Rewards and CompensationRewards and CompensationRewards and CompensationRewards and Compensation

Nature of CompensationNature of CompensationNature of CompensationNature of Compensation

• Types of Rewards Intrinsic

Intangible, psychological, and social effects of compensation

Extrinsic Tangible, monetary, and non-monetary effects of

compensation

• Types of CompensationDirect compensation

The employer exchanges monetary rewards for work done.

Indirect compensation Employer-provided benefits—like health insurance—that are

provide employees for being a member of the organization.

Components of a Compensation System Components of a Compensation System Components of a Compensation System Components of a Compensation System

Strategic CompensationStrategic CompensationStrategic CompensationStrategic Compensation

• Objectives of a Strategically Supportive Compensation System:

Legal compliance with all appropriate laws and regulations

Cost effectiveness for the organization

Internal, external, and individual equity for employees

Performance enhancement for the organization

Compensation PhilosophiesCompensation PhilosophiesCompensation PhilosophiesCompensation Philosophies

• Entitlement PhilosophyAssumes that individuals who have worked another

year are entitled to pay increases, with little regard for performance differences.

• Pay-for-Performance PhilosophyRequires that compensation changes reflect individual

performance differences.

Continuum of Compensation PhilosophiesContinuum of Compensation PhilosophiesContinuum of Compensation PhilosophiesContinuum of Compensation Philosophies

Compensation Approaches Compensation Approaches Compensation Approaches Compensation Approaches

Compensation System Design IssuesCompensation System Design IssuesCompensation System Design IssuesCompensation System Design Issues

ExpatriatesExpatriatesExpatriatesExpatriates

Host-Country Host-Country NationalsNationals

Host-Country Host-Country NationalsNationals

Third-Country Third-Country NationalsNationals

Third-Country Third-Country NationalsNationals

Global Global Compensation Compensation

IssuesIssues

Global Global Compensation Compensation

IssuesIssues

Typical Components of Expatriate CompensationTypical Components of Expatriate CompensationTypical Components of Expatriate CompensationTypical Components of Expatriate Compensation

Individual vs. Team RewardsIndividual vs. Team RewardsIndividual vs. Team RewardsIndividual vs. Team Rewards

Distribute variable rewards at the team levelDistribute variable rewards at the team levelDistribute variable rewards at the team levelDistribute variable rewards at the team level

Make system simple and understandable.Make system simple and understandable.Make system simple and understandable.Make system simple and understandable.

Using Team-Based Reward SystemsUsing Team-Based Reward SystemsUsing Team-Based Reward SystemsUsing Team-Based Reward Systems

Use skill-based pay for the base.Use skill-based pay for the base.Use skill-based pay for the base.Use skill-based pay for the base.

Use variable pay based on business entity performanceUse variable pay based on business entity performanceUse variable pay based on business entity performanceUse variable pay based on business entity performance

Maintain a high degree of employee involvementMaintain a high degree of employee involvementMaintain a high degree of employee involvementMaintain a high degree of employee involvement

Perceptions of Pay FairnessPerceptions of Pay FairnessPerceptions of Pay FairnessPerceptions of Pay Fairness

EquityEquityEquityEquity

InternalInternalEquityEquity

InternalInternalEquityEquity

ExternalExternalEquityEquity

ExternalExternalEquityEquity

The perceived fairness between what a person does The perceived fairness between what a person does (inputs) and what the person receives (outcomes).(inputs) and what the person receives (outcomes).

The perceived fairness between what a person does The perceived fairness between what a person does (inputs) and what the person receives (outcomes).(inputs) and what the person receives (outcomes).

Employee compensation viewed as equitable in relation to the Employee compensation viewed as equitable in relation to the compensation of employees performing similar jobs in other compensation of employees performing similar jobs in other organizations.organizations.

Employee compensation viewed as equitable in relation to the Employee compensation viewed as equitable in relation to the compensation of employees performing similar jobs in other compensation of employees performing similar jobs in other organizations.organizations.

Employees receive compensation in relation to the knowledge, Employees receive compensation in relation to the knowledge, skills, and abilities they use in their jobs as well as their skills, and abilities they use in their jobs as well as their responsibilities and accomplishments.responsibilities and accomplishments.

