Money value and meaning in organizational context Money influence on organizational behaviour Goals and basic principles in compensation Key questions on compensation Elements that integrate compensation Indirect compensation


Management of information
Critical analysis

On successful completion of this class, students will be able to: Locate compensation in the global human resources management system Reflect effects compensation has over other organizational variables Analyze the components of a compensation system and know how to use them Reflect the link between compensation and employee

Problem Solving
Open problems

Group Working
Team and group working

Learning Resources
Self-evaluation Critical analysis Respond to feedback Autonomy Self critical

Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved.

6.1. Goals and basic principles 6.2. Key questions in compensation systems 6.3. Elements of compensation 6.4. Indirect compensation or benefit

We understand compensation as all the financial returns, tangible services and benefits that receive employees in the organization (Milkovich y Newman, 2002).

Gomez-Mejía, L.R., Balkin, D.B. and Cardy, R.L (2004). Managing Human Resources. International Edition. Pearson, Prentice-Hall. Noe, R., Hollenbeck, J., Gerhart, B., and Wright, P.(2002), Human Resource Management, McGraw Hill


1. Goals and basic principles
Importance of compensation systems (Claver, 1995): Influence over organizational efficacy Important cost from the total costs Source of Problems

Different approaches

Firms: the most quality and quantity and the less cost

Employees will try to get more compensation

1. Goals and basic principles
Reward Management Criteria
1. Equity: internal vs external 2. Compensation: fix vs variable 3. Individual performance vs group 4. Retribution based on position vs performance 5. Elitism vs equality 6. Salary over or below market 7. Financial vs non financial remuneration 8. Public vs secret remuneration 9. Centralised decisions vs decentralised

2. Key questions in compensation systems
Compensation influence behaviours to get the strategy (Lawler, 1995). Conditions (Armstrong, 1995):
1. 2. 3. 4. 5. Policies and retribution fit. Support key values in organisation Fit culture and managers styles. Manage and say explicit behaviours that want the organisation. Must attract and retain employees.


2. Key questions in compensation systems
Firm models concerning compensation
Gomez Mejía (1992) Algorithmic model Based on position Behaviour control Seniority Experimental model Based on performance Results control Present and future skills

How to develop a compensation system?
1. 2. Job description. Job Analysis 3. Job specification. 4. Determination of the relative worth of each position through a process established before

5. Hierarchical of positions. 6. Position classification by levels

External Equity

2. Final establishment of a Compensation system.

1. Check market value through reference points or key positions

Individual salary assignment.

Criteria to establish compensation inside the compensation interval of each position: experience, seniority, performance

2. Key questions in compensation systems
Conditionings of the compensation system
The labour market The state Unions Technological changes Internal factors


3. Components of compensation
Total retribution

Basic Salary

Salaries incentives /Variable

Indirect compensation


3. Components of compensation
Others Rewards x job Vacations, retirement, …

Rewards x service

Extra hours, …

Rewards x effort

Seniority raise

Fitting salaries (level of life) Rewards x performance Basic Salary (internal-position and external-market) Rewards in benefits

Source: Adpated from Davis, 1972 (cited in Chiavenato, 1988)

3. Components of compensation
Six myths about salary by Pfeffer
(Harvard Business Review, Remuneration and incentive systems, p. 163-164, Deusto ed.) 1. Price of work and labour costs are the same 2. If prices of work are reduced labour costs are also reduced 3. Labour costs are an important percentage of total costs in a firm 4. Keep labour costs low creates a potent and sustenaible competitive advantage 5. Salaries rewards/Incentives improve outcomes 6. People work, mainly, by money


Compensation in Travel Agency Geisha, SL?
1. Incorporation, compensation varies considering four aspects: • Individual characteristics of employee (experience, skills and aptitudes) • Tasks and functions to develop • Market situation in the moment of hiring • And competency (number of valid candidates to the position) 2. Periodical negotiation during staying in the firm. It is searched the continue improvement considering: • Constant improvement from a qualitative and quantitative point of view • Level of responsibility • Profitability of position for the firm • Results balance of the department or business unit • Results balance of the firm

Compensation in Travel Agency Geisha, SL?
Negotiation can be followed by a salary over labour agreement Negotiation from agencies labour agreement: 16 monthly in 16, 14, or 12 payments depending the firm. In Gheisa Travel Agency there are 12 monthly, so the other 4 are paid inside each month. Salary are composed by the next concepts: basic salary, 4 payments divided by twelve months, and transport plus.

