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COMPENSATION
Compensation: An Overview• Compensation - Total of all rewards provided employees
in return for their services
• Direct financial compensation - Pay that a person receives
in the form of wages, salaries, bonuses, and commissions
• Indirect financial compensation - All financial rewards
that are not included in direct compensation
• Nonfinancial compensation - Satisfaction that a person
receives from the job itself or from the work environment
Equity in Financial Compensation
• Equity - Fair pay treatment for employees
• External equity - Jobs are fairly compensated in
comparison to the similar jobs in the labour market.
• Internal equity - Exists when employees are paid
according to the relative value of their jobs within the
same organization
Equity in Financial Compensation (Continued)
• Employee equity - Individuals performing similar jobs for the same firm are paid according to factors unique to the employee, such as performance level or seniority
• Team equity - More productive teams are rewarded more than less productive groups
Determinants of Individual Financial Compensation
• Organization• Labor market• Job• Employee
The Organization as a Determinant of Financial Compensation
• Compensation policies
• Organizational politics
• Ability to pay
The Labor Market as a Determinant of Financial Compensation
• Compensation surveys
• Cost of living
• Labor unions
• Society
• Economy
• Legislation
Compensation Surveys
• What are other firms paying?
• Geographic area of survey
• Specific firms to contact
• Jobs to include
Cost of Living
• When prices rise over a period of time and pay does not, real pay is actually lowered
• Some firms may index pay increases to the
inflation rate
Labor Unions
• Collective bargaining between management
and unions as “wages, hours, and other
terms and conditions of employment.”
• Unions may attempt to create, Pressure
Society
• Government has sometimes responded to
public opinion and stepped in to encourage
businesses to hold down wages and prices
• Businesses in a local labor market are also
concerned
The Economy
• Affects financial compensation decisions
• Depressed economy generally increases the
labor supply
• Cost of living often rises as the economy
expands
Compensation Legislation
• Minimum Wages Act 1948
• Payment of Wages Act 1936
• Bonus Act 1956
• Wage Boards
• Pay Commissions
The Job as a Determinant of Financial Compensation
• Job itself continues to be a factor, especially in
those firms that have internal pay equity as a
primary consideration
• Organizations pay for the value they attach to
certain duties, responsibilities, and other job-
related factors such as working conditions
The Employee as a Determinant of Financial Compensation
• Performance-Based Pay
• Seniority
• Experience
• Membership in the organization
• Potential
• Political influence
• Luck
• Special employee classes
Performance-Based Pay
• Merit pay - Pay increase given to employees based on their level of performance as indicated in the appraisal
• Variable pay - Compensation based on performance (bonus)
• Skill-based pay - System that compensates employees on the basis of job-related skills and knowledge they possess
• Competency-based pay - Compensation plan that rewards employees for their demonstrated expertise
Seniority
• Length of time an employee has been
associated with the company, division,
department, or job
• Labor unions tend to favor seniority
Experience
• Has potential for enhancing a person's
ability to perform
• Possibility can only be realized if the
experience acquired is positive
Potential
• Organizations do pay some individuals
based on their potential
• Many young employees are paid well
because of their potential
Political Influence
• Should not be used to determine financial
compensation
• To deny its existence would be unrealistic
• A person's pull or political influence may sway
pay and promotion decisions
Special Employee Classes
• Compensation for professionals
• Compensation for sales employees