Compensation and Human Theory A close look at all the theories of human motivation reveals a common driving principle: people do what they are rewarded for doing. This has been termed "the greatest management principle in the world." Reinforcement, expectancy, and goal setting describe how to motivate people. Hence they are also called the "process theories." Rewards are both intrinsic—that is feeling good about an accomplishment— and extrinsic—that is being recognized for an accomplishment. Compensation is part of the mix of rewards for employees. David McClelland’s early studies showed that receiving a bonus or salary increase had a short-term positive effect. Withholding a bonus or salary increase had a long-term negative effect. Pay satisfaction is comprised of four elements: the level of pay and benefits, the extent to which workers perceive their earnings are fair or deserved, comparisons with other people’s pay, and noneconomic satisfactions such as intrinsic satisfaction with the content of one's work. Compensation is a topic near and dear to every employee. Companies are learning that sharing the economic gains of reaching targets helps employees stay motivated to reach increasingly difficult goals. For example, PepsiCo has instituted a program called "SharePower" that makes all employees—not just a select group of senior executives— who work at least 1,500 hours per year and who are employed by Pepsi for 1 year or longer, eligible for stock. Since its introduction, stories abound at Pepsi about how employees have gone the extra mile to serve customers. When HR professionals help employees see that a particularly demanding project or exercise will result in economic payback for the employee, the employee is likely to work harder. With a clear line of sight between work and reward, employees may cope better with increased demands. Financial incentives, in order to be effective, must be clearly linked with desired outcomes. For example, in one banking call center, management rewarded employees who had shorter time per call averages because they were able to take more calls. The employees strove to have shorter online times each day. Unfortunately, they often did not complete customer requests and customers had to call several times to get a request completed or problem solved. Call volumes in the center went up dramatically, and customer satisfaction with the call center service went down. The plan was changed once management determined they had created the problem. Benefits and services are a major ingredient in employee compensation. Estimates are that on average, benefits as a part of payroll are 41%. The overall benefits plan of a company is also an important element in employee retention. Each plan is designed for the specific company and its unique situation, although there are many similarities within industries. As part of the corporate downsizings, many companies outsource their bene.

1. Compensation and Human Theory
A close look at all the theories of human motivation reveals a
common driving
principle: people do what they are rewarded for doing. This has
been termed "the
greatest management principle in the world." Reinforcement,
expectancy, and goal
setting describe how to motivate people. Hence they are also
called the "process
theories." Rewards are both intrinsic—that is feeling good about
an accomplishment—
and extrinsic—that is being recognized for an accomplishment.
Compensation is part
of the mix of rewards for employees.
David McClelland’s early studies showed that receiving a bonus
or salary increase had
a short-term positive effect. Withholding a bonus or salary
increase had a long-term
negative effect. Pay satisfaction is comprised of four elements:
the level of pay and
benefits, the extent to which workers perceive their earnings are
fair or deserved,
comparisons with other people’s pay, and noneconomic
satisfactions such as intrinsic
satisfaction with the content of one's work.
Compensation is a topic near and dear to every employee.
Companies are learning that
sharing the economic gains of reaching targets helps employees

2. stay motivated to reach
increasingly difficult goals. For example, PepsiCo has instituted
a program called
"SharePower" that makes all employees—not just a select group
of senior executives—
who work at least 1,500 hours per year and who are employed
by Pepsi for 1 year or
longer, eligible for stock. Since its introduction, stories abound
at Pepsi about how
employees have gone the extra mile to serve customers. When
HR professionals help
employees see that a particularly demanding project or exercise
will result in economic
payback for the employee, the employee is likely to work
harder. With a clear line of
sight between work and reward, employees may cope better with
increased demands.
Financial incentives, in order to be effective, must be clearly
linked with desired
outcomes. For example, in one banking call center, management
rewarded employees
who had shorter time per call averages because they were able
to take more calls. The
employees strove to have shorter online times each day.
Unfortunately, they often did
not complete customer requests and customers had to call
several times to get a request
completed or problem solved. Call volumes in the center went
up dramatically, and
customer satisfaction with the call center service went down.
The plan was changed
once management determined they had created the problem.
Benefits and services are a major ingredient in employee
compensation. Estimates are

3. that on average, benefits as a part of payroll are 41%. The
overall benefits plan of a
company is also an important element in employee retention.
Each plan is designed for
the specific company and its unique situation, although there
are many similarities
within industries. As part of the corporate downsizings, many
companies outsource
their benefit and services management. One of the more
successful, PayChex, offers a
full range of services and options including insurance and 401k
plans. This is a way for
small- and medium-sized businesses to compete with the larger
companies who have
had benefits for a long time.
Retirement benefits have changed significantly since the 1970s,
when a company
pension was the reward for many years of employment. Today
with 401k plans, SEP
plans, and a variety of “portable pensions,” individuals are
really responsible for their
own retirement fund. Ongoing questions about the long-term
viability of social security
have many worried. Through the tax code, the government is
offering larger tax
benefits for saving for retirement. As baby boomers begin to
retire from full-time
employment, there is an opportunity for companies to have new
part-time resources
available. With the shortage of skilled labor, this change is
already beginning to
happen.

4. Employee Services
1
Question 1: Who is entitled to unemployment insurance, and
who is not?
Answer 1: By definition, unemployment insurance provides
benefits if a person
is unable to work through some fault other than his or her own.
It is paid from
a payroll tax in most states. Strictly speaking, a worker fired for
cause is not
eligible, since that is through their own fault, although an
employee who is laid
off is eligible.
Question 2: Discuss merit pay and the potential issues when it is
used as an
incentive.
Answer 2: Merit pay is a salary increase that is awarded to an
employee based
on his or her individual performance. It becomes part of the
employee’s base

5. pay. Bonus payments are one-time payments that do not become
part of base
pay. There are several potential issues associated with merit
pay. First, the
effect of awarding pay raises across the board (without regard
to individual
merit) may actually detract from performance. Second,
supervisors tend to
minimize the differences in employee performance when
computing merit
raises. They give most employees about the same raise, either
because of a
reluctance to alienate some employees or because of a desire to
give everyone
a raise that will at least help them stay even with the cost of
living. Third,
almost every employee thinks he or she is an above-average
performer, so
getting a below-average merit increase can be demoralizing.
Question 3: How does workers' compensation function? How do
employers try
to control the cost of claims?
Answer 3: Workers' compensation is a state-provided benefit
that provides
income and medical benefits to work-related accident victims or
their
dependents, regardless of fault. Employers attempt to control
the cost of claims
by screening out accident-prone workers, reducing accident-
causing conditions,
and instituting safety and health programs that comply with
government safety
standards.

6. Question 4: Explain the difference between medical insurance
and the
Consolidated Omnibus Budget Reconciliation Act (COBRA),
and under what
circumstances an individual is entitled to each.
Answer 4: Health, hospitalization insurance, and disability
insurance helps
protect against hospitalization costs and the loss of income
arising from off-the-
job accidents or illness. They are generally offered to current
employees,
sometimes with an employee paying a portion of the cost.
COBRA requires
Employee Services
2
most private employers to continue to make health benefits
available to
terminated or retired employees and their families for a period
of time,
generally 18 months. The former employee must pay for the
coverage, as well
as a small fee for administrative costs.
Question 5: What is the purpose of an employee assistance
plan?

7. Answer 5: An employee assistance plan is a formal employer
program for
providing employees with counseling or treatment programs for
problems such
as alcoholism, gambling, or stress. One study found that
personal mental
health was the most common problem addressed by employee
assistance
programs, followed by family problems.
Question 6: Describe the differences between Social Security
and pension
plans and how the Employee Retirement Income Social Security
Act (ERISA) of
1974 affected each.
Answer 6: ERISA is a law that pension rights be vested and
protected by a
government agency. When an employee is vested, this means
that the
employee has some pension benefits at a specified time in the
future. Social
Security, on the other hand, provides income benefits only when
individuals are
over age 62, and it is dependent on how much they have
contributed. Social
Security also provides survivor’s benefits and disability
payments.
Compensation

