EMPLOYEE

COMPENSATION
 Determining Pay Rates

 Employee compensation
– All forms of pay or rewards going to employees
and arising from their employment.

 Direct financial payments

– Pay in the form of wages, salaries, incentives,
commissions, and bonuses.

 Indirect financial payments

– Pay in the form of financial benefits such as
insurance.
 Corporate Policies, Competitive
Strategy, and Compensation
 Aligned reward strategy
– The employer’s basic task is to create a bundle of
rewards—a total reward package—specifically
aimed at eliciting the employee behaviors the firm
needs to support and achieve its competitive
strategy.

– The HR or compensation manager will write the

policies in conjunction with top management, in a
manner such that the policies are consistent with
the firm’s strategic aims.
 Compensation Policy Issues
 Pay for performance
 Pay for seniority
 Pay for skill / competency
 Salary increases and promotions
 Overtime and shift pay
 Probationary pay
 Paid and unpaid leaves
 Paid holidays
 Salary compression
 Geographic costs of living differences
 Compensation Policy Issues

 Salary compression
– A salary inequity problem, generally caused by
inflation, resulting in longer-term employees in a
position earning less than workers entering the
firm today.
 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.
 Forms of Equity
 External equity
– How a job’s pay rate in one company compares to the job’s
pay rate in other companies.

 Internal equity
– How fair the job’s pay rate is, when compared to other jobs
within the same company

 Individual equity
– How fair an individual’s 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.
 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.
Pricing Managerial and Professional Jobs
 Compensating managers
– Base pay: fixed salary, guaranteed bonuses.

– Short-term incentives: cash or stock bonuses

– Long-term incentives: stock options

– Executive benefits and perks: retirement plans, life

insurance, and health insurance.
 Competency/Skill-based Pay

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

 Competencies
– Demonstrable characteristics of a person,
including knowledge, skills, and behaviors, that
enable performance.
 Competency/Skill-based Pay
 Pay levels are based on how many skills employees
have or how many jobs they can do. It is sometimes called
knowledge-based pay.
 From management’s perspective, benefits are:
o Filling staffing needs is easier (interchangeable).
o Facilitates communication across the organization
due to better understanding of others’ jobs.
o It lessens dysfunctional “protection of territory”
behavior.
o It helps meet the needs of ambitious employees
who confront minimal advancement opportunities.
 Skill-based pay may also have equity implications;
employees will make their input-outcome comparisons.
 Flexible Benefits

The idea is to allow each employee to choose a

benefit package that is individually tailored to
his/her own needs and situation.
 Flexible Benefits
There are three basic types of programs:
 Core-plus Plans:
A core of essential benefits and a menu-like
selection of other benefit options.
 Modular Plans:
Pre-designed benefits packages for specific groups
of employees.
 Flexible Spending Plans:
Employees set aside a specific dollar amount for
benefits tax-free and draw against the account for
medical and dental services as needed.
 Compensation as a Motivator
There are many work motivators, including:

• Promotions
• Desirable work assignments
• Peer recognition
• Work freedom
 Rewards Review
Intrinsic Extrinsic

Financial Non-financial
participation in
decision making

Performance Implied Explicit assigned

greater job based membership-based membership-based parking space
freedom
preferred
cost of living protection
more bonuses assignments
increase Program
responsibility
business
labor market pay for time
opportunities piecework cards
adjustment not worked
for growth
own
services/
diversity commission profit sharing secretary
perks
of activities
impressive
incentive time-in-rank title
plans increase

merit pay
plans
 Types of Reward Plans
Intrinsic Rewards Vs. Extrinsic Rewards
Intrinsic rewards (personal satisfactions) come from the
job itself, such as:
• pride in one’s work
• feelings of accomplishment
• being part of a work team

Extrinsic rewards come from a source outside the job,

mainly by management:

• money
• promotions
• benefits
 Types of Reward Plans
Financial Rewards Vs. Nonfinancial Rewards
Financial rewards:
• wages
• bonuses
• profit sharing
• pension plans
• paid leaves
• purchase discounts

Nonfinancial rewards:
make life on the job more attractive; employees vary
greatly on what types they like
 Types of Reward Plans
Performance-based Vs. Membership-based
• Performance-based rewards are tied to specific job
performance criteria
– commissions
– piecework pay plans
– incentive systems
– group bonuses
– merit pay

• Membership-based rewards such as cost-of-living

increases, benefits, and salary increases are offered
to all employees
 Special Cases of Compensation
Team-Based Compensation

• Incentives for empowered work teams to exceed

established goals and share equally in rewards

• It depends on:

clarity of team purpose and goals

ability of the team to obtain needed resources
effective team communication skills and trust
 Executive Compensation Programs
Supplemental Nonfinancial Compensation Perquisites
club
memberships paid life insurance
free financial, legal
and tax counseling
supplemental
retirement accounts

interest-
free loans
perks may postretirement
include consulting contracts

mortgage
assistance
expense accounts

company cars supplemental

disability isurance