Chap 11: RETURN AND RISK

I. MAIN DECISION AREAS AND CONCEPTS IN EMPLOYEE

COMPENSATION MANAGEMENT:
- Pay has a large impact on employee attitudes and behaviors.
- Policies having to do with wages, salaries, and other earnings affect their overall income
and thus their standard of living. Both the level of pay and its seeming fairness compared
with others’ pay are important.
- Total compensation, as noted, consists of cash compensation and benefits.
- Salary level decisions can be broken into two areas: pay structure and individual pay
o Pay structure: which in turn entails a consideration of pay level and job
structure.
o Pay level: the average pay (including wages, salaries, and bonuses) of jobs in an
organization.

II. EQUITY THEORY AND FAIRNESS

- Equity theory suggests that people evaluate the fairness of their situations by comparing
them with those of other people.
- Equity theory’s main implication for managing employee compensation is that, to an
important extent, employees evaluate their pay by comparing it with what others get paid,
and their work attitudes and behaviors are influenced by such comparisons and another
implication is that employee perceptions are what determine their evaluation.
- Two types of employee social comparisons of pay are especially relevant in making pay
level and job structure decisions:
o External equity pay comparisons focus on what employees in other organizations
are paid for doing the same general job
o Internal equity pay comparisons focus on what employees within the same
organization, but in different jobs, are paid.

III. DEVELOPING PAY LEVELS

1. MARKET PRESSURES
- Product market competition: An organization that has higher labor costs than its product
market competitors will have to charge higher average prices for products of similar
quality. Product market competition places an upper bound on labor costs and
compensation.
- Labor market competition: eflects the number of workers available relative to the
number of jobs available. Shortages and surpluses influence pay levels.
2. EMPLOYEES AS A RESOURCE
- Because organizations have to compete in the labor market, they should consider their
employees not just as a cost but also as a resource in which the organization has invested
and from which it expects valuable returns.8 Although controlling costs directly affects
an organization’s ability to compete in the product market, the organization’s competitive
position can be compromised if costs are kept low at the expense of employee
productivity and quality

3. DECIDING WHAT TO PAY

- Although organizations face important external labor and product market pressures in
setting their pay levels, a range of discretion remains.9 How large the range is depends on
the particular competitive environment the organization faces.

4. MARKET PAY SURVEYS

- To compete for talent, organizations use benchmarking, a procedure in which an
organization compares its own practices against those of the competition

5. DEVELOPING A JOB STRUCTURE:

- Job evaluation: A job evaluation system is composed of compensable factors and a
weighting scheme based on the importance of each compensable factor to the
organization provides basic descriptive information on job attributes, and the job
evaluation process that assigns values to these compensable factors.
- The point factor system: job evaluators often apply a weighting scheme to account for the
differing importance of the compensable factors to the organization.

6. DEVELOPING A PAY STRUCTURE:

- At least three pay-setting approaches, which differ according to their relative emphasis on
external or internal comparisons, can be identified:using market survey data, using the
pay policy line, and using pay grades.

7. THE IMPORTANCE OF COMPETITIVE LABOR MARKET AND PRODUCT

MARKET FORCES IN COMPENSATION DECISIONS:
- Suggests that the relative worth of jobs is quite similar overall, whether based on job
evaluation or pay survey data. The marketing VP job may receive the same number of job
evaluation points, but market survey data may indicate that it typically pays less than the
information technology VP job, perhaps because of tighter supply for the latter.