Professional Documents
Culture Documents
Compensation: Introducing The Pay Model and Pay Strategy
Compensation: Introducing The Pay Model and Pay Strategy
Compensation: Introducing The Pay Model and Pay Strategy
Part One
Introducing the Pay Model and
Pay Strategy
Chapter One
The Pay Model
© 2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
1–1
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Overview
Chapter one begins with the importance of
compensation and provides a definition.
The chapter continues with a discussion
on the various forms of compensation.
The major focus presents a pay model
with three main components:
• compensation objectives, policy decisions,
and techniques.
© 2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
1–2
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Compensation: Does It Matter?
It Matters: So What?
© 2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
1–3
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Society Stakeholders
Compensation
Managers Employees
© 2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
1–4
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Society
Some people see pay as a measure of
justice.
• Laws and regulations aim to eliminate the gap
between male/female earnings differentials.
• Benefits may also be seen as a reflection of
equality or justice in society.
Job losses (or gains) in a country is partly
a function of labor costs (and productivity).
© 2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
1–5
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Stockholders
Some stockholders say using stock to pay
employees creates a sense of ownership.
Others argue it dilutes stockholder wealth.
Stockholders have a particular interest in
executive pay.
Linking executive pay to company
performance increases stockholders' returns.
© 2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
1–6
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Managers
Compensation influences manager’s
success in two ways.
• First, it is a major expense that must be
managed.
• Second, it is a major determinant of employee
attitudes and behaviors.
© 2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
1–7
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Employees
Pay is usually a major source of financial
security.
Employees may see compensation as:
• a return in an exchange,
• an entitlement for being an employee of the
company,
• an incentive to take/stay in a job and invest in
performing well, or
• as a reward for having done so.
© 2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
1–8
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Employees
Pay can influence employee motivation
and behavior in two ways:
• The incentive effect is the degree to which
pay influences individual and aggregate
motivation.
• The sorting effect is the effect that pay can
have on the composition of the workforce.
How an organization pays can result in sorting
effects.
© 2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
1–9
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
What is Compensation?
Compensation
All forms of financial returns and
tangible services and benefits
employees receive as part of an
employment relationship.
© 2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
1 – 10
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Forms of Pay
Forms of pay are categorized in two ways.
• Total compensation:
is pay received directly as cash and indirectly as
benefits.
• Relational returns:
are psychological.
© 2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
1 – 11
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
EXHIBIT 1.5
Total Returns For Work
© 2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
1 – 12
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Cash Compensation: Base
© 2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
1 – 13
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Cash Compensation: Merit
Increases/Merit Bonuses/COLAs
A cost of living adjustment (COLA) is made
to base pay on the basis of changes in:
• what others are paying, living costs, or
experience/skill.
Merit increases are increments to base pay
based on performance.
Merit bonuses are paid in a lump sum
rather than becoming a part of base pay.
© 2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
1 – 14
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Cash Compensation: Incentives
Incentives are a one-time payment which
differs from merit adjustments.
• Incentives do not increase base wage.
• Incentive payment is known beforehand.
• Incentive programs use objective measures of
performance.
Incentives may be long-term (stock
ownership, or stock options) or short-term.
© 2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
1 – 15
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Benefits
Income protection.
• Medical insurance, retirement programs, life
insurance, and savings plans are common.
Work/life balance.
• Includes time away from work, access to
services, and flexible work arrangements.
Allowances often grow out of short supply.
• China’s housing and transportation allowances.
© 2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
1 – 16
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Total Earnings Opportunities
Present value of a stream of earnings.
• Comparison of today's initial offers to consideration
of future bonuses, merit increases, and promotions.
Relational returns from work.
• Nonfinancial returns that substantially impact
employee behavior.
A network of returns.
• Created by different forms of pay; useful if
bonuses, development opportunities, and
promotions all work together
© 2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
1 – 17
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
A Pay Model
Three basic building blocks:
1. The compensation objectives.
2. The policies that form the foundation of the
compensation system.
3. The techniques that make up the
compensation system.
© 2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
1 – 18
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
EXHIBIT 1.6
The Pay Model
This model
serves as both
a framework
for examining
current pay
systems and a
guide for most
of the text.
© 2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
1 – 19
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Compensation Objectives
Pay objectives guide the design of the pay
system and are standards for judging success.
• Efficiency is improving performance, increasing
quality, and controlling costs.
• Fairness (procedural fairness) is the process used
to make pay decisions.
• Ethics means the organization cares about how its
results are achieved.
• Compliance is conforming to federal and state
compensation laws and regulations.
© 2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
1 – 20
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Four Policy Choices:
Internal Alignment
Internal alignment:
• refers to comparisons among jobs or skill
levels inside a single organization.
• pertains to the pay rates both for employees
doing equal work and for those doing
dissimilar work.
Pay relationships affect the compensation
objectives of efficiency, fairness and
compliance.
© 2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
1 – 21
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Four Policy Choices:
External Competitiveness
External competitiveness refers to pay
comparisons with competitors.
• Pay is ‘market driven’.
• Objectives:
To ensure that pay is sufficient to attract and
retain employees.
To control labor costs to ensure competitive
pricing of products/ services.
© 2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
1 – 22
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Four Policy Choices
Employee Contributions Management
Understanding the Right people get
basis for judging the right pay for
performance, helps achieving the right
perceive pay as objectives in the
fair. right way.
© 2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
1 – 23
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Pay Techniques
Techniques tie the four basic policies to
the pay objectives.
Many variations of pay techniques exist.
© 2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
1 – 24
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Summary
Chapter one began with the importance of
compensation and provided a definition.
The chapter continued with a discussion
on the various forms of compensation.
The major focus presented a pay model
with three main components:
• compensation objectives, policy decisions,
and techniques.
© 2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
1 – 25
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.