pay and incentive systems

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2. Chapter Pay and Incentive Systems 8
Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved.

3. o Challenges off tthhee ““TTrruusstt GGaapp””
 How do perceptions of unfairness develop?
What are some of the predictable consequences of the “trust gap”?
What are some strategies for reducing the “trust gap”?
Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved.

4. Ch Three Major Chaannggeess iinn PPaayy PPhhiilloossoopphhyy
Willingness to reduce the size of a workforce and to restrict pay
 Less concern with pay position relative to competitors, and more
concern with what the company can afford
 Implementation of programs to encourage and reward performance
– thereby making pay more variable
Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved.

5. TThhrreeee FFoorrmmss ooff EEqquuiittyy
Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved.
 Internal Equity
 External Equity
 Individual Equity

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IInntteerrnnaall EEqquuiittyy
 In terms of the relative worth of individual jobs to an organization,
are pay rates fair?
 Determined through the process of job evaluation – that is,
assigning a value (e.g., points) to each job, and developing a rank
order of jobs based on their relative worth to the firm

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EExxtteerrnnaall EEqquuiittyy
Wages are determined based on market value (“going rates”)
 Determined through pay surveys of similar jobs in local, regional,
national, or international labor markets
 The median rate of pay for a given job in a relevant labor market is
considered to be the “going rate”

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IInnddiivviidduuaall EEqquuiittyy
 Is each individual’s pay “fair” relative to that of other individuals
doing the same or similar jobs?
 Individuals who perceive that they are in an inequitable situation
will seek to reduce that inequity by:
 Mentally distorting their inputs or outcomes
 Directly altering their inputs or outcomes
 Leaving the organization

9. SSttrraatteeggiicc CCoommppeennssaattiioonn
 Compensation is a pivotal control and incentive mechanism that can
be used to achieve business objectives
 Compensation plans need to be tied to an organization’s strategic
mission, and take their direction from that mission, e.g., innovation,
cost leadership
 Integrate pay considerations into planning and control
 Overall organizational performance is the ultimate criterion of the
success of strategic pay decisions and operational compensation
programs
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10. Im Four Imppoorrttaanntt LLaawwss tthhaatt AAffffeecctt PPaayy
 Fair Labor Standards Act
 Davis-Bacon Act
Walsh-Healy Act
McNamara-O’Hara Service Contract Act
Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved.