CHAPTER 11 COMPENSATION PowerPoint Presentation by Charlie Cook Copyright © 2002 South-Western. All rights reserved

CHAPTER 11

COMPENSATION

PowerPoint Presentation by Charlie CookCopyright © 2002 South-Western. All rights reserved

Copyright © 2002 South-Western. All rights reserved. 11–2

The Importance of CompensationThe Importance of CompensationThe Importance of CompensationThe Importance of Compensation

• Attract employeesAttract employees• Retain employeesRetain employees• Motivate employeesMotivate employees• Compliance with pay lawsCompliance with pay laws• Administrative simplicityAdministrative simplicity• Cost effectivenessCost effectiveness

• Which goals would be most critical for a Which goals would be most critical for a technology company such as Visionary Design technology company such as Visionary Design Systems?Systems?

• Attract employeesAttract employees• Retain employeesRetain employees• Motivate employeesMotivate employees• Compliance with pay lawsCompliance with pay laws• Administrative simplicityAdministrative simplicity• Cost effectivenessCost effectiveness

• Which goals would be most critical for a Which goals would be most critical for a technology company such as Visionary Design technology company such as Visionary Design Systems?Systems?



Think of Something that was unfair.Think of Something that was unfair.Think of Something that was unfair.Think of Something that was unfair.

• Explore what it is and why it was unfair.Explore what it is and why it was unfair.• Explore what it is and why it was unfair.Explore what it is and why it was unfair.


Critical Thinking Questions:Critical Thinking Questions:Critical Thinking Questions:Critical Thinking Questions:

1.1. Why do most private firms choose to have a pay Why do most private firms choose to have a pay secrecy policy? Do they work? Does pay secrecy policy? Do they work? Does pay secrecy fit with a high commitment HR system secrecy fit with a high commitment HR system where employee participation is a strong element where employee participation is a strong element of corporate culture?of corporate culture?

2. Should a manager receive higher pay than the 2. Should a manager receive higher pay than the subordinates that she/he supervises?subordinates that she/he supervises?

1.1. Why do most private firms choose to have a pay Why do most private firms choose to have a pay secrecy policy? Do they work? Does pay secrecy policy? Do they work? Does pay secrecy fit with a high commitment HR system secrecy fit with a high commitment HR system where employee participation is a strong element where employee participation is a strong element of corporate culture?of corporate culture?

2. Should a manager receive higher pay than the 2. Should a manager receive higher pay than the subordinates that she/he supervises?subordinates that she/he supervises?


Critical Thinking Questions:Critical Thinking Questions:Critical Thinking Questions:Critical Thinking Questions:

3.3. What are the strategic advantages of paying What are the strategic advantages of paying below the market for pay? Can a firm sustain below the market for pay? Can a firm sustain this pay choice?this pay choice?

4. Why would a firm decide to pay above the 4. Why would a firm decide to pay above the market? Is this choice open to all firms in an market? Is this choice open to all firms in an industry or sector? industry or sector?

3.3. What are the strategic advantages of paying What are the strategic advantages of paying below the market for pay? Can a firm sustain below the market for pay? Can a firm sustain this pay choice?this pay choice?

4. Why would a firm decide to pay above the 4. Why would a firm decide to pay above the market? Is this choice open to all firms in an market? Is this choice open to all firms in an industry or sector? industry or sector?


Equity TheoryEquity TheoryEquity TheoryEquity Theory

• Internal equityInternal equity– Fairness of pay differentials between different jobs in the Fairness of pay differentials between different jobs in the

organization can be established by job ranking, job organization can be established by job ranking, job classification, point systems and factor comparisons.classification, point systems and factor comparisons.

• External equityExternal equity– Fairness of organizational compensation levels relative to Fairness of organizational compensation levels relative to

external compensation is assessed by collecting wage and external compensation is assessed by collecting wage and salary information to guide in setting the organization’s pay salary information to guide in setting the organization’s pay strategy to lead, meet or lag labor market wages.strategy to lead, meet or lag labor market wages.

• Internal equityInternal equity– Fairness of pay differentials between different jobs in the Fairness of pay differentials between different jobs in the

organization can be established by job ranking, job organization can be established by job ranking, job classification, point systems and factor comparisons.classification, point systems and factor comparisons.

• External equityExternal equity– Fairness of organizational compensation levels relative to Fairness of organizational compensation levels relative to

external compensation is assessed by collecting wage and external compensation is assessed by collecting wage and salary information to guide in setting the organization’s pay salary information to guide in setting the organization’s pay strategy to lead, meet or lag labor market wages.strategy to lead, meet or lag labor market wages.


Equity Theory (cont’d)Equity Theory (cont’d)Equity Theory (cont’d)Equity Theory (cont’d)

• Individual EquityIndividual Equity– Fairness about pay differentials among individuals who hold Fairness about pay differentials among individuals who hold

the same job in the organization is established by using:the same job in the organization is established by using:• Seniority-based pay systems that reward longevity with the Seniority-based pay systems that reward longevity with the

organization.organization.

