What Is Compensation?

Compensation represents the rewards employees receive for performing their job. They are either:
Intrinsic: intrinsic compensation represents employees critical psychological states that result from performing their jobs. Extrinsic: extrinsic compensation includes both monetary and nonmonetary rewards.

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Elements of Core Compensation

Base pay
- Hourly pay - Annual salary - Seniority pay - Skill-based - Person-focused pay
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Base pay adjustments

- COLAs - Merit pay pay - Incentive pay

Base Pay
Compensable Factors: An employees skill level An employees effort An employees level of responsibility The severity of the working conditions

Copyright 2013 Pearson Education, Inc. Publishing as Prentice Hall

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Base Pay Adjustments

COLAsCOLAs represent periodic base pay increases that are founded on changes in prices as indexed by the consumer price index (CPI). Seniority Payseniority pay systems reward employees with periodic additions to base pay according to employees length of service in performing their jobs Merit Paymerit pay programs assume that employees compensation over time should be determined, at least in part, by differences