8. LEAD STORY - DATELINE: Compensation and Benefits
Review, September 17, 1998.
In a today's tightened labor market, a growing number of
organizations are seeking new strategies to
determine compensation packages. Many organizations are
phasing out or replacing merit systems
with pay-for-performance programs (Currents in Compensation
and Benefits, Compensation &
Benefits Review, September 17, 1998) and other alternative
systems of pay such as gain sharing
(Nation's Business, January 1, 1998). The emphasis is on pay-
for-performance.
Question 1.What are the advantages of implementing a pay-for-
performance compensation
system?
Tying compensation to performance focuses workers on the
bottom line. Pay-for-performance offers
workers an opportunity to share in the profits of an organization
by actively involving them. Many
pay-for-performance systems reward workers for recommending
and implementing cost saving
measures. This type of compensation system encourages
workers to look beyond individual work

9. areas and to focus on how the business functions.
Fleetwood Enterprises, a California based recreational vehicle
and manufactured housing maker,
relies on incentive pay to boost performance ("The Real Thing",
The Wall Street Journal, April 9,
1998). Fleetwood's base pay is relatively low, but all its
workers (manufacturing and management)
can and do earn production or incentive bonuses. Because of the
way it compensates its workers,
Fleetwood tends "to get people who are entrepreneurial types"
("The Real Thing", The Wall Street
Journal, April 9, 1998).
Question 2.What are the disadvantages of the compensation
system involving relatively low base
pay with incentives?
Answer: By offering a relatively low base pay an organization
may have a difficult time attracting
talented people. Many will not be attracted to a lower wage. For
the individual worker a low base
salary makes personal finance management more of a challenge.
A low base wage means lower
weekly or monthly take home pay. When bonuses are paid
workers must practice fiscal restraint or

10. budget wisely. Working within this compensation system one
would have to get accustomed to
income swings. There is also the possibility that focusing on
ways to cut costs will stifle creative
ideas that require a lot of money to implement.
Like Fleetwood, Nucor Corp., a steelmaker in Charlotte, N.C.,
places a strong emphasis on incentive
pay. It hires production workers at a base rate of $10 - $12 per
hour. However, production workers
can earn up to as much as 60% of their annual income, which
means that with production bonuses
workers can make as much as $25 per hour.
Small business owners are finding gain sharing to be an answer
to boost performance. One such
organization is Katzinger's Inc., a 100-seat restaurant and
delicatessen in Columbus, Ohio (Nation's
Business, January 1, 1998). When rising costs began getting out
of control, the owners told
employees that if they helped reduce food costs to a certain
level the employees would share in the
profits. The employees quickly took the owners up on the offer
and within the first month employees

11. were able to take home about $40 each. Since the first gain-
sharing pay out, employees have
earned up to as much as $95 for a single month.
In yet another innovation to determining pay, AES Corp., an
independent global power producer,
began an experiment. As part of a salary experiment begun in
fall of 1997, managers chose their
own compensation. This experiment involved several members
of the Silk Road Group, the
management group overseeing projects throughout Central Asia,
with a listing of salaries, bonus and
stock options paid each person in the group, and comparative
compensation data for all AES
employees with similar responsibilities. Members of this group
were then asked to submit a proposal
for their annual compensation packages for the coming year.
After a group discussion and peer
review process, the proposals were submitted to the payroll
department without changes ("Blank
Check", The Wall Street Journal, April 9, 1998).
Question 3. As a manager what must you consider before using
a system similar to AES Corp.
(setting own salary through a peer review process)?

12. Answer: From a management perspective opening up the books,
especially in relation to salary, may
be the most threatening. Managers tend to worry about how
people will react when they find out
someone else is making more money yet doing the same job.
Participants using a peer review
process must be completely frank with colleagues. The
organization's culture must therefore
encourage and support honesty over politics.
Although the most frequently used methods vary slightly
depending upon the position within the
hierarchy, organizations report using better compensation and
benefits as a primary method for
retaining employees at all levels (Hansen, Compensation &
Benefits Review, September 17, 1998).
Organizations hope that by developing an innovative
compensation program they will attract and
retain the most talented of job candidates.
SOURCES:
1.Livingston, Abby. "Gain-sharing Encourages Productivity",
Nation's Business, Vol. 86, January 1,
1998, pp. 21(2).

