Compensation Management

COMPENSATION MANAGEMENT
Compensation Strategies 1
objectives

At the end of this topic students will be able to:
Define and discuss the advantages, dis-advantages and

applicability of:
Base Pay
Performance Pay (Merit Pay)
Incentive Pay
Indirect Pay (Fringe Benefits)
Pay-for-knowledge
Identify how the various pay systems can be linked to the

competitive strategy of an organization.
Introduction

Why:
does the person who cuts your hair get paid per head?
does the person who pumps your gas get paid per hour?
do realtors get paid only when they sell a house?
are auto salespeople paid only when they sell a car?
are stockbrokers paid only when they make a trade?
are carpet installers paid for each square metre of carpet
laid?
are long-haul truck drivers paid per kilometre driven?
are dentists paid per tooth drilled?
Compensation Mixed Choices

Job Evaluation
Base Pay Market Pricing
Pay for Knowledge
Performance Individual Performance

Group Performance
Pay Organization Performance
Mandatory Benefits
Pension Plan
Indirect Pay Health & Life Insurance

Pay for time not worked
Employee Services
Other Benefits
Purpose

The questions that will be addressed are:
What role should each of the three compensation

component (base pay, performance pay, indirect pay) play
in the compensation mix ?
What top level of compensation should be provided?
What are the advantages and disadvantages of each of the

three pay components and their key elements?
Under what circumstance is each most appropriate?
Base Pay

Definition
The portion of an individuals compensation that is

based on a unit of time worked. Not on output
produced or results achieved.
Is the basic monetary compensation paid for work

performed
Base Pay

Factors
Is guaranteed by the employer
Amount pay is typically determined by the value that the

organization accords to the work the higher the value of the
work the higher the level of base pay
May be calculated on a hourly, daily, weekly, monthly or annual

rate
When calculated on a hourly basis, it is known as wages
Base Pay

Factors contd.
When calculated on a weekly, monthly or annual

basis it is known as salary
Sometimes preferred to output related pay
Easier to determine
Base pay

Advantages
It does not confine employee attention to one or two

behaviours (selection of task)
Allows employer to recognize and encourage important non-

output-based job behaviours i.e. skill development
Can signal the relative importance of jobs within the

organization.
Demonstrates a commitment on the part of the employer to the

employee creating a greater likelihood of employee
commitment to the employer
Base Pay

Why use Base Pay?
Because:
Output related pay cannot always be used
1. For some organizations output related pay is simply

impractical
No other alternative is viable
It does not confine employees attention to only one or two
behaviours as output-based pay tends to do
2. Allows the employer to recognize and encourage

important non-output-based job behaviours:
Ex. Skill development
Base Pay

Why use Base Pay?
Because contd.:
3. Base-pay can signal the relative importance of jobs
within the organization
4. Base-pay demonstrates a commitment on the part of the

employer to the employee, creating a greater likelihood of
employee commitment to the employer
5. Depending on the method used to set up a base pay

strategy, it can support a particular managerial strategy.
6. It is usually much simpler to implement and administer

than an out-put related system.
Base Pay

Substitution of output related pay for time-based pay is
only feasible for jobs in which the output is:
Easy to measure
Easy to price in terms of its value to the employer
Easy to attribute to individual employees
Controlled by the individual employee
Not highly unstable
Base Pay

Disadvantages
Base pay represents more of a fixed employer commitment

than performance-contingent pay, especially if salaries are
used
Ex. Base pay is not linked to variability in an employers
ability to pay in the way that performance-contingent pay
is.
While base pay does contribute to membership behaviour, it

does not directly motivate task behaviour, nor does it signal
key task behaviour
Base Pay

Disadvantage
Since base pay does not relate organizational success

directly to individual success, it does not directly contribute
to citizenship behaviour.
Base pay is not self-correcting. In an output-related system,

employees who do not perform up to standard tend to
voluntarily remove themselves from the organization
because they are unable to earn enough money. But time-
based pay provides no such mechanism
Base Pay

