Chapter 9 & 10: Managing Compensation Flashcards
Three types of compensation
- Direct Compensation
- Indirect Compensation
- Nonfinancial compensation
Direct compensation
employee wages and salaries, incentives,
bonuses, and commissions
Indirect compensation
benefits supplied by employers.
Nonfinancial compensation
employee recognition programs, rewarding jobs,
organizational support, work environment, and
flexible work hours to accommodate personal
needs
Strategic Compensation
Links the compensation of employees to the mission, objectives,
philosophies, and culture of the organization.
Challenges to Strategic Compensation
- Firm’s policies and practices
- Firm’s compensation options
- Equitability of the firm’s sytem
- Appropriate of the system
Theories of Motivating Employees through compensation (Theoretical Explanations)
- Equity Theory
- Expectancy Theory
Equity Theory
An employee’s perception that compensation received is equal to
the value of the work performed
Expectancy Theory
A theory of motivation that holds that employees should exert
greater work effort if they have reason to expect that it will result
in a reward that they value
Establishing Base Pay Rates
Internal Equity
- Determine worth of each job –> Job evaluation
- Group similar jobs into pay grades
Establishing external equity
- Conduct a wage/salary survey
- Price each pay grade: wage curves
- Fine tune pay rates
Internal Equity: Job Evaluation, The Point Method
- Determine clusters of jobs to be evaluated
- Collect job information
- Select and define compensable factors
- Define factor degrees
- Determine factor weights
- Assign points to factors and degrees
Typical Compensable Factors
- Skill
- Effort
- Responsibility
- Working Conditions
Disadvantages of Job Evaluation
- Does not provide a precise measure of each job’s worth
- Final job rankings indicate the relative importance
of jobs - Method can be used to consider only a reasonably small
number of jobs - Too rigid, reduces flexibility
- Reinforces top-down
- Impedes changes
- Does not reward behavior change
- Discourages lateral moves
Factors to establish external equity
- Wage surveys
- Labour market conditions
- Area wage rates
- Cost of living (Consumer - - - Price Index – CPI)
- Collective bargaining
External Equity: Market Pricing
Rely almost exclusively on external market pay rates
Base Pay Structure
Pay Grade
- Jobs of approximately equal value
Pay Range
The minimum and maximum pay rates for jobs in a particular pay grade
Steps to Conduct JE’s Market Fit
- Conduct survey to determine competitor’s rates
- Survey results used to create market line
- Adjust market line to create pay policy line which reflects pay strategy
- Pay grades and ranges designed around policy line to align internal and external environment
Factors to determine pay increases
- Seniority
- Cost-of-Living Adjustments (COLA)
- Lump-Sum Increases (LSI)
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.
Strategic Reasons for Incentive Plans
- Variable Pay
- Incentive Plans
Variable Pay
Tying pay to some measure of individual, group, or
organizational performance
Incentive Plans
Establishing a performance “threshold” to qualify for incentive
payments
Requirements for a Successful Incentive Plan
- Identify important
organizational metrics that
encourage employee behaviour. - Involve employees.
- Find the right incentive payout.
- Establish a clear link between
performance and payout. - Set performance measures.
Administering Incentive Plans
incentive systems are effective when:
* Incentives are based on actual differences
* Annual incentive budgets are large enough to reward and reinforce exceptional
performance
* Overhead costs are controllable
Pay Equity
Equal pay for work of equal value
