, the world of pay and compensation , compensation strategy , the compensation program , determining rates of pay , jobs and pay in the united states

1. Chapter - 3
The World of pay and Compensation

2. After studying this chapter, you should
be able to know about
1. The major components of compensation program.
2. The variations in base rates of pay for employee
performing different assignments within an organization.
3. Factors that influencing differences in rates of pay for
people doing similar work in different organizations.
4. The increasing importance of different rates of pay within a
global economy.
LEARNINGOBJECTIVES

3. Compensation Strategy
 Identify forces that influence compensation practices and promote hiring and
retention of a productive workforce.
 With the move toward heavy capital investment for continuing automation and
robotization, labor costs in the manufacturing sector of the economy have
been declining from the 40% figure.
 Today less than 20% of the workforce is involved in manufacturing; more and
more people are working in service –related industries and job.
 More than 70% of all workers perform what are considered service jobs.
 Most service sector organizations are heavily labor intensive, and it is not
usual for service-related companies to spend 40% and sometimes as high as
0% of each revenue dollar for employee compensation costs.

4. The Compensation Program
To understand something about these labor costs, a good first step is to identify the
major parts that can be included with in a compensation program-
1. Base wages and salaries.
 From the perspective of many employees, the most important part of the
compensation program involves the determination and administration of base
wage and salaries.
 The lifestyle of great majority of workers revolve around their paychecks.
 The powerful influences on the lifestyle of wage earners and their dependents
underscore the importance of the job and the pay received by employees for
performing the job.

5. Continued
2.Wages and salary add-Ons:
 It includes overtime pay, shift differential, premium pay for working weekends
and holidays, and other add-ons for being on call for other demands not normally
required of workers,
 For employees who perform specific jobs in certain kinds of companies, these
add-ons are practically permanent, and the employees can depend on receiving
them with a high degree of certainty.
3.Incentive payments:
 Payment for output reached its zenith in the manufacturing world at end of the
nineteenth and into the twentieth century.
 Many kind of factory and mail work filled nearly into pay for output systems.
 With the rising dominance of service jobs in the second half of the twentieth
century, Including work of Clarks, secretaries, repair and service technicians,
administrators, professionals, scientists, and managers, activities and output very
so much from day to day and from person to person that pay-for-output systems
are frequently neither feasible nor practical.

6. Continued
4. Employee benefits and services:
 This part of compensation package includes time off with pay, pay when
employment has been suspended or terminated, pay when unable to work because
of accident or sickness.
 Benefits and services are of rather recent vintage. Following World War II, many
compensation enchantments focus on the area of benefits and services.
 During the 1980s and 1990s. Many organizations made strong efforts to limit the
rising costs of the benefit package.
 Health care and retirement costs, in particular, have increased much more rapidly
than practically any other part of the total compensation package.

7. Determining Rates of Pay
The critical or basic reasons underlying the differences in pay and compensation packages for
different employees relates to the following correlates or determinants.
Each of these correlates is relatively simple and straightforward. But like most factors influencing
compensation decisions their instructions can become difficult to follow and understand.
1. Kind and level of required knowledge and skills.
2. Kind of business
3. Union and nonunion status
4. Capital intensive versus labor intensive
5. Size of Business
6. Philosophy of Management
7. Total Compensation Package
8. Geographic Location
9. Supply and Demand of labor
10. Profitability of the firm
11. Employment stability
12. Gender Differences
13. Employee tenure and performance

8. Continued
1. Kind and levels of required knowledge and skills:
 The most important factor influencing the rate of pay of an employee is the kind of
job the person perform.
 In classifying or differentiating jobs for pay purpose, no one single factor carries
greater significance than the knowledge and skills required of the job holder.
 They also have mastered skills in their particular disciplines or areas of work that
have enabled them to reach levels of eminence and, in return, receive exceedingly
high rates of pay for what they do.
2. Kind of Business:
The nature of the business is also a major factor influencing the pay received by a
jobholder.
For some jobs (especially higher-level jobs) private sector businesses provide higher
rates of pay than those in the public sectors.
Profit motive private sector organization pay their leaders far more than non-profit
private sector organizations do.
Not only do private-sector-public-sector and profit-nonprofit characteristics influence

9. Continued
3. Union and non-union status:
In 2003, approximately 12.9% of all workers in the United States were unionized.
Industries with the highest proportion of unionized workers are in the public sector-
federal, state, and total governments 37.2%; transportation and utilities 26.2%;
manufacturing 13.5%; construction 16.0%; and mining 9.1%. By 2003 the present of
unionized members in the private sector had declined to les than 10%.
Since the blossoming of unions in the 1930s, those businesses with the highest rate of
unionization also have included some of the highest-paid members of the workforce.
4. Capital intensive versus Labor intensive:
Quite often, businesses that have low labor costs relative to revenue pay employees
higher rates of pay. Probably no one cost of business is more controllable and has a
greater influence on profits than labor costs.
Labor intensive industries also require the employment of larger number of low skilled
laborers.
As business become more capital intensive, using newer and more sophisticated
technology and processes, they require fewer employee; However, these employees
must have higher levels of knowledge an skills. In turn, these more highly skilled
employees usually will demand higher rates of pay.

