The document discusses pay and incentive systems. It covers challenges of the "trust gap" between employers and employees, three major changes in pay philosophy, and three forms of equity: internal, external, and individual. Internal equity refers to fair pay rates based on job evaluation. External equity means pay is based on market rates. Individual equity means pay is fair for each person in the same job. The document also discusses using compensation strategically to achieve business objectives, and four important laws that affect pay.

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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
Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved.

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.