Compensation, Incentives &

Corporate Governance
Ch 1: Introduction to Compensation
 Staffing

Employee
Human
& Labor HUMAN RESOURCE Resource
Relations MANAGEMENT
Development
FUNCTIONS

Safety &
Compensation
Health
Why Work?
To get Compensated
Is that money only…..?
 Compensation
• Total of all rewards given to employees in return for their services.
a) Direct financial compensation - Pay received in the form of
wages, salaries, bonuses, and commissions
• Salary- A form of periodic payment from an employer to an employee, which may
be specified in an employment contract or Fixed income of white collar or
executives over a period of time. (usually for exempt employees)
• Wage- A payment usually of money for labor or services usually according to
contract and on an hourly, daily, or piecework basis —often used in plural. Wage
earners often have to give up pay for leaving early, coming in late, missing a day, or
taking a vacation or Fixed wages of blue collar or manual worker over a period of
time. (usually for non-exempt employees)
• Commission- Variable pay on sales.
• Bonuses- reward for performance (one-time), not added in base pay.
• Increment- Additions in base pay (merit, seniority, performance, knowledge,
incentive etc.)
b) Indirect financial compensation - All financial rewards not
included in direct compensation (Fringe Benefits).
c) Nonfinancial compensation - Satisfaction a person receives from
job itself or from work environment
Components of a Total Compensation Program
External Environment
Internal Environment
Compensation
Financial Non-Financial

Direct Indirect (Benefits) Job Environment

The Job
Wages Legally Required Benefits Sound Policies
Skill Variety
Salaries Social Security Competent Employees
Commissions Unemployment Compensation Task Identify Congenial Coworkers
Bonuses Workers’ Compensation Task Significance Suitable Status Symbols
Autonomy Working Conditions
Family & Medical Leave
Feedback Workplace Flexibility
Voluntary Benefits Payment
Flextime
for Time Not Worked Health Care
Compressed Work Week
Life Insurance
Job Sharing
Retirement Plans
Flexible Compensation
Employee Stock Option Plans
Telecommuting
Supplemental Unemployment Benefits
Part-time Work
Employee Services
Modified Retirement
Premium Pay
Unique Benefits
 Another approach of classifying
Compensation
• Intrinsic rewards satisfaction derived from the job
itself. Satisfy higher level needs for self esteem,
achievement, growth and development
 They drive from factors inherent in the job itself – the
job content – such as:
 amount of challenge or the interest the job provides
 The degree of variety in the job
 The extent to which it provides feedback and autonomy
 The meaning or significance of the job
The Influence of Core Job Characteristics of Intrinsic Compensation
Core Job Critical Psychological Benefits to
Characteristics States Employees
Skill Variety Experienced Lower
Task Identity meaningfulness of the Turnover
Task work Lower
Significance Absenteeism

Experienced
Autonomy Enhanced job
responsibility for work
performance
outcomes

Gained knowledge of Greater Job

Feedback
results from work satisfaction
activities

9
 Extrinsic reward Benefits provided by the
employer. Non-monetary and monetary incentives
for obtaining certain job performance levels and
acquiring new skills and knowledge.
 Equity and Its Impact on Pay Rates
 Description
 Pay should be based upon contributions made by the Employees.
Higher effort should be rewarded with higher pay.
 Application to Compensation
 Payshould be tied to the performance level of individual
Employee
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.

Equality-Compensation of employees on a unified way, regardless

of their performance
 Equity in Financial Compensation
• Equity - Fair pay treatment for employees
External equity - Involves employee perceptions of the fairness of
their compensation relative to those outside performing similar
jobs in other firms.
 Internal equity - Involves the perceived fairness of pay differentials
among different jobs (Grades) within an organization
Individual Equity - How fair an individual’s pay as compared with
what his/her co-workers are earning for the same/very similar jobs
within the company.
Procedural equity- The perceived fairness of the procedures to make
decisions regarding the allocation of pay.
Equity Perceptions
Outcomes Outcomes

Inputs Inputs
Person A Person B

Outputs Outputs Under-reward

Inputs
< Inputs

Outputs Outputs
Inputs
= Inputs
Equity

Outputs Outputs Over-reward

Inputs > Inputs
 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.
 Compensation System: Asset or Liability?

• Firms typically spend 40 to 70 percent of their operating

budgets to compensate their employees. For most firms,
compensation is the single largest operating expenditure.
• Some firms spend too much on compensation and some too
little.
• The key issue is:
What is the organization receiving for its investment in
wages, salaries, and benefits?
Are the compensation system and the money devoted to it
contributing to the achievement of organizational objectives
in the fullest possible way?
Does the firm have in place the compensation system that
adds the greatest possible value to the company after taking
costs into account?
 Optimal Compensation System
The reward system that adds value to the
organization, after considering all its cost.
A compensation system is one of the most
powerful tools available to an employer for:
 shaping employee behavior
Influencing company’s performance

Copyright (c) 2010 by Nelson

Education Ltd
 Optimal Compensation System
This does not mean that optimal compensation system is the
cheapest one
For some firms a high wage compensation strategy may be
the one that maximizes overall effectiveness
Resource constraints may prevent a company from adopting
what would otherwise be the optimal reward strategy
In general, an effective reward system maximizes the value
added relative to the resources devoted to the reward system
• Counterproductive consequences of poorly designed
compensation system:
Low employee motivation
High employee turnover
Poor job performance
Irresponsible behavior and employee dishonesty
Is it realistic to expect that a reward system will
achieve all eight of the
effectiveness criteria?

Probably not. But these criteria still serve

as goals and measures of progress.
 Role &Purpose of the Compensation System
• The basic purpose of a compensation system is to help create a
willingness among qualified persons to join the organization and
to perform the task needed by the organization
• This means that employees must perceive that accepting a job with
a given employer will help them satisfy some of their own
important needs
• These needs include:
Economic needs for the basic necessities of life
Needs for security
Social interaction
Status
Achievement
Recognition , and growth and development