Compensation
System
Development
Determining Pay Rates
Employee compensation
All forms of pay or rewards going to employees
and arising from their employment.
Direct financial payments
Pay in the form of wages, salaries, incentives,
commissions, and bonuses.
Indirect financial payments
Pay in the form of financial benefits such as
insurance.
Strategy,
and Compensation
Aligned reward strategy
The employer’s basic task is to create a bundle
of rewards specifically aimed at the employee
behaviors the firm needs to support and
achieve its competitive strategy.
Compensation Policy Issues
Pay for performance
Pay for seniority
Salary increases and promotions
Overtime and shift pay
Probationary pay
Paid and unpaid leaves
Paid holidays
Salary compression
Geographic costs of living differences
Compensation Policy Issues
(cont’d)
Salary compression
A salary inequity problem, generally caused by
inflation, resulting in longer-term employees in
a position earning less than workers entering
the firm today.
Equity and Its Impact on Pay Rates
The equity theory of motivation
States that if a person perceives an inequity,
the person will be motivated to reduce or
eliminate the tension and perceived inequity.
Forms of Equity
External equity
How a job’s pay rate in one company compares to the
job’s pay rate in other companies.
Internal equity
How fair the job’s pay rate is, when compared to other
jobs within the same company
Individual equity
How fair an individual’s pay as compared with what his
or her co-workers are earning for the same or very
similar jobs within the company.
Procedural equity
The perceived fairness of the process and procedures to
make decisions regarding the allocation of pay.
Methods to Address Equity Issues
Salary surveys
To monitor and maintain external equity.
Job analysis and job evaluation
To maintain internal equity,
Performance appraisal and incentive pay
To maintain individual equity.
Communications, grievance mechanisms,
and employees’ participation
To help ensure that employees view the pay
process as transparent and fair.
Incentives
Financialrewards paid to workers
whose production exceeds a
predetermined standard.
Frederick Taylor
Popularized scientific management
and the use of financial incentives
in the late 1800s.
Law of individual differences
The fact that people differ in
personality, abilities, values, and
needs.
Different people react to different
incentives in different ways.
Managers should be aware of
employee needs and fine-tune the
incentives offered to meets their
needs.
Money is not the only motivator.
Types of Incentive Plans
(cont’d)
Pay-for-performance plans
Individual incentive/recognition
programs
Sales compensation programs
Team/group-based variable pay
programs
Organization wide incentive
programs
Individual Incentive Plans
Straight piecework: A fixed sum is
paid for each unit the worker produces
under an established piece rate
standard. An incentive may be paid for
exceeding the piece rate standard.
Standard hour plan: The worker gets a
premium equal to the percent by which
his or her work performance exceeds the
established standard.
Individual Incentive Plans
(cont’d)
Pros and cons of piecework
Easily understandable, equitable, and powerful
incentives
Employee resistance to changes in standards
or work processes affecting output
Quality problems caused by an overriding
output focus
Possibility of violating minimum wage
standards
Employee dissatisfaction when incentives
either cannot be earned due to external factors
or are withdrawn due to a lack of need for
output
Individual Incentive Plans
(cont’d)
Merit pay
A permanent cumulative salary
increase the firm awards to an
individual employee based on his or her
individual performance.
Merit awards may be tied to both
individual and organizational
performance.
Lump-Sum Award Determination Matrix
(an example)
To determine the dollar value of each employee’s incentive award: (1)
multiply the employee’s annual, straight-time wage or salary as of June
30 times his or her maximum incentive award and (2) multiply the
resultant product by the appropriate percentage figure from this table.
For example, if an employee had an annual salary of $20,000 on June
30 and a maximum incentive award of 7% and if her performance and
the organization’s performance were both “excellent,” the employee’s
Individual Incentive Plans
(cont’d)
Incentives for professional employees
Professional employees are those whose work
involves the application of learned knowledge to
the solution of the employer’s problems.
Lawyers, doctors, economists, and engineers.
Possible incentives
Bonuses, stock options and grants, profit sharing
Better vacations, more flexible work hours
improved pension plans
Equipment for home offices
Individual Incentive Plans
(cont’d)
Recognition-based awards
Recognition has a positive impact on
performance, either alone or in conjunction
with financial rewards.
Combining financial rewards with
nonfinancial ones produced
performance improvement in service
firms almost twice the effect of using
each reward alone.
Day-to-day recognition from supervisors,
peers, and team members is important.
Incentives for Salespeople
Salary plan
Straight salaries
Best for: prospecting (finding new clients), training
customer’s sales force, or participating in national and
local trade shows.
Commission plan
Pay is only a percentage of sales
Keeps sales costs proportionate to sales revenues.
May cause a neglect of nonselling duties.
Can create wide variation in salesperson’s income.
Likelihood of sales success may linked to external factors
rather than to salesperson’s performance.
Can increase turnover of salespeople.
Incentives for Salespeople
(cont’d)
Combination plan
Payis a combination of salary
and commissions.
Plan gives salespeople a floor
(safety net) to their earnings.
Team/Group based Incentive
Plans
Team or group incentive plan
A plan in which a production
standard is set for a specific work
group, and its members are paid
incentives if the group exceeds the
production standard.
Gainsharing
An incentive plan that engages many or all employees in a
common effort to achieve a company’s productivity
objectives.
Scanlon plan (Joseph Scanlon, 1937)
Employees receive 75% of savings from their suggestion.
Team/Group based Incentive
Plans
• At-Risk Pay Plans/Risk-sharing
Plans
— To put some portion of the employee’s pay at risk. If
employees meet or exceed their goals, they earn
back not only the portion of their pay that was at
risk, but also an incentive.
Organization wide Variable Pay
Plans
Profit-sharing plans
Cash plans
Employees receive cash shares of the firm’s profits at
regular intervals.
Deferred profit-sharing plans
The employer puts cash awards into trust accounts for
he employees’ retirement.
Organization wide Variable Pay
Plans (cont’d)
Employee stock ownership plan
(ESOP)
A corporation annually contributes its own stock—
or cash (with a limit of 15% of compensation) to
be used to purchase the stock—to a trust
established for the employees.