Employees receive compensation in relation to the knowledge, Employees receive compensation in relation to the knowledge, skills, and abilities they use in their jobs as well as their skills, and abilities they use in their jobs as well as their responsibilities and accomplishments.responsibilities and accomplishments.

Procedural JusticeProcedural JusticeProcedural JusticeProcedural Justice Perceived fairness of the process and proceduresPerceived fairness of the process and proceduresused to make decisions about employees.used to make decisions about employees.

Perceived fairness of the process and proceduresPerceived fairness of the process and proceduresused to make decisions about employees.used to make decisions about employees.

Distributive JusticeDistributive JusticeDistributive JusticeDistributive Justice Perceived fairness in the distribution of outcomes.Perceived fairness in the distribution of outcomes.Perceived fairness in the distribution of outcomes.Perceived fairness in the distribution of outcomes.

Pay Openness/Pay Openness/SecrecySecrecy

Pay Openness/Pay Openness/SecrecySecrecy

The degree of openness or secrecy that an organization The degree of openness or secrecy that an organization allows regarding its pay system.allows regarding its pay system.

The degree of openness or secrecy that an organization The degree of openness or secrecy that an organization allows regarding its pay system.allows regarding its pay system.

Development of a Base Pay SystemDevelopment of a Base Pay SystemDevelopment of a Base Pay SystemDevelopment of a Base Pay System

• Job EvaluationFormal, systematic means to identify the relative

worth of jobs within an organization. Evaluating every job in the organization on:

Skills, Effort, Responsibility and Working Conditions

• Job Evaluation Committees – Committees whose task is to conduct job evaluations

as may be required and/or to determine compensable factors. Most often chaired by key compensation officials from human resources. Membership should be a diverse as possible to ensure widespread input.

Compensation Compensation Administration Administration

Process Process

Compensation Compensation Administration Administration

Process Process

Components of the Wage MixComponents of the Wage MixComponents of the Wage MixComponents of the Wage Mix

WAGEWAGEMIXMIX

Labor MarketConditions

Area WageRates

Cost ofLiving

CollectiveBargaining

LegalRequirements

Compensation Strategyof the Organization

Worth ofthe Job

Employee’sRelativeWorth

Employer’sAbilityto Pay

Factors Affecting the Wage MixFactors Affecting the Wage MixFactors Affecting the Wage MixFactors Affecting the Wage Mix

The Wage Mix—Internal FactorsThe Wage Mix—Internal FactorsThe Wage Mix—Internal FactorsThe Wage Mix—Internal Factors

• Compensation StrategySetting organization compensation policy to lead,

lag, or match competitors’ pay.

• Worth of a JobEstablishing the internal wage relationship among

jobs and skill levels.

• Relative Worth of an EmployeeRewarding individual employee performance

• Ability-to-Pay Having the resources and profits to pay employees.

The Wage Mix—External FactorsThe Wage Mix—External FactorsThe Wage Mix—External FactorsThe Wage Mix—External Factors

• Labor Market ConditionsAvailability and quality of potential employees is

affected by economic conditions, government regulations and policies, and the presence of unions.

• Area Wage RatesA firm’s formal wage structure of rates is influenced

by those being paid by other area employers for comparable jobs.

The Wage Mix—External FactorsThe Wage Mix—External FactorsThe Wage Mix—External FactorsThe Wage Mix—External Factors

• Cost of LivingLocal housing and environmental conditions can

cause wide variations in the cost of living for employees.

Inflation can require that compensation rates be adjusted upward periodically to help employees maintain their purchasing power.

The Wage Mix—External FactorsThe Wage Mix—External FactorsThe Wage Mix—External FactorsThe Wage Mix—External Factors

• Collective BargainingEscalator clauses in labor agreements that provide

for quarterly upward cost-of-living wage adjustments for inflation to protect employees’ purchasing power.

Unions bargain for real wage increases that raise the standard of living for their members.

Real wages are increases larger than rises in the consumer price index; that is, the real earning power of wages.