• Merit-based pay systems that reward employee performance.Merit-based pay systems that reward employee performance.

• Incentive plans that allow employees to receive part of their Incentive plans that allow employees to receive part of their compensation based on their job performance.compensation based on their job performance.

• Skills-based pay systems where compensation is based on Skills-based pay systems where compensation is based on employees possessing skills that the firm values.employees possessing skills that the firm values.

• Team-based pay plans that encourage cooperation and Team-based pay plans that encourage cooperation and flexibility in employees.flexibility in employees.

• Individual EquityIndividual Equity– Fairness about pay differentials among individuals who hold Fairness about pay differentials among individuals who hold

the same job in the organization is established by using:the same job in the organization is established by using:• Seniority-based pay systems that reward longevity with the Seniority-based pay systems that reward longevity with the

organization.organization.

• Merit-based pay systems that reward employee performance.Merit-based pay systems that reward employee performance.

• Incentive plans that allow employees to receive part of their Incentive plans that allow employees to receive part of their compensation based on their job performance.compensation based on their job performance.

• Skills-based pay systems where compensation is based on Skills-based pay systems where compensation is based on employees possessing skills that the firm values.employees possessing skills that the firm values.

• Team-based pay plans that encourage cooperation and Team-based pay plans that encourage cooperation and flexibility in employees.flexibility in employees.






Why Pay Secrecy?Why Pay Secrecy?Why Pay Secrecy?Why Pay Secrecy?

• The compensation employees get is privileged The compensation employees get is privileged information to both the parties information to both the parties

• Pay secrecy diminishes an opportunity for Pay secrecy diminishes an opportunity for comparison among employees and organization's comparison among employees and organization's exposure to perceived inequality exposure to perceived inequality

• Though perfectly justifiable pay differences are Though perfectly justifiable pay differences are complicated and difficult to explain reasons, complicated and difficult to explain reasons, especially if people doing similar jobs are lined at especially if people doing similar jobs are lined at different pay levels under different market different pay levels under different market conditions conditions

• The compensation employees get is privileged The compensation employees get is privileged information to both the parties information to both the parties

• Pay secrecy diminishes an opportunity for Pay secrecy diminishes an opportunity for comparison among employees and organization's comparison among employees and organization's exposure to perceived inequality exposure to perceived inequality

• Though perfectly justifiable pay differences are Though perfectly justifiable pay differences are complicated and difficult to explain reasons, complicated and difficult to explain reasons, especially if people doing similar jobs are lined at especially if people doing similar jobs are lined at different pay levels under different market different pay levels under different market conditions conditions


Why Pay Secrecy?Why Pay Secrecy?Why Pay Secrecy?Why Pay Secrecy?

• Pay secrecy can prevent embarrassing situations by Pay secrecy can prevent embarrassing situations by shielding under-paid and under-performing shielding under-paid and under-performing employees. employees.

• Managers enjoy more freedom in administering Managers enjoy more freedom in administering pay in a pay secrecy organization, as the difference pay in a pay secrecy organization, as the difference in the pay need not be explained to others. in the pay need not be explained to others.

• Pay secrecy can prevent embarrassing situations by Pay secrecy can prevent embarrassing situations by shielding under-paid and under-performing shielding under-paid and under-performing employees. employees.

• Managers enjoy more freedom in administering Managers enjoy more freedom in administering pay in a pay secrecy organization, as the difference pay in a pay secrecy organization, as the difference in the pay need not be explained to others. in the pay need not be explained to others.


Why NOT Pay Secrecy?Why NOT Pay Secrecy?Why NOT Pay Secrecy?Why NOT Pay Secrecy?

• Open communication and build trust Open communication and build trust

• An open pay system drives the point home to employees An open pay system drives the point home to employees that the management believes in fair and open policies. that the management believes in fair and open policies.

• Open pay policies not only take power and control from the Open pay policies not only take power and control from the managers but politics are also less likely to surface managers but politics are also less likely to surface resulting in merit getting rewarded. resulting in merit getting rewarded.

• When pay information is kept as secret, employees make When pay information is kept as secret, employees make inaccurate perceptions. Further more, those perceptions inaccurate perceptions. Further more, those perceptions work against increasing motivation. work against increasing motivation.

– Hence, to maximise motivation employees need to know how Hence, to maximise motivation employees need to know how performance is defined and measured and finally rewarded.performance is defined and measured and finally rewarded.

• Open communication and build trust Open communication and build trust

• An open pay system drives the point home to employees An open pay system drives the point home to employees that the management believes in fair and open policies. that the management believes in fair and open policies.

• Open pay policies not only take power and control from the Open pay policies not only take power and control from the managers but politics are also less likely to surface managers but politics are also less likely to surface resulting in merit getting rewarded. resulting in merit getting rewarded.

