CHAPTER 11

COMPENSATION

PowerPoint Presentation by Charlie Cook

Copyright © 2002 South-Western. All rights reserved
 The Importance of Compensation

• Impacts an employer’s ability to attract and retain

employees.
• Ensure optimal levels of employee performance in
meeting the organization’s strategic objectives.
• Compensation’s components
– Direct compensation in the form of wages or salary
• Base pay (hourly, weekly, and monthly)
• Incentives (sales bonuses and or commissions)
– Indirect compensation in the form of benefits
• Legally required benefits (e.g., Social Security)
• Optional (e.g., group health benefits)

Copyright © 2002 South-Western. All rights reserved. 11–2

Copyright © 2002 South-Western. All rights reserved. 11–3
 Equity Theory

• Internal equity
– Fairness of pay differentials between different jobs in the
organization can be established by job ranking, job
classification, point systems and factor comparisons.
• External equity
– Fairness of organizational compensation levels relative to
external compensation is assessed by collecting wage and
salary information to guide in setting the organization’s pay
strategy to lead, meet or lag labor market wages.

Copyright © 2002 South-Western. All rights reserved. 11–4

 Equity Theory (cont’d)

• Individual Equity
– Fairness about pay differentials among individuals who hold
the same job in the organization is established by using:
• Seniority-based pay systems that reward longevity with the
organization.
• Merit-based pay systems that reward employee performance.
• Incentive plans that allow employees to receive part of their
compensation based on their job performance.
• Skills-based pay systems where compensation is based on
employees possessing skills that the firm values.
• Team-based pay plans that encourage cooperation and
flexibility in employees.

Copyright © 2002 South-Western. All rights reserved. 11–5

 Equity Theory (cont’d)

Copyright © 2002 South-Western. All rights reserved. 11–6

 Equity Theory (cont’d)

Copyright © 2002 South-Western. All rights reserved. 11–7

Copyright © 2002 South-Western. All rights reserved. 11–8
 Job Evaluation: Point System Method

Copyright © 2002 South-Western. All rights reserved. 11–9

 Five Levels of the Compensable Factor “Technical Skills”

Copyright © 2002 South-Western. All rights reserved. 11–10

Copyright © 2002 South-Western. All rights reserved. 11–11
 Job Evaluation Methods

Copyright © 2002 South-Western. All rights reserved. 11–12

 Legal Issues in Compensation

• Title VII of Civil Rights Act of 1964

– Protects workers rights to fair treatment.
• Equal Pay Act of 1963
– Requires equal pay for equal work.
• Comparable Worth
– Argues that standards of equal pay for equal work should be
replaced with the doctrine of equal pay for equal value.
– Objective, measurable data to support an assessment of the
value of different jobs is lacking.
– There is no basis in current law for the arguments of
comparable worth.
Copyright © 2002 South-Western. All rights reserved. 11–13
 Legal Issues in Compensation (cont’d)

• Fair Labor Standards

Act of 1938
– Regulates the minimum
wage
– Sets overtime policy (time
and one-half after forty
hours)
– Establishes exempt
classes for managers and
other professional
employees.

Copyright © 2002 South-Western. All rights reserved. 11–14

 Key Strategic Issues in Compensation

• Determining compensation relative to the market.

• Striking a balance between fixed and variable
compensation.
• Deciding whether or not to utilize team-based
versus individual pay.
• Creating the appropriate mix of financial and non-
financial compensation.
• Developing a cost-effective compensation program
that results in high performance.

Copyright © 2002 South-Western. All rights reserved. 11–15

 Reading 11.1: Compensating Teams

• Reasons for tailoring compensation to individuals:

– Motivation comes from within the individual as opposed to the
group.
– The development of skills and behaviors is an individual
undertaking.
– Fairness in dealing with teams does not mean equal pay for
all.
– Team compensation is not a payoff but a means of nurturing
behavior that benefits the team.

Copyright © 2002 South-Western. All rights reserved. 11–16

 Reading 11.2:
New Thinking for the New Millennium

• Strategic approaches to may compensation (pay)

systems more responsive:
– Pay the person for individual worth (knowledge, skills and
competencies) rather than for the value of a job they perform.
– Reward excellence through a pay for performance
compensation that establishes a clear relationship between a
significant amount of pay and attainment of organizational
objectives.
– Individualize the pay system to give employees choices in
how they are rewarded and what reward they receive.

Copyright © 2002 South-Western. All rights reserved. 11–17