Types
Seniority base pay
Refers to permanent increases in base pay that are awarded at

agreed periods and bears a direct relationship to the employees
length of service
Predicated on the idea:

that employees become more valuable to their organization over time
That valued employee will leave if their salaries are not also increasing
in value
Is intended to reward employees for their ongoing skill acquisition

and refinement
Base Pay

Types contd.
Seniority Base
Principle, practices and procedures

Collective Bargaining
Job definition
Employees length of service
Base Pay

Seniority-base Pay
Advantages
Employees perceived that they are treated fairly

uniformity
Objectivity use as a yardstick for promotion and

compensation
Reduces subjectivity
Base Pay

Seniority-base Pay
Advantages
Facilitates the administration of pay programs

increases are set and can be budgeted for.
Eliminates favouritism.
Ability of supervisors to motivate employees without

the use of bribery
Base Pay

Seniority-based pay and competitive strategy
Seniority pay does not fit well with the imperative

identified above because:
Employees can count on receiving the same pay raises

regardless of their individual performance record.
High-performing employees receive the same pay increases

as low-performing ones.
Pay raises are received without regard to whether

companies are meeting the differentiation or cost goals.
Base Pay

Seniority-based pay and competitive strategy
Seniority pay does not fit well with the imperative identified above
because contd.:
Employees have little incentive to improve skills or take risks on the

job.
Although seniority pay plans reflect employees increased worth, they

measure such contributions indirectly rather than based on tangible
contributions or the successful acquisition of job-related knowledge or
skills.
Now more than ever, companies need to be accountable to

shareholders, which will require direct measurement of employee job
performance.
Base Pay

Types
Longevity
Is added pay for employees who have reached the
maximum of a pay grade and is not likely to move into
the next higher grade
Commonly used in public sector as:

an incentive to reduce employee turnover
a reward for continuous years of service
Base Pay

Advantages and disadvantages of the methods of
Base Pay
Method Advantages Disadvantages
Market Pricing Simplicity and going rate not always

easy to identify
cost Job definitions may
vary from the market
Keeps jobs data
Does not address
aligned with internal equity
market conditions Lack of control of
compensation strategy
May violate pay equity
Compensation Strategies legislation 22
Base Pay

Base Pay
Centralized control May impede high

Job
of compensation

involvement
Evaluation costs More costly to
Signals importance develop than market
of different jobs pricing
Promotes internal Need for job
equity descriptions
Makes calibration to May become an
the market easier adversarial process
Costly to maintain 23
Compensation Strategies
Base Pay

Base Pay
Job Systematic way to

determine pay for new
Can inhibit
jobs flexibility and
Evaluation Availability of package skill
plans from consultants
Fits well with classical development
and human relations
Low discontinuation
rate
Base Pay

Base Pay
Incentive for May raise labour cost

Pay for
employee skill

topping out
knowledge
development
No disincentive to
problem
Resistance by senior
movement employees to rotation
High work force Higher training costs
flexibility Complex to develop
Does not require job and administer
descriptions May also need to
Compensation Strategies maintain job-based 25
system
Base Pay

Base Pay
Jobs are broader with

Pay for
more intrinsic
May be difficult to
calibrate system to
knowledge rewards market
May improve Not all employee may
customer service have desire or
capability
Supports high
Unions may resist
involvement because not based on
management seniority
High discontinuation
Compensation Strategies rate 26
Advantage and disadvantage of the
compensation mix components
Component
Base Pay

Advantages
Flexibility
Disadvantages
Fixed pay
Can recognize commitment
valued job
behaviours
Does not
Can signal relative motivate task
importance of jobs behaviour
Demonstrates Does not
commitment to encourage
employee
Can support
citizenship
managerial behaviour
strategy Not self-
Simplicity correcting
Performance Pay

Definition
Any type of financial reward provided only when certain specified

performance results occur
Results may be based on the performance of individual employees, a

group or team or an entire organisation
Also called:
Performance-contingent pay
Variable pay
At-risk pay
Pay-for-performance
Performance Pay

