - Merit-based pay systems: Reward employee performance - Incentive plans: Employees receive part of compensation based on performance - Skills-based pay systems: Compensation based on employees possessing skills that firm values - Team-based pay plans: Encourage cooperation and flexibility

Internal Equity

 Fairness of pay differentials between different jobs in organization  Established by job ranking, job classification, point systems or factor comparisons (job evaluation)

Internal alignment, often called internal equity, refers to the pay relationships between the jobs / skills / competencies within a single organization. The relationships form a pay structure that can support the workflow, is fair to workflow, employees, employees, and directs their behavior toward organization objectives.

External Equity

 Fairness of organizational compensation levels relative to external compensation  Assessed by collecting wage and salary survey information to guide in setting organizations pay strategy to lead, meet, or lag labor market wages

External Equity

 Lag policy
- Lower wages than competitors, compensates employees through other means - Opportunity for advancement - Incentive plans - Good location - Good working conditions - Employment security

 Market policy
- Wages equal to competitors - Neutralizes pay as factor

 Lead policy
- Higher wages than competitors to ensure organization becomes employer of choice

Methods to Address Equity Issues

 Salary surveys
- To monitor and maintain external equity.

 Job analysis and job evaluation

- To maintain internal equity,

 Performance appraisal and incentive pay

- To maintain individual equity.

 Communications, grievance mechanisms, and employees participation

- To help ensure that employees view the pay process as transparent and fair.

What Is Competency-based Pay?

Competency-based pay
Where the company pays for the employees range, depth, and types of skills and knowledge, rather than for the job title he or she holds.

Demonstrable characteristics of a person, including knowledge, skills, and behaviors, that enable performance.

Strategic Compensation Policy Concerns

1. The rate of pay within the organization and whether it is to be above, below, or at the prevailing community rate. 2. The ability of the pay program to gain employee acceptance while motivating employees to perform to the best of their abilities. 3. The pay level at which employees may be recruited and the pay differential between new and more senior employees. 4. The intervals at which pay raises are to be granted and the extent to which merit and/or seniority will influence the raises. 5. The pay levels needed to facilitate the achievement of a sound financial position in relation to the products or services offered.

Compensating Teams

 Management often overlooks powerful intrinsic rewards that come from

- Team participation - Being part of corporate decisionmaking process

 Let team decide who gets what from awards basket

The Pay-for-Performance Standard

 Pay-for-Performance Standard
The standard by which managers tie compensation to employee effort and performance. Refers to a wide range of compensation options, including meritbased pay, bonuses, salary commissions, job and pay banding, team/ group incentives, and various gainsharing programs.

The Bases for Compensation

 Hourly Work
- Work paid on an hourly basis.

- Work paid according to the number of units produced.

 Salary Workers
- Employees whose compensation is computed on the basis of weekly, biweekly, or monthly pay periods.

The Wage MixInternal Factors

 Employers Compensation Strategy

- Setting organization compensation policy to lead, lag, or match competitors pay.

 Worth of a Job
- Establishing the internal wage relationship among jobs and skill levels.

 Employees Relative Worth

- Rewarding individual employee performance

 Employers Ability-to-Pay
- Having the resources and profits to pay employees.

The Wage MixExternal Factors

 Labor Market Conditions

Availability and quality of potential employees is affected by economic conditions, government regulations and policies, and the presence of unions.

 Area Wage Rates

A firms formal wage structure of rates is influenced by those being paid by other area employers for comparable jobs.

The Wage MixExternal Factors

 Cost of Living
Local housing and environmental conditions can cause wide variations in the cost of living for employees. Inflation can require that compensation rates be adjusted upward periodically to help employees maintain their purchasing power.

The Wage MixExternal Factors

 Collective Bargaining
Escalator clauses in labor agreements provide for quarterly upward cost-ofliving wage adjustments for inflation to protect employees purchasing power. Unions bargain for real wage increases that raise the standard of living for their members. Real wages are increases larger than rises in the consumer price index; that is, the real earning power of wages.

The Wage Curve

 Wage Curve
A curve in a scattergram representing the relationship between relative worth of jobs and wage rates. Groups of jobs within a particular class that are paid the same rate. A range of rates for each pay grade that may be the same for each grade or proportionately greater for each successive grade. Payment rates above the maximum of the pay range.

 Pay Grades

 Rate Ranges

 Red Circle Rates


Wage Structure with Increasing Rate Ranges

The Wage Curve (contd)

 Competence-based Pay, (also skill-based pay or knowledge-based pay)

- Compensation for the different skills or increased knowledge employees possess rather than for the job they hold in a designated job category. - Greater productivity, increased employee learning and commitment to work, improved staffing flexibility to meet production or service demands, and the reduced effects of absenteeism and turnover,

- Collapses many traditional salary grades into a few wide salary bands.

Motivating Employees through Compensation

 Pay Secrecy
- An organizational policy prohibiting employees from revealing their compensation information to anyone. - Creates misperceptions and distrust of compensation fairness and payfor-performance standards. - Arguments against secrecy: - Knowledge of base pay is the strongest predictor of pay satisfaction, which is highly associated with work engagement - Knowledge of base pay more strongly predicts pay satisfaction than does the actual amount of pay received by employees.

Virtuous and Vicious Circles

Organization Performance INCREASES

Increased PerformancePerformanceBased Pay

Virtuous Circle
Risk/Return BALANCE Increased Employee Performance

Organization Performance DECREASES

Decreased PerformancePerformanceBased Pay

Vicious Circle
Risk/Return IMBALANCE Decreased Employee Performance

Framework for Analyzing Different Deals

HIGH PAY LOW COMMITMENT Hired Guns (Stockbrokers)

HIGH PAY HIGH COMMITMENT Cult - like (Microsoft)


LOW PAY LOW COMMITMENT Workers as Commodity (Employers of Migrant Farm Workers)





Pay structure, refers to the array of pay rates for different work or skills within a single organization. The number of levels, differentials in pay between the levels, and the criteria used to determine those differences create the structure.

Consequences of an Internally Aligned Structure

Undertake training Increase experience

Pay structure

Reduce turnover Facilitate career progression Facilitate performance Reduce pay-related paygrievances Reduce pay-related work paystoppages

Internal Consistency: Engineering Job Structure

Entry Level

Engineer: Limited use of basic principles. Close supervision. Senior Engineer: Full use of standard principles and concepts. Under general supervision. Systems Engineer: Wide applications of principles and concepts, plus working knowledge of other related disciplines. Under very general direction. Lead Engineer: Applies extensive knowledge as a generalist or specialist. Exercises wide latitude. Advisor Engineer: Applies advanced principles, theories, and concepts. Assignments often self-initiated. self-

Recognized Authority

Consultant Engineer: Exhibits an exceptional degree of ingenuity, creativity, and resourcefulness. Acts independently to uncover and resolve operational problems.

Which Structure has the Greatest Impact on Performance? On Fairness?

Structure A Layered
Chief Engineer Engineering Manager Consulting Engineer Senior Lead Engineer Lead Engineer Senior Engineer Engineer Engineer Trainee

Structure B DeDe-layered
Chief Engineer

Consulting Engineer

Associate Engineer

Pay Mix Policy Alternatives

Performance - Driven Benefits 17% Options 4% Options 16% Bonus 17% Work - Life Balance Security (Commitment) Benefits 20% Base 50% Base 80% Options 10% Bonus 10% Base 50% Bonus 6% Base 70% Market Match Benefits 20%

Benefits 30%