Components of a Total Compensation Program External Environment/Internal Environment

Internal Factors

Compensation policy of Organization

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

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

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.

Worth of a Job

Establishing the internal wage relationship among jobs and skill levels. Organizations without a formal compensation program generally base the worth of jobs on the subjective opinions of people familiar with the jobs. In such instances, pay rates may be influenced heavily by the labor market or, in the case of unionized employers, by collective bargaining. Organizations with formal compensation programs, however, are more likely to rely on a system of job evaluation. Even when rates are subject to collective bargaining, job evaluation can assist the organization in maintaining some degree of control over its wage structure.

The Wage Curve

Wage Curve - A curve in a scattergram representing the relationship between relative worth of jobs and wage rates. Pay Grades - Groups of jobs within a particular class that are paid the same rate. Rate Ranges

- A range of rates for each pay grade that may be the same for each grade or proportionately greater for each successive grade.
Red Circle Rates - Payment rates above the maximum of the pay range.

Employees Relative Worth

Rewarding individual employee performance. In both hourly and salary jobs, employee performance can be recognized and rewarded through promotion and with various incentive systems. Superior performance can also rewarded by granting merit raises on the basis of steps within a rate range establish for a job class. If merit raises are to have their intended value, however, they must be determined by an effective performance appraisal system that differentiates between employees who deserve the raises and those who do "not. This system, moreover, must provide a visible and credible relationship between performance and any raises received.

Employers Ability-to-Pay

Having the resources and profits to pay employees Pay levels are limited by earned profits and other financial resources available to employers. Thus an organization's ability to pay is determined in part by the productivity of its employees.

Economic conditions and competition faced by employers can also significantly affect the rates they are able to pay.
Competition and recessions can force prices down and reduce the income from which compensation payments are derived. In such situations, employers have little choice but to reduce wages and/or lay off employees, or, even worse, to go out of business.

External Factors

Labor Market Conditions

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

LArea Wage Rates

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

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.

Collective Bargaining

One of the primary functions of a labor union, is to bargain collectively over conditions of employment, the most important of which is compensation. The union's goal in each new agreement is to achieve increases in real wage increase by improving the purchasing power and standard of living of its members

Legal Requirements

Payment of Wage Act (1936)

The Minimum Wages Ordinance (1961) West Pakistan Minimum Wages Ordinance for Unskilled Workers (1969)

The Factories Act (1934)

Forms of Equity

1. 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

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

3. External equity
How a jobs pay rate in one company compares to the jobs pay rate in other companies. 4. .

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

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)

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

Comparable salary for work performed by workers of similar jobs in other firms.

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.

Virtuous and Vicious Circles

Organization Performance INCREASES Increased PerformanceBased Pay

Virtuous Circle
Risk/Return BALANCE Increased Employee Performance

Vicious Circle

Organization Performance DECREASES Risk/Return IMBALANCE

Decreased PerformanceBased Pay

Decreased Employee Performance