Advantage of Performance Pay:
Signal key behaviours and motivates employees to achieve

them
Reduce the need for other types of mechanism for controlling

employee behaviour
Raise employee interest in performance and provide

employees with information about their current performance
levels
Used to support specific managerial strategies and thereby

promote achievement of the organizations goal.
Performance Pay

Advantages
Makes pay plans more variable help to link

compensation level to the firms ability to pay.
Stabilizes an organizations employment level

lessening the need to increase employment in peak
time and lay off at the end of.
Workers average about 20% more earnings than

comparable workers on time-based pay
Performance Pay

Disadvantages
Employees prefer predictability
Employees will not object is it provides an add-on to

wages/salary but, will object if it leads to reduction of pay
Employees will resist substitution of performance pay for

base pay or indirect pay
May have to offer higher total compensation than norm in

order to induce employees to accept substitution
Performance Pay

Disadvantages
Cause employees to only focus on aspects of the job that are

being measured
If poorly designed can have unanticipated negative

consequences
More difficult to manage than base pay
Has a high rate of discontinuation
Performance Pay

Three categories
Individual performance plans

Piece rates
Commissions
Merit pay
Targeted incentives
Group performance plans

Productivity gain-sharing plans
Goal-sharing plans
Other types of team-based pay
Organizational performance plans

Employee profit sharing plans
Employee stock plans
Other organizational pay plans
Performance Pay

Individual Performance Plan
Piece Rates
Developed by Fredrick Taylor
a pay system under which individuals receive a fixed sum for each unit
of output they produce
Commonly associated with the manufacturing sector but also used in

service sector
Requires trust on both sides
Requires job security
Performance Pay

Piece Rates contd.
The objective is to maximize individual productivity by

linking output to reward
In the service sector market pricing is generally used to

set the piece rate
Performance Pay

Piece Rates
Straight piece rate

The same fixed sum is paid for each piece produced,
regardless of how many pieces are produced.
Differential piece rate

A lower sum per piece is paid if employees production
does not meet the production standard
Performance Pay

Piece Rates
Advantages
Highly motivational
Reduce the need for external control of employees
Link compensation to output & employers ability to pay
Provide specific information about the standard level of

output expected.
Performance Pay

Piece Rates
Disadvantages
Can only be applied in a limited number of circumstances
Jobs with diverse activities and a high degree of

interdependence hard to keep track of performance
Jobs for which tasks are continually changing, or tools,

materials and technologies are rapidly changing are also not
amenable
Rate setting is not a scientific process
Performance Pay

Piece Rates
Disadvantages
Group norm will dictate production level
Management practices lay off worker when productive

increase will not induce increase work speed
Created conflict and lack of cooperation among workers
May affect product or service quality
Performance Pay

Piece Rates
Disadvantages
Problems with material and equipment usage
Encourage accidents and safety violations
Need to be re-calculated each time a major change occur -

machinery
Performance Pay

Piece Rates
Is more applicable when:

Workers control their own production
Interdependence between workers is low
Each unit of production can be easily measured and priced
Individuals perform a limited number of tasks can be easily
compensated with the piece rate method
Tasks do not change frequently
Increased productivity will not cause layoffs
Monitoring of quality standards is easy
Performance Pay

Sales Commission
Pay that is geared to the dollar volume of sales or

transactions conducted
Used to compensate sales personnel in many industries
Sales persons receive a certain percentage of their gross

sales
Commission rate typically varies according to the product

being sold
Performance Pay

Sales Commission
Advantages
Commission rates are relatively easy to set and measure
Usually less interdependence among sales employees than among

production workers
Work output is more distinct little or no dependence on others
Unlimited number of sales that can be made without creating a need to

reduce the sales force
Reduces the need for other types of control mechanisms supervision

etc.
Performance Pay

Sales Commission
Advantages contd.
Serves as a source of feedback and a self-correcting

mechanism
Reduces employer risk, since worker pay is link directly to

sales revenue
Increases sales
Fits well with motivation theory

Performance Pay

Sales Commission
Disadvantages
Variable income unplanned budget
Inability to attract high calibre applicants
May cause high turnover
Low income during poor economic conditions
Low income during orientation period
Performance Pay

