Week 10 - Compensation Flashcards
What is Equity Theory (Organizational Justice)?
*Equity theory ensures that people have fair access to opportunities based on their needs, and it explains that individuals judge fairness by comparing what they contribute to what they receive.
*Organizational justice theory builds on this, asserting that workers make similar fairness judgments, impacting their workplace trust and willingness to be productive.
*For example, if the Coffee Bean Company lacks organizational justice, employees may be less trusting and productive, as per this theory.
The three components of equity theory
Distributive Justice (DJ) - who gets what
Procedural Justice - how is DJ decided
Interactional Justice - how decisions about DJ and PJ are communicated (and what can be done after)
Greenberg Theft Study (1990)
Theorist: Jerald Greenberg
Theory: Employees may resort to theft when they perceive unfair pay, a concept aligned with equity theory.
Reactions to 15% Pay Cut Across Plant Locations:
Plant A - Inadequate Explanation:
Expectation: Spike in negative reactions.
Reasoning: Inadequate explanation may lead to dissatisfaction, frustration, and an increased risk of theft.
Plant B - Good Explanation:
Expectation: Increase in understanding and acceptance.
Reasoning: Clear, reasonable explanation could lead to improved understanding, reducing negative reactions and the likelihood of theft.
Plant C - Control Group:
Expectation: Stable reactions.
Reasoning: Plant C, without a pay cut, provides a baseline for comparison, expected to remain stable in terms of employee reactions.
4 phases of direct compensation
Compensation Philosophy
Reviewing Job analysis
Pricing Jobs
Matching employees pay
Phase 1 - Compensation Philosophy
(Lead Match Lag)
Compensation Philosophy: Establishing the organization’s approach and principles regarding employee compensation.
*It involves deciding whether the organization will lead, match, or lag behind the industry average in terms of pay levels.
*Leading means paying above the market average, matching means aligning with the market, and lagging means paying below the market average.
Phase 2 - Job Analysis
(Job Descriptions, Job Specifications, Performance Standards)
The systematic process of gathering and documenting information about a job, including its duties, responsibilities, and the skills required.
Job Descriptions: A detailed account of the tasks, responsibilities, and working conditions associated with a particular job.
Job Specifications: Outlining the qualifications, skills, and characteristics required for a job.
Performance Standards: Establishing the criteria against which employee performance will be assessed.
Phase 3 - Pricing Jobs
(Job Evaluation, Market Pricing, Skill-Based):
Job Evaluation: A systematic process used to determine the relative worth of jobs within an organization. It helps in establishing an internal pay structure.
Market Pricing: Evaluating external market data to determine how competitive an organization’s pay rates are compared to the market.
Skill-Based: A compensation approach that focuses on paying employees based on the skills they possess, emphasizing the value of skills in determining pay.
What are the job evaluation methods?
Job ranking - simplest method
Job grading - works well for similar jobs (levels, sr. vs. jr…)
Point system - points for KSAs, responsibilities, conditions, works well for dissimilar jobs
What is internal equity
Systematic procedures to determine the relative worth or value of jobs
Phase 4 - Matching Employees’ Pay
Matching Employees’ Pay: Ensuring employees’ pay rates align with the established compensation philosophy, job analysis outcomes, and pricing decisions. (orgs pay policy)
This phase involves implementing the determined compensation structure for each employee based on their job roles, skills, and performance.
What is Pay Secrecy
A management policy not to discuss or publish individual salaries
Advantages of Pay Secrecy
Most employees prefer to have their pay kept secret
Gives managers greater freedom
Disadvantages of pay secrecy
This may generate distrust in the pay system
Covers up inequities
Employees may perceive there is no relationship between pay and performance
What is direct compensation?
Definition:
Direct compensation refers to the monetary rewards that an employee receives directly in exchange for their work or services.
Components:
Base Salary/Wages: The fixed amount of money paid regularly, usually on a monthly or hourly basis.
Bonuses: Variable payments made as a reward for performance or achieving specific goals.
Overtime Pay: Additional pay for hours worked beyond the standard working hours.
Commissions: Payments based on sales or performance targets.
Purpose:
Direct compensation is designed to recognize and reward the employee’s skills, experience, and performance directly related to their job responsibilities.
Taxes:
Generally subject to income taxes and other applicable deductions.
What is indirect compensation
Definition:
Indirect compensation, also known as employee benefits or perks, encompasses non-monetary benefits provided to employees in addition to their regular salary.
Components:
Health Insurance: Coverage for medical, dental, and vision care.
Retirement Plans: Pension plans, 401(k) plans, or other retirement savings programs.
Paid Time Off: Vacation days, sick leave, and holidays.
Flexible Work Arrangements: Options like telecommuting or flexible work hours.
Training and Development: Opportunities for skill enhancement and career development.
Purpose:
Indirect compensation is designed to enhance the overall well-being of employees and contribute to their work-life balance, health, and job satisfaction.
Taxes:
Some components of indirect compensation may have tax implications, but many are either tax-free or tax-advantaged.
