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  1. 1. COMPENSATION: Introduction © Nancy Brown Johnson 1/05
  2. 2. Why is compensation important?  Society  Firm  Individual
  3. 3. What are the elements ofcompensation?  Base pay  Incentives  Fringe benefits
  4. 4. What are different forms of payment?  Cash  Benefits – Payment for time not worked – Non-pecuniary benefits (gym memberships, child care)  Intrinsic
  5. 5. Exchange Theory  Pay is an exchange for efforts  Implicit Social Contract – beliefs about mutual obligations  Implicit Psychological Contract  Temporal Quality – amount of time in job & career
  6. 6. Equity Theory Pay, benefits, opportunities, etc. the same more or less OUTCOME OUTCOME INPUTS <=> INPUTS ?effort, ability,experience etc. A person evaluates fairness by comparing their ratio with others.IRWIN©a Times Mirror Higher Education Group, Inc., company, 1997
  7. 7. Equity Theory Workers compare their compensation with others If unequal workers attempt to restore equity
  8. 8. Workers Restore Equity by:  Reducing input  Attempting to get raise  Quitting  Psychological Adjustment
  9. 9. Compensation ModelEquity Compensation Objective ToolIndividual Seniority, Motivation(Pay for Perf.) PerformanceInternal Job Evaluation Retention(Pay Structure)External Market Surveys Attraction(Pay Level)Procedural Communication, OrganizationJustice Appeals Citizenship,(Pay CommitmentAdministration)
  10. 10. Internal Equity  Comparison of Jobs  Jobs worth to the Employer – Similarities and differences in work content – Relative contribution to organization objectives  Accomplished through job evaluation
  11. 11. External Equity  Value of the job to the labor market  Assessed through wage surveys
  12. 12. Individual Equity  Relative pay between individuals doing the same job  Influences motivation
  13. 13. Organizational Justice Perceived fairness of the pay system –Outcomes –Process Issues –Interactions Influences Commitment, Organization Citizenship
  14. 14. Strategic Perspectives  The strategy balances 4 types of equity  Best Practice  Contingency: – organizations will have pay systems that fit with their business strategy – organizations that have “fit” will outperform those without “fit”  Strategic Decisions include: – pay level, pay structure, individual rewards, team rewards, pay administration
  15. 15. Best Practice v. Strategy Debate  Best practice - there are a set of compensation practices that are good for all firms.  Strategy - the set of compensation practices that are good for firms will vary based upon the firm’s goals.
  16. 16. Best Practice Examples*  High wages  Guarantee of Employment Security  Use incentives; share gains  Employee Ownership  Participation & Empowerment  Teams  Smaller pay differences *Source: Pfeffer, Competitive Advantage Through People ,
  17. 17. Summary  There are four key elements to equity  The strategic contingency view is that some firms may weight those elements differently depending on firm objectives  The best practice view is that there are good practices that all firms should engage in no matter what their strategy.
  18. 18. Summary (continued)  Equity forms the basis for compensation management  Strategy guides the organization in the balancing of equity components  The test is whether the compensation system reinforces sustained competitive advantage