Sales Commission
Disadvantages contd.
Employees not willing to do jobs thats not sales base
Might encourage deceit to customers
Intense competition among employees
Poor human resources skills and distrust of management may lead

to the need to create sales territories to prevent lost of sales to fellow
co-workers
May serve to encourage dishonest sales practice among workers
Performance Pay

Sales Commission
Disadvantages - As it relates to the Employer
Encourage poor recruitment and selection methods

Little or no training and development methods employed
to retain poor performing employees
If employee fails to sell company fails to get money
High turnover cost
Low customer satisfaction due to high turnover
Attention is focus on gross revenue generation and not
profitability of sales.
Performance Pay

Sales Commission
Types
Base salary plus commission

Serves to the employee for work not directly related to
sales
Draw system
Employees receive regular advances against future
commissions to smooth out income fluctuations
Performance Pay

Types of Merit Pay:
Merit raises
Merit bonuses
Promotions
Performance Pay

Merit Pay
Objective is to recognize and encourage continuing good

performance of individual employees
Feels that employees compensation should be determined at

least in part, by differences in their job performance
Granted base on past performance reward outstanding effort
Should be base on both objective and subjective factors
Always use in combination with base pay
Performance Pay

Merit Pay
Critical success factors:
Employees must know that their efforts on the job will lead
to enhanced job performance and there must be
commitment from top management.
Job requirements must be realistic and must be explicit

enough to permit measurement of performance.
Employees should be well suited to perform the job based

on their skills and abilities
Performance Pay

Merit Pay
Critical success factors:
Employees must perceive a strong relationship between attaining

performance standards and pay increases.
Companies granting merit increases must ensure that the funds needed
to compensate employees are available and are paid in a timely
manner.
Employees should have sufficient control over their performance and

external conditions should not weight in the merit pay decision
process. There must be explicit performance standards against which
employees job performance can be clearly evaluated.
Performance Pay

Merit Pay
Competitive Strategy
Where organizations have adopted a differentiation competitive strategy, merit

pay is not a logical choice since:
It mandates employee role that display creativity, an open mind to novel ways of
approaching work and a degree of risk taking
Companies hold a longer-term focus with regard to the attainment of pre-

established objectives
Merit pay potentially lends itself more to inspiring creativity and risk taking than
either seniority or longevity pay by linking substantial awards with permanent
pay increases
In order for merit pay to be effective, objectives that are tied to creativity and risk
taking must be established on a regular basis; otherwise, merit raises would be
equivalent to providing employees with financial entitlements
Performance Pay

Merit Pay
Disadvantages
Employees may receive merit increases even if their

performance does not warrant them.
Supervisors may be reluctant to differentiate pay increases

to avoid possible animosity and internal conflict.
Poor performers may view merit pay increases as

entitlements and superior performers may question the
value of striving for excellent performance
Performance Pay

Merit Pay
Merit Raises
Definition
An increase to an employees base pay in recognition of

good job performance
Performance Pay

Merit raise
Advantages
An increase to an employees base pay in recognition of

good job performance
Represents a permanent increase in base pay
Extremely expensive for an employer
Usually base on an employees performance during the
previous year
Usually base on appraised performance
Helps to retain high calibre employees
Performance Pay

Merit raise
Disadvantages
Because performance appraisal is not an exact science it

may encourage lack of confidence in it
In some organisations pay raises given to above average
performers are not much more than those given to average
performer
Once an employer reached the top of his/her grade there
were no more merit increases motivation
Can cause division because they are usually base on the
opinion of the supervisor
Performance Pay

Merit Pay
Merit bonus
Definition
A bonus provided to recognize good employee

performance that does not increase base pay.
Performance Pay

Merit Pay
Merit bonus
Advantages
Granted only for the period in which good performance

occurs
Can be used in conjunction with a merit raise system
Not being a fixed amount
May be paid out in lump sum
Can be paid at any time
Performance Pay

