Book -Chapter 1

The Pay Model

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 Learning Objectives
• Compensation - Definition
• Forms of pay
• A pay model

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 Perspectives of Compensation

Society’s Stockholders’
Views Views

Employees’ Managers’
Views Views

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may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 
 Perspectives of Compensation
• Society
• Considers pay as a measure of justice
• Job benefits- Reflection of justice in society
• Stockholders
• Using stock to pay employees creates a sense of
ownership
• Linking executive pay to company performance
increases stockholders' returns

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may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 
 Perspectives of Compensation
• Managers
• Major expense
• Can be used to:
• Influence employee behaviors
• Improve organizational performance
• Employees
• Major source of financial security
• Entitlement for being an employee of the
company
• Reward for a job well done
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 Incentive and Sorting Effects of Pay on
Employers’ Behaviors
• Pay affects motivational intensity, direction,
and persistence
• Incentive effect: Degree to which pay influences
individual and aggregate motivation
• Sorting effect: Effect that pay can have on the
composition of the workforce
• How an organization pays, can result in sorting effects

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may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 
 What is Compensation?
• All forms of financial returns and tangible
services and benefits employees receive as
part of an employment relationship

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may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 
 Forms of Pay
• Total compensation
• Pay received directly as cash and indirectly as
benefits
• Relational returns
• Are psychological

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may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 
 Exhibit 1.4 - Total Returns for Work

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may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 
 Forms of Pay
• Base wage
• Cash that an employer pays in return for the
work performed
• A function of the skill or education an employee
possesses
• Salary-Pay for employees:
• Who are exempt from regulations of the Fair Labor
Standards Act (FLSA)
• Is calculated at an annual or monthly rate

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may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 
 Forms of Pay
• Wage-Pay for workers:
• Covered by overtime and reporting provisions of the
Fair Labor Standards Act
• Is calculated on hourly basis
• Merit pay/Cost-of-living adjustments
• Periodic adjustments to base wages on the basis
of changes in:
• What other employers are paying for same work
• Overall cost of living
• Experience or skill
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may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 
 Forms of Pay
• Pay increases are given in recognition of past
work behavior
• Same increases given to everyone, regardless of
performance
• Incentives (Variable pay)
• Related to performance
• Do not increase base wage
• Potential size of the payment will generally be
known beforehand

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may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 
 Forms of Pay
• Are one-time payments
• May be long-term (stock options) or short-term
• Benefits
• Income protection
• Medical insurance, retirement programs, and life
insurance
• Work/life balance
• Vacations, financial planning, referrals for child and
elder care, and telecommuting
• Allowances
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may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 
 Forms of Pay
• Total earning opportunities
• Comparison of today's initial offers to
consideration of future
• Relational returns from work
• Nonfinancial returns that substantially impact
employee behavior
• Network of returns
• Created by different forms of pay
• Useful if bonuses and development opportunities
work together
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 A Pay Model
• Basic building blocks
• Compensation objectives
• Policies that form the foundation of the
compensation system
• Techniques that make up the compensation
system

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may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 
 Exhibit 1.5 - The Pay Model

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may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 
 Compensation Objectives
• Guide the design of the pay system
• Serve as standards for judging the success of
the pay system
• Compliance - Conforming to federal and state
compensation regulations

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 Four Policy Choices
• Internal alignment
• Compares jobs or skill levels inside a single
organization
• Pertains to the pay rates for employees doing:
• Equal work
• Dissimilar work

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 Four Policy Choices
• Pay relationships affect employee decisions to:
• Stay with the organization
• Become more flexible by investing in additional
training
• Seek greater responsibility

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 Four Policy Choices
• External competitiveness
• Pay comparisons with competitors
• Pay is ‘market driven’
• Objective:
• To ensure that pay is sufficient to attract and retain
employees
• To control labor costs to ensure competitive pricing of
products/ services

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 Four Policy Choices
• Employee contributions
• Understanding the basis for judging
performance, helps perceive pay as fair
• Management
• Right people get the right pay for achieving the
right objectives in the right way

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 Pay Techniques
• Tie the four basic policies to the pay
objectives
• Many variations exist

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may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.