1-1

Key Questions and Issues

 How do differing perspectives affect our
views of compensation?
 What can a pay system do for an
organization? For an employee?
 How does the pay model help organize
one’s thinking about compensation?
 Under what circumstances would one of
the four basic pay policies be
emphasized relative to the others?
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 1-2

Contrasting Perspectives of
Compensation
Society’ Stockholders’
s Views Views

Managers’
Employees’
Views
Views
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 Exhibit 1.2: Labor Costs as a 1-3

Percentage of Revenues, Airline

Industry

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 1-4

What Is Compensation?

Compensation refers to
all forms of financial
returns and tangible
services and benefits
employees receive as
part of an employment
relationship.
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 1-5

Exhibit 1.3: Total Returns

for Work

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 1-6

Forms of Pay
Direct Pay Forms Indirect Pay Forms

 Cash Compensation:  Benefits:Income

Base Protection

 Cash Compensation:  Benefits: Work/Life

Merit Pay / Cost-of- Focus
Living Adjustments
 Benefits: Allowances
 Cash Compensation:
Incentives

 Long-Term Incentives
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 1-7

Relational Returns from

Work
Recognition Employment
& Status Security

Challenging Learning
Work Opportunities
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 Exhibit 1.4: Framework for 1-8

Analyzing Employment
Relationships
HIGH PAY – LOW COMMITMENT HIGH PAY – HIGH COMMITMENT
High

Hired Guns Cult - like

TRANSACTIONAL

(Stockbrokers) (Microsoft)

LOW PAY – LOW COMMITMENT LOW PAY – HIGH COMMITMENT

Workers as Commodity Family

Low

(Employers of Migrant (Starbucks)

Farm Workers)

Low High
RELATIONAL
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 1-9

Exhibit 1.5: THE PAY MODEL

POLICIES TECHNIQUES OBJECTIVES

Work Descriptions Evaluation/ INTERNAL

ALIGNMENT
analysis certification STRUCTURE
EFFICIENCY
•
Performanc
Market Surveys Policy PAY
COMPETITIVENESS definitions lines STRUCTURE e
• Quality
• Customers
Seniority Performance Merit INCENTIVE
•
CONTRIBUTORS based based guidelines PROGRAMS Stockholder
s
• Costs

MANAGEMENT Costs Communication Change EVALUATION FAIRNESS

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 1-10

Compensation Objectives

Efficiency

Fairness

Compliance

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 1-11

Pay System Policies

Internal alignment
 Focus - Comparisons among jobs or skill levels
inside a single organization
External competitiveness
 Focus - Compensation relationships external to
the organization: comparison with competitors
Employee contributions
 Focus - Relation emphasis placed on employee
performance
Management
 Focus - Policies related to managing the pay
system
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 1-12

Pay System Techniques

Include methods used to operationalize
policy decisions and link decisions to overall
compensation objectives
Examples of techniques
 Internal consistency
 Job analysis
 Job evaluation

 External competitiveness
 Pay surveys
 Employee contributions
 Incentiveplans
 Performance-based pay increases

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 Caveat Emptor -
1-13

Be An Informed Consumer
 Does the research measure anything
useful?
 Does the study separate correlation
from causation?
 Are there alternative explanations?

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