Merit Pay
Merit Bonus
Disadvantages
Depends on reliable and accepted performance measures

which may not exist
Both managers and employees may have little faith in the
available measures
Can create poor relationship if bonus pool is limited
Not suited for work depending on collaboration etc.
Component

Advantages Disadvantages
Performance Signals key

behaviours and
Cost can be
substantial
Pay motivates action
Reduces need for
Rigidity
Difficult to develop
control mechanisms efficient benefits
Create employee package
interest in Administration and
performance communication
Can support costly
managerial strategy Does not motivate
Relates pay to firms task behaviour
ability to pay May cause excessive
employee stability
May encourage
undesirable
Compensation Strategies behaviour 61
Incentive Pay

Definition
Special rewards offered to employees when

performance can be measured objectively and when
employee have control over work outcomes
An incentive designed to motivate a specific type of

employee behaviour
Also a performance base pay
Incentive Pay

Types
Individual Incentive
Base on commission, piecework and standard hour plans
Sharing plans in which productivity gains are distributed

between employers and employees
Selective plans that encourage efficiency and discourage

inefficiency
Incentive Pay

Sharing Plans
Halsey Plan
Uses past production records to determine the standard time for a

job. Workers are guaranteed a minimum wage based on the
standard time. If the worker finishes before the standard time, the
savings are divided between the worker and employer, usually on
a 50/50 basis
Example
If a worker John, makes $10 an hour, when John finishes a 5-hour job
in 4 hours he would receive $40 for the 4 hours worked and 50% of $10
for the 1 hour saved. John therefore receives $45. His average hourly
rate has risen from $10 to $11.20
Incentive Pay

Sharing Plan
Rowan Plan
Is similar to the Halsey Plan, however, the bonus is calculated

on the proportion of time saved in relation to standard time. If
we use the example of John again, John would receive $40 for
the 4 hour worked and a bonus of 20% representing the total
amount he saved (1/5). This 20% is multiplied against the total
earnings of the 4 hours, that is 0.2 x $40 = $8. Thus John will
receive $48.00 or $12.00 per hour.
Incentive Pay

Selective Plans
Also called fast or famous plans
Reward those you perform well and provide no

incentives for those who perform poorly
Incentive Pay

Two examples:
Taylor Plan
Earnings are divided into 2 groups, namely a low rate for

output under standard and a higher rate for output above
standard
The difference in wages between those falling below, those

meeting and those exceeding the standard, is usually quite
significant, as seen by the following example of a job where
the standard is 10 pieces an hour and the low rate and high
rate per piece are 80 cents and $1.00 respectively
Incentive Pay

Example:
Worker 1: 9 pieces an hour for 40 hours

9 x 80 cents = $7,20 x 40 = $228 weekly
Worker 2
10 pieces an hour for 40 hours
10 x $1.00 = $10.00 x 40 = $400 weekly
Worker 3
11 pieces an hour for 40 hours
11 x $1.00 = $11.00 x 40 = $440 weekly
Incentive Pay

Gantt Plan
Everyone who fails to reach the standard is paid a

guaranteed day rate.
Those who reach the standard receive a step bonus of 20%

and a higher rate for everything over the standard.
Incentive Pay

Example
Assume a standard of 10 pieces per hour, an hourly rate of $6.00, a

step bonus of 20% and a higher bonus rate of 5% of the hourly rate
Below standard (9 items or less):

$6.00 guaranteed hourly rate
At standard (10 items)

$6.00 + 20% bonus = $7.20 hourly rate
Just above standard (11 items)

$6.00 + 20% bonus + additional 5% bonus per item of guaranteed
hourly rate = $7.50
Incentive Pay

Management Incentive Plans
Award pay to individual managers when they meet or

exceed objectives based on sales, profit, production or
other measures for their division, department or unit.
Generally require the achievement of multiple,

complex objectives without compromising the quality
and quantity of output that is generated by employees
Incentive Pay

