This graphic shows that an employee’s total compensation has three components. The relative proportion of each varies extensively by firm. Generally, the largest element of total compensation is base compensation, the fixed pay an employee receives on a regular basis. Another component of total compensation is pay incentives, which are programs designed to reward employees for good performance. Benefits is the final component, and encompasses a wide variety of programs; including health insurance, vacations, and unemployment compensation.
Compensation affects a person economically, sociologically, and psychologically. For this reason, mishandling compensation issues is likely to have a strong negative impact on employees and, ultimately, on the firm’s performance. Developing a compensation plan must been done carefully, and with attention paid to the issues highlighted in the next three illustrations.
The labor market model is, in essence, a supply and demand model applied to labor. As shown here, the less employers are willing to pay (which represents a low demand for labor) and the lower the pay workers are willing to accept for a given job (which represents a high supply of labor), the lower the wage rate for that job.
The traditional job-based pay system is still predominant, even though it may not be the best approach to compensation. This illustration outlines the conditions in which job-based pay policies do work well.
There are, however, many situations in which individual-based compensation is more effective; as outlined in this illustration.
There are three key components of developing job-based compensations plans: achieving internal equity, achieving external equity, and achieving individual equity. This illustration summarizes how these are interrelated and the steps involved in each component. The large majority of U.S. firms rely on this or a similar scheme to compensate their work force.
Challenges Identify the compensation policies and practices that are most appropriate for a particular firm. Weigh the strategic advantages and disadvantages of the different compensation options. Establish a job-based compensation scheme that is internally consistent and linked to the labor market. Understand the difference between a compensation system in which employees are paid for the skills they use and one in which they are paid of the job they hold. Make compensation decisions that comply with the legal framework. 1
Compensation Financial rewards that employees receive can come in a wide array of forms Most visible forms are cash compensation and fringe benefits Total rewards an individual receives, when compared to with what he feels he should receive , determine satisfaction 2
Compensation Compensation is a systematic approach to providing monetary value to employees in exchange for work performed. Compensation may achieve several purposes assisting in recruitment, job performance, and job satisfaction 3
Compensation The methods and practices of maintaining balance between interests of operating the company within the fiscal budget and attracting, developing, retaining, and rewarding high quality staff through wages and salaries which are competitive with the prevailing rates for similar employment in the labor markets. 4
Compensation Compensation is a tool used by management for a variety of purposes to further the existence of the company. Compensation may be adjusted according the business needs, goals, and available resources. 5
Compensation Recruit and retain qualified employees Increase or maintain morale/satisfaction Reward and encourage peak performance Achieve internal and external equity Reduce turnover and encourage company loyalty Modify (through negotiations) practices of unions 6
Components of CompensationSystem Compensation will be perceived by employees as fair if based on systematic components Various compensation systems have developed to determine the value of positions 7
Components of CompensationSystem Job descriptionsA critical component of both compensation and selection systems, job descriptions define in writing the responsibilities, requirements, functions, duties, location, environment, conditions, and other aspects of jobs. Descriptions may be developed for jobs individually or for entire job families. 8
Components of CompensationSystem Job analysis The process of analyzing jobs from which job descriptions are developed. Job analysis techniques include the use of interviews, questionnaires, and observation. 9
Components of CompensationSystem Job evaluation A system for comparing jobs for the purpose of determining appropriate compensation levels for individual jobs or job elements. There are four main techniques: Ranking, Classification, Factor Comparison, and Point Method. 10
Components of CompensationSystem Salary ranges/structures Useful for standardizing compensation practices. Most pay structures include several grades with each grade containing a minimum salary/wage and either step increments or grade range. 11
Components of CompensationSystem Salary surveys • Collections of salary and market data. May include average salaries, inflation indicators, cost of living indicators, salary budget averages. When purchasing the results of salary surveys conducted by other vendors, note that surveys may be conducted within a specific industry or across industries as well as within one geographical region or across different geographical regions. 12
Components of CompensationSystemWritten proceduresPolicies and regulations 13
Total Compensation The package of quantifiable rewards an employee receives for his or her labors. Includes three components: base compensation, pay incentives, and indirect compensation/benefits 15
The Elements of TotalCompensation Total Compensation Base Pay Indirect Compensation Incentives Compensation/ Benefits 16
The Nine Criteria for Developing aCompensation Plan1. Internal versus External Equity Will the compensation plan be perceived as fair within the company, or will it be perceived as fair relative to what other employers are paying for the same type of labor?2. Fixed versus Variable Pay Will compensation be paid monthly on a fixed basis —through base salaries —or will it fluctuate depending on such preestablished criteria as performance and company profits?3. Performance versus Membership Will compensation emphasize performance and tie pay to individual or group contributions, or will it emphasize membership in the organization —logging in a prescribed number of hours each week and progressing up the organizational ladder? 17
The Nine Criteria for Developing aCompensation Plan (cont.)4. Job versus Individual Pay Will compensation be based on how the company values a particular job, or will it be based on how much skill and knowledge an employee brings to that job?5. Egalitarianism versus Elitism Will the compensation plan place most employees under the same compensation system (egalitarianism), or will it establish different plans by organizational level and/or employee group (elitism)?6. Below-Market versus Above-Market Compensation Will employees be compensated at below-market levels, at market levels, or at above-market levels? 18
The Nine Criteria for Developing aCompensation Plan (cont.)7. Monetary versus Nonmonetary Awards Will the compensation plan emphasize motivating employees through monetary rewards like pay and stock options, or will it stress nonmonetary rewards such as interesting work and job security?8. Open versus Secret Pay Will employees have access to information about other workers’ compensation levels and how compensation decisions are made (open pay) or will this knowledge be withheld from employees (secret pay)?9. Centralization versus Decentralization of Pay Decisions Will compensation decisions be made in a tightly controlled central location, or will they be delegated to managers of the firm’s units? 19
The Labor Market Model Supply of Qualified Employees Wage W1 Demand for Employees 0 N1 Number of Qualified Workers 20
Compensation Tools The goal of all these tools is to produce pay systems that: Equitable Allow the firm to: Attract Retain Motivate workers While Keeping labour costs under control 21
Compensation Tools Can be grouped into two broad categories Job-based Approaches Skill-based Approaches 22
Compensation Tools Job-based Approaches Includes traditional and widely used type of compensation programs These plans assume that work gets done by people who are paid to perform well-defined jobs All jobs not equally important Important jobs attract better compensation Employees paid according to Grade 23
Compensation Tools Skill-based Approaches Far less common Assumes that workers should be paid according to how flexible or capable they are at performing multiple tasks Greater the variety of job-related skills workers possess, the more they are paid 24
When to Use a Job-basedPay Policy A job-based pay policy tends to work best in situations where: Technology is stable Jobs do not change often Employees do not need to cover for one another frequently Much training is required to learn a given job Turnover is relatively low Employees are expected to move up through the ranks over time Jobs are fairly standardized within the industry 25
Individual-basedCompensation Individual-based compensation programs are more suitable when: The firm has a relatively educated workforce with both the ability and the willingness to learn different jobs The company’s technology and organizational structure change frequently Employee participation and teamwork are encouraged throughout the organization Opportunities for upward mobility are limited Opportunities to learn new skills are present The costs of employee turnover and absenteeism in terms of lost production are high 26