Job EvaluationJob EvaluationJob EvaluationJob Evaluation

FactorFactorComparisonComparison

FactorFactorComparisonComparison

RankingRankingRankingRanking ClassificationClassificationClassificationClassification

PointPointMethodMethod

PointPointMethodMethod

Job Job Evaluation Evaluation MethodsMethods

Job Job Evaluation Evaluation MethodsMethods

Valuing Jobs Using Market PricingValuing Jobs Using Market PricingValuing Jobs Using Market PricingValuing Jobs Using Market Pricing

• Market PricingUse of pay survey data to identify the relative value of

jobs based on what other employers pay for similar jobs.

• Advantages of Market PricingTies organizational pay levels to what is actually

occurring in the market, without being distorted by “internal” job evaluation.

Communicates to employees that the compensation system is “market linked,” rather than distorted by internal issues.

Valuing Jobs Using Market Pricing (cont’d)Valuing Jobs Using Market Pricing (cont’d)Valuing Jobs Using Market Pricing (cont’d)Valuing Jobs Using Market Pricing (cont’d)

• Disadvantages of Market Pricing It relies on market survey data that is limited or may

have been gathered in methodologically sound ways.

The responsibilities of a specific job in a company may be somewhat different from those of the “matching” job identified in the survey.

The market data’s scope (range of sources) is another concern.

Tying pay levels to market data can lead to wide fluctuations based on market conditions.

Pay SurveysPay SurveysPay SurveysPay Surveys

• Pay SurveyCollection of data on compensation rates for workers

performing similar jobs in other organizations.

• Benchmark JobsJobs found in many organizations and performed by

several individuals who have similar duties that are relatively stable and require similar KSAs.

• Internet-Based Pay SurveysPay survey questionnaires are distributed

electronically rather than as printed copies.

Using Pay SurveysUsing Pay SurveysUsing Pay SurveysUsing Pay Surveys

MethodologyMethodologyMethodologyMethodology

ParticipantsParticipantsParticipantsParticipants Broad-basedBroad-basedBroad-basedBroad-based

TimelinessTimelinessTimelinessTimelinessSurvey Data Survey Data RelevanceRelevance

Survey Data Survey Data RelevanceRelevanceJob MatchesJob MatchesJob MatchesJob Matches

Pay StructuresPay StructuresPay StructuresPay Structures

• Job FamilyA group of jobs having common organizational

characteristics.

• Common Pay StructuresHourly and salariedOffice, plant, technical, professional, managerialClerical, information technology, professional,

supervisory, management, and executive

• Pay GradesGroupings of individual jobs having approximately the

same job worth.

Establishing Establishing Pay Structures Pay Structures

Establishing Establishing Pay Structures Pay Structures

Pay Structures (cont’d)Pay Structures (cont’d)Pay Structures (cont’d)Pay Structures (cont’d)

• Market BandingGrouping jobs into pay grades based on similar

market survey amounts.

• Market LineGraph line that shows the relationship between job

value as determined by job evaluation points and job value as determined by pay survey rates.

Shows the distribution of pay for the surveyed jobs, allowing a linear trend line to be developed by the least-squares regression method.

Pay RangesPay RangesPay RangesPay Ranges

• BroadbandingThe practice of using fewer pay grades having

broader pay ranges that in traditional systems.Benefits

Encourages horizontal movement of employees

Is consistent with trend towards flatter organizations

Creates a more flexible organization

Encourages competency development

Emphasizes career development

Determining Pay IncreasesDetermining Pay IncreasesDetermining Pay IncreasesDetermining Pay Increases

• Performance and Merit Increases• Merit Pay

Merit pay programs reward employees with permanent incrses to base pay according to differences in performance.

• Just noticeable difference (JND)The minimum pay increase that employees will see as

making a substantial change in compensation. Sometimes referred to as just-meaningful pay.

Determining Pay Increases (cont’d)Determining Pay Increases (cont’d)Determining Pay Increases (cont’d)Determining Pay Increases (cont’d)

• Seniority Time spent in an organization or on a particular job that is used

to determine eligibility for organizational rewards and benefits.

• Cost-of-Living Adjustments (COLA) A percentage increase in wages to maintain real wages in a

period of economic inflation.

Adjustments are tied to changes in an economic measure (e.g., the Consumer Price Index).

• Lump-Sum Increases (LSI) A one-time payment of all or part of a yearly pay increase that

does not increase base wages.