Referral Incentive Plans
Reward employees with monetary bonuses for

referring new customers or recruiting successful job
applicants.
Incentive Pay

Advantages
Increases output
lower production cost
Increase worker income
Direct stimulus to worker
Can be estimated more actually (in advance)
Less direct supervision
Better working relationship between employer and
employee
Incentive Pay

Disadvantages
Quality tends to deteriorate unless there is a stricter system

of checking and inspection.
Payment by results may lead to opposition or restriction on

output when new machines or methods are proposed or
introduced.
When paid by results, workers tend to regard their highest

earnings as norms, and, therefore, press for a considerably
higher minimum wage.
Incentive Pay

Disadvantages
The amount and cost of clerical work increases if done

manually.
There is a danger of disregarding safety regulations and

thereby increasing the rate of accidents.
Jealousies may arise among workers.
It is difficult to set pieces or bonus rates accurately
Incentive Pay

Group Incentive
Team-based
Small group
Incentive Pay

Gain-sharing
Group incentive
Incentive payment base on improved company

performance
Develop a philosophy of management that emphasizes

employee involvement
Incentive Pay

Gain Sharing
Three components
A leadership philosophy
Promotes high levels of trust, open communication and participation
Employee involvement
A bonus
Awarded when companys actual productivity exceeds targeted
productivity
Bonus is base on a formula
Incentive Pay

Types of gain sharing programs
The Scanlon plan
Involves all employees of the company working to:

solve production problem
reduce production cost
improve productivity as well as company profits
Rationale
Companies would be able to offer higher pay for the worker, generate
increased profits for stockholders , and have fewer price increases for
consumers
Emphasises employee involvement
Incentive Pay

Its Three components
Teamwork
Suggestion systems
Monetary reward based on productivity improvements
Incentive Pay

Rucker Plan
Similar to Scanlon Plan
Main difference formula used to measure

productivity
Value added equal =

Difference between the value of the sales price of a
product and the value of what was purchased to
produce the product
Indirect Pay

Definition
Any type of employer-provided reward (or benefit)
that serves an employee need but is not part of base or
performance pay
A major expenditure for many firms
Was known as fringe benefit
Indirect Pay

Major categories of indirect pay
Benefits mandated by law Employment Insurance
Deferred income plans Pension Plans
Life, medical, dental Health Benefits
Pay for time not worked Public holiday
Employee services psychological counselling to food services
Miscellaneous benefits company vehicle consumer discount

Indirect Pay

Why use Indirect Pay
Competitive pressure
To satisfy the security needs of the employees
Income tax benefit
Can be purchased more cheaply by employer than employee
ex. Medical
Protects the financial security and peace of mind of employees
Sense of protection for employees
Reinforcement of a particular managerial strategy ex.
Intrinsic reward
Promotes consequences beneficial to the organization
subsidizing fitness classes improve employees health
Indirect Pay

Disadvantages
Cost
Rigidity hard/illegal to remove once installed
Difficult to develop a benefit package that meets the

true needs of the employees
Administration and communication of the benefit
Indirect Pay

Disadvantages
Weak link between indirect pay and specific employee

task behaviour
Create stability among employee retain unhappy

employees
Not a lot is known about the impact of indirect pay on

employees

Component Advantages Disadvantages
Can help attract Cost can be substantial
Indirect Pay
employees

Rigidity
Matches unionized firms Difficult to develop
Favourable tax treatment
Economies of scale in
efficient benefits
purchasing package
Can provide valued Administration and
rewards communication costly
Provide employee peace Does not motivate task
of mind behaviour
Helps employer deal May cause excessive
humanely with problems
Can help promote
employees stability
company products May encourage
Can support managerial undesirable behaviour
strategy
Pay-for-knowledge
Definition