13. 2.Cira, Darrell J. "Competency-Based Pay: A Concept in
Evolution", Compensation & Benefits
Review, Vol. 30,September 17, 1998.
3.Hansen, Fay. "Currents in Compensation and Benefits",
Compensation & Benefits Review, Vol. 30,
September 17, 1998.
4.Jacobs, Karen. "The Real Thing", The Wall Street Journal,
April 9, 1998.
5.Markels, Alex. "Blank Check", The Wall Street Journal, April
9, 1998.
4.Which of the compensation programs (low base pay with
incentives, setting your own salary, or
gain sharing) is most appealing to you? Which is least
appealing? Explain your answer.
Answer: Responses will vary according to your preferences.
You should have some concrete
notions about which of the compensation programs are most
likely to improve performance.
Employee Satisfaction
Introduction

14. This section examines the factors related to job satisfaction and
the relationship
between satisfaction and performance. Job satisfaction is of
great importance to
managers because of its relationship to a variety of worker
perceptions, behaviors, and
behavioral intentions.
Factors in employee satisfaction
Job satisfaction is an attitude formed about the experience of
work. This attitude
includes three components: cognitions—what a person thinks
about the job experience;
affects—what a person feels about the job experience; and
behaviors—actual behavior
on the job or intentions to behave in a certain way. There are a
variety of factors which
may contribute to job satisfaction: characteristics of the job
itself; relationships with
coworkers, supervisors, and clients; characteristics of the
groups of which workers may
be a part; and characteristics of the roles workers fill. Non-work
factors, such as life
satisfaction, may also impact on job satisfaction.

15. The characteristics of the job which influence satisfaction are
variety—the opportunity
to use a variety of skills and abilities in job performance;
identity—the opportunity to
perform a whole, identifiable piece of work; significance—the
perception that the work
performed or product produced is important to someone;
autonomy—the ability to
exert control over the job; and feedback—information regarding
level of job
performance. These characteristics are moderated by individual
personality differences.
That is, not all workers respond in the same way to these job
characteristics.
On-the-job relationships contribute to job satisfaction. If
relationships with coworkers,
supervisors, or clients are poor, job satisfaction will suffer.
Related to these
relationships are characteristics of groups to which workers may
belong. If the norms
of the group are inconsistent with personal norms, job
satisfaction could suffer. If, on
the other hand, the group is cohesive and works well together,
job satisfaction will be

16. enhanced.
Experiences on and off the job are not easily separated. Thus,
satisfaction with life in
general may contribute to job satisfaction. If a worker is
dissatisfied with non-work
issues, that dissatisfaction could spill over to attitudes and
feelings about work.
Personality differences are also related to job satisfaction.
Workers who are generally
cheerful, enthusiastic, and confident are more likely to
experience higher levels of job
satisfaction than workers who characteristically experience
negative mood states.
Job satisfaction may be viewed as an overall phenomenon or as
being comprised of
facets which contribute to the overall sense of satisfaction.
Intrinsic job satisfaction is
related to the job itself while extrinsic job satisfaction is related
to issues not directly
related to the job such as pay or benefits.
The satisfaction – performance link

17. The relationship between job satisfaction and job performance
is not fully understood.
At one point in time, it was thought that job satisfaction led to
increased performance;
later, it was thought that high levels of performance led to
increases in satisfaction.
Discovering the satisfaction-performance relationship has been
difficult because job
performance may be measured subjectively (which is based on
the feelings or
perceptions of a supervisor or worker) or objectively (which is
based on measures of
quantity or quality).
If satisfaction leads to increases in performance, then managers
should ensure that
workers are satisfied with both the intrinsic and extrinsic
aspects of work. If, on the
other hand, increased performance leads to job satisfaction, then
managers should act
as facilitators of work by ensuring that workers have all the
resources required to
perform effectively. Because the relationship is not fully
understood, managers should

18. employ both strategies: ensure that the intrinsic and extrinsic
aspects of job satisfaction
are addressed and that workers are provided with the tools,
training, and other
resources that will support increases in job performance.