• When pay information is kept as secret, employees make When pay information is kept as secret, employees make inaccurate perceptions. Further more, those perceptions inaccurate perceptions. Further more, those perceptions work against increasing motivation. work against increasing motivation.

– Hence, to maximise motivation employees need to know how Hence, to maximise motivation employees need to know how performance is defined and measured and finally rewarded.performance is defined and measured and finally rewarded.



Job Evaluation: Point System MethodJob Evaluation: Point System MethodJob Evaluation: Point System MethodJob Evaluation: Point System Method


Five Levels of the Compensable Factor “Technical Skills”



Job Evaluation MethodsJob Evaluation MethodsJob Evaluation MethodsJob Evaluation Methods


Key Strategic Issues in Key Strategic Issues in CompensationCompensation

Key Strategic Issues in Key Strategic Issues in CompensationCompensation

• Determining compensation relative to the market.Determining compensation relative to the market.• Striking a balance between fixed and variable Striking a balance between fixed and variable

compensation.compensation.• Deciding whether or not to utilize team-based Deciding whether or not to utilize team-based

versus individual pay.versus individual pay.• Creating the appropriate mix of financial and non-Creating the appropriate mix of financial and non-

financial compensation.financial compensation.• Developing a cost-effective compensation program Developing a cost-effective compensation program

that results in high performance.that results in high performance.

• Determining compensation relative to the market.Determining compensation relative to the market.• Striking a balance between fixed and variable Striking a balance between fixed and variable

compensation.compensation.• Deciding whether or not to utilize team-based Deciding whether or not to utilize team-based

versus individual pay.versus individual pay.• Creating the appropriate mix of financial and non-Creating the appropriate mix of financial and non-

financial compensation.financial compensation.• Developing a cost-effective compensation program Developing a cost-effective compensation program

that results in high performance.that results in high performance.


Reading 11.1: Compensating TeamsReading 11.1: Compensating TeamsReading 11.1: Compensating TeamsReading 11.1: Compensating Teams

• Reasons for tailoring compensation to individuals:Reasons for tailoring compensation to individuals:– Motivation comes from within the individual as opposed to the Motivation comes from within the individual as opposed to the

group.group.– The development of skills and behaviors is an individual The development of skills and behaviors is an individual

undertaking.undertaking.– Fairness in dealing with teams does not mean equal pay for Fairness in dealing with teams does not mean equal pay for

all.all.– Team compensation is not a payoff but a means of nurturing Team compensation is not a payoff but a means of nurturing

behavior that benefits the team.behavior that benefits the team.

• Reasons for tailoring compensation to individuals:Reasons for tailoring compensation to individuals:– Motivation comes from within the individual as opposed to the Motivation comes from within the individual as opposed to the

group.group.– The development of skills and behaviors is an individual The development of skills and behaviors is an individual

undertaking.undertaking.– Fairness in dealing with teams does not mean equal pay for Fairness in dealing with teams does not mean equal pay for

all.all.– Team compensation is not a payoff but a means of nurturing Team compensation is not a payoff but a means of nurturing

behavior that benefits the team.behavior that benefits the team.


Reading 11.2:Reading 11.2:New Thinking for the New MillenniumNew Thinking for the New Millennium

Reading 11.2:Reading 11.2:New Thinking for the New MillenniumNew Thinking for the New Millennium

• Strategic approaches to may compensation (pay) Strategic approaches to may compensation (pay) systems more responsive:systems more responsive:

– Pay the personPay the person for individual worth (knowledge, skills and for individual worth (knowledge, skills and competencies) rather than for the value of a job they perform.competencies) rather than for the value of a job they perform.

– Reward excellenceReward excellence through a pay for performance through a pay for performance compensation that establishes a clear relationship between a compensation that establishes a clear relationship between a significant amount of pay and attainment of organizational significant amount of pay and attainment of organizational objectives.objectives.

– Individualize the pay systemIndividualize the pay system to give employees choices in to give employees choices in how they are rewarded and what reward they receive.how they are rewarded and what reward they receive.

• Strategic approaches to may compensation (pay) Strategic approaches to may compensation (pay) systems more responsive:systems more responsive:

– Pay the personPay the person for individual worth (knowledge, skills and for individual worth (knowledge, skills and competencies) rather than for the value of a job they perform.competencies) rather than for the value of a job they perform.

– Reward excellenceReward excellence through a pay for performance through a pay for performance compensation that establishes a clear relationship between a compensation that establishes a clear relationship between a significant amount of pay and attainment of organizational significant amount of pay and attainment of organizational objectives.objectives.

– Individualize the pay systemIndividualize the pay system to give employees choices in to give employees choices in how they are rewarded and what reward they receive.how they are rewarded and what reward they receive.

Documents

CHAPTER 11 COMPENSATION PowerPoint Presentation by Charlie Cook Copyright © 2002 South-Western. All rights reserved