Pays workers for the range of jobs that they are capable of performing for the
organization at any point in time.
Employees pay is contingent upon the acquisition of skills.
Other pay base employees wages on the specific jobs they actually do, pay-for-
knowledge plans base wages on the repertoire of jobs that the employee is
trained to do.
Under such plans, a typical employee starts at a base rate, and as he or she
learns different jobs in the organization, the pay rate increases simultaneously
Pay for Knowledge

Necessary elements of the system:
Set of skill blocks

Defined progression of paths through the skill blocks
Specification of period within skill blocks (max and min)
Training and certification/testing to demonstrate skill
acquisition
Specification of the max and min of skills each employee
needs
Rate of pay for each skill block
Specification of jobs covered by the system
Assessment of employee skills
Pay-for-Knowledge

A radical departure from traditional job-based compensation systems.
Job-based compensation system assign pay rates to the specific jobs that
exist in the workplace
Workers are compensated on the basis of their performance of these

specific jobs
Workers are only compensated for the relevant knowledge, skills and
abilities that they can apply to the specific jobs to which they are assigned
Includes both competency-based pay (professional level) and skill-based

pay (operational level)
Pay for Knowledge

Advantages
Benefits both employee and employer
Employer benefits leaner staffing, greater work force flexibility and stability,
higher output, lower absenteeism, less turnover and higher productivity
Employee benefits higher motivation, higher job and pay satisfaction,

increased feelings of self-worth, increased job security, improvements in the
quality of work-life and higher organizational commitment
Jobs are usually broader and provide more intrinsic rewards
Higher possibility of staff rotation
Pay for Knowledge

Disadvantages
Increased cost greater skills mean higher pay
Training is costly
Increase in administrative cost
Pay inequity

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Define and discuss the advantages, dis-advantages and

Identify how the various pay systems can be linked to the

Performance Individual Performance

Indirect Pay Health & Life Insurance

What role should each of the three compensation

What top level of compensation should be provided?

What are the advantages and disadvantages of each of the

Under what circumstance is each most appropriate?

The portion of an individuals compensation that is

Is the basic monetary compensation paid for work

Is guaranteed by the employer

Amount pay is typically determined by the value that the

May be calculated on a hourly, daily, weekly, monthly or annual

When calculated on a hourly basis, it is known as wages

When calculated on a weekly, monthly or annual

Sometimes preferred to output related pay

It does not confine employee attention to one or two

Allows employer to recognize and encourage important non-

Can signal the relative importance of jobs within the

Demonstrates a commitment on the part of the employer to the

1. For some organizations output related pay is simply

2. Allows the employer to recognize and encourage

4. Base-pay demonstrates a commitment on the part of the

5. Depending on the method used to set up a base pay

6. It is usually much simpler to implement and administer

Easy to price in terms of its value to the employer

Easy to attribute to individual employees

Controlled by the individual employee

Not highly unstable

Base pay represents more of a fixed employer commitment

While base pay does contribute to membership behaviour, it

Since base pay does not relate organizational success

Base pay is not self-correcting. In an output-related system,

Seniority base pay

Refers to permanent increases in base pay that are awarded at

Predicated on the idea:

Is intended to reward employees for their ongoing skill acquisition

Principle, practices and procedures

Employees perceived that they are treated fairly

Objectivity use as a yardstick for promotion and

Facilitates the administration of pay programs

Ability of supervisors to motivate employees without

Seniority pay does not fit well with the imperative

Employees can count on receiving the same pay raises

High-performing employees receive the same pay increases

Pay raises are received without regard to whether

Employees have little incentive to improve skills or take risks on the

Although seniority pay plans reflect employees increased worth, they

Now more than ever, companies need to be accountable to

Commonly used in public sector as:

Market Pricing Simplicity and going rate not always

Centralized control May impede high

Job Systematic way to

Incentive for May raise labour cost

Jobs are broader with

Any type of financial reward provided only when certain specified

Results may be based on the performance of individual employees, a

Signal key behaviours and motivates employees to achieve

Reduce the need for other types of mechanism for controlling

Raise employee interest in performance and provide

Used to support specific managerial strategies and thereby

Makes pay plans more variable help to link