10. Continued
5. Size of Business:
 Larger businesses often provide higher wage rates than similar businesses.
Profitability and unionization frequently are related to company size.
 Firms normally increase in size because their products are in demand. With the high
demand come economies of scale and the opportunity to increase profit with
additional unit of good or services provided.
 A direct relationship also exists between the size of the salaries and bonuses
received by top executives and size of the companies for which they work.
6. Philosophy of Management:
 Some owners and top executives have a philosophical bias toward paying their
employees as much as possible. Other owners and managers have a completely
opposite bias. These biases have a definite impact on the amount of pay offered and
given to employees.
 To employer who have a no more than necessary philosophy, such factors as
minimum wage laws or existing market- established minimum wage rates
significantly influence the rate of pay offered to employees. Some employers are
committed to the philosophy of paying their employee above industry or area
standard s in order to attract or retain the best pool of skilled workers available.

11. Continued
7. Total Compensation Package:
 Base pay or annual earnings have been used to compare the compensation packages of
employees. With each passing year, this kind of comparison become less and less useful.
 Today, even young, new employees soon become interested in their employer’s pension plan,
day care assistance, medical and hospitalization insurance, and may other benefits and
services.
 Today, employees have sufficient interest in and knowledge of their compensation packages
to recognize the value the worth of their major components. In fact, it is challenge to
management and to compensation professionals to keep employees fully informed of the
compensation they received.
8. Geographical Location:
 Employment and unemployment do not affect all sectio0n of the nation equally. The drop in
commodity prices between 1982 and 1986 and the increase in foreign manufactured goods
had a particularly devastating impact on the contiguous “heartland” states.
 Not only do employment opportunities dampen or improve job wage rates, but certain regions
have historically paid higher wage then others. States where earnings are the highest are
normally states with the highest of living .

12. Continued
9. Supply and Demand of Labor:
 Even in times of high unemployment, individuals with certain sets of skills or
abilities are in demand. Sometimes the demands are in specific locations; at other
times, they are national in scope.
 When there is short supply of unskilled or low-skilled workers willing to work for
minimum or near minimum wages, the pay offered for these workers will quickly
soar over existing federal minimum wage guidelines.
10. Profitability of the Firm:
 Employees working for highly profitable businesses have a greater chance of
receiving higher wages than those working for less profitable firms.
 Historically, high-paying firms felt they had an edge in hiring and retaining the
best workers by paying above the going rate in their markets.
11. Employee Stability:
During periods when workforces are being reduced in size, employees become
extremely concerned about continuation of employment.
Practically all workers want the psychological security of knowing that their jobs will
be there as long as they want them.

13. Continued
 The good life consists of not only a car, housing and clothing, but enjoyable leisure time.
 This items all have a cost, a frequently a significant part of the cost is absorbed through
accredit card that is secures by future employment.
 Employee who feel that their jobs are permanent are often willing to take lower pay, knowing
that the paycheck will be there as long as assignment are performed in an acceptable manner.
12. Gender Difference:
 The gap between male and female earnings has been a major irritant to advocates of women’s
right.
 In industries and jobs in which females dominate the workforce (in excess of 70% of all
employees are female), wage rates are normally lower than in those cases in which males are
the dominant workers.
13. Employee tenure and Performance:
 When analyzing rate of pay using various kinds of composite data, it is practically impossible
to separate two critical employee differences: tenure and performance.
 In most cases, an employees rate of pay increases with years of services. Even employee in
low level, minimal skill jobs become more valuable with increasing the length of service.
 Individual performance also can make a significant difference in the pay receives by
incumbents in similar jobs.

14. Jobs and pay in the United States
Cultural components are different in countries of all over the world. United states is a country
where all the countries people crowded. The nature of jobs and pay in the united states are two
types;
1. Foreign Competition-The Global Economy
2. Compensation and Global Economy:
o Taxation
o Social Security
o Deregulations and Takeovers
3. Becoming More Competitive:
 Computer based technology will drive the production of goods and services.
 High skilled workers will operate these computer driven technologies.
 Errors made at any level in the organization can severely damage its profitability and even its
survival.
 Quality products demanded by customer require the effort and attention of an committed,
trained, and well-educated workforce.
 Top management must become more skilled in integrating short-term activities with the long-
term directions their business must take and be willing to take the risks in moving toward the
unknown. Strategic considerations will continue to be an ever-increasing part of the work of
top management.

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