Example of salaries in four positions Compensation Questionnaire 2004 PriceWaterhouseCoopers
Minimum Maximum

Puesto Director General

General manager Marketing Manager HR Manager

Director de Marketing

Director de RRHH

Técnico de RRHH

HR Technician

Concepto Retribución fija Fixed salary R. Variable a corto plazo Variable salary Total salary R. Total 2 Retribución fija Fixed salary R. Variable a corto plazo Variable salary Total salary R. Total 2 Retribución fija Fixed salary R. Variable a corto plazo Variable salary Total salary R. Total 2 Retribución fija Fixed salary Variable salary R. Variable a corto plazo Total salary R. Total 2

Q1 100.670 22.560 117.201 64.345 8.942 73.353 68.100 6.340 76.450 23.000 1.128 24.123

Q2 134.125 43.540 163.147 86.135 16.494 99.850 87.410 12.530 98.790 27.221 2.222 29.878

Q3 198.624 84.530 267.937 110.175 22.813 128.120 104.560 18.730 125.125 31.112 3.878 34.430


Salary examples in the tourism sector Agreement in Valencia
4 and 5 stars hotels (year 2001, in pts.)
Basic Salary Compensation levels Monthly salary 143.007 137.711 129.765 124.467 117.448 79.444 126.218 Extras Hours
Holiday day

First Second Third Fourth Fifth Sixth Waiter rooms

1.692 1.633 1.535 1.479 1.393 1.496

12.535 12.073 11.363 10.916 10.293 11.294

Compensating performance
Merit Pay (Campbell, Campbell y Chia, 1998). Problems: Weak measures of performance Low acceptation of the feedback from supervisor Limited desire of merit reward: not attractive for employee Merit links disperse: time delayed Potential consequences not voluntaries: focus on activities

Compensating performance
Higher flexibility Armstrong (1995)
Increasing variable proportion based on performance Avoid rigid hierarchical structures Introduce payment systems that reward employees that gain skills and competencies Do not use mechanical systems to calculate the performance payment Relate compensation increasing with merit and with market data, avoiding reward the same to all Let employees a higher election of benefits to receive (Cafeteria Benefits). Admit quick responses to problems caused by the scarcity of resources and by market worth pressure, and the flexibility of the way to arrive to an agreement in a proper way.


Compensating performance
Consider… (Baron y Kreps, 1999):
Loose efficacy if the employee can control the outcomes not in the planned way It has the value of the following and sorting of the employee tasks It focus in the desired behaviours Groupal rewards: free-rider problem

Compensating performance
Lower probability to be effective (Baron y Kreps, 1999):

The more complex the technology The more ambiguity in tasks The more focus in cooperativism in organization culture The more the strategy focus on quality or innovation The more the link between inputs and outputs is diffuse The more the trust in intrinsic motivation The more the perception on inequity The more the culture is against monetary differences

Compensating performance
Trends in performance compensation
Tower Perrins study, 50 large companies in the Spanish economy: The Spanish companies will tend more to increase the differences in compensation, rating 70% as something preference in the HR strategies
Stimulate and retain the best (70%) Improve the internal equity (16%) Managers loyalty (15%) Improve competitiveness (13%) Focus on “understanding individually”

1. 2. 3. 4. 5.

In the next three years
1. 2. 3. 4. 5. 6. 7.

Increase differences in performance compensation (12%) Increase the number of employees participating in variable compensation plans Modify the professional classification and job analysis (33%) Increase the team goals value over the individual (33%) Introduce different compensation structures for different groups (33%) Introduce individual increasing by individual merit or performance (30%) Increase the managers responsibility over compensation systems (30%)


4. Benefits
Why do not give the money directly to the employee? The low cost of many employees Effects in behaviour and quality of employees Fiscal advantages Impact on productivity
Attract and retain the best Motivation

Toward a more symbolic interaction with organisation

4. Benefits
Company services toward the employee. Affect in many cases also to the employee's family.
Advantages for the company More employee's motivation Reduce absenteeism and rotation Higher loyalty Higher wellbeing Facilitate recruitment and retention Higher productivity Show the company culture Advantages for the employee Offer assistance to solve personal problems Increase job satisfaction Contribute to the personal development and wellbeing Offer means to improve social relationships Reduce insecure feelings Offer an extra compensation Reduce dissatisfaction causes

4. Benefits

Benefits related with health Benefits related with wellbeing in the position and organization Benefits in education and information Benefits in economic affairs Benefits in recreation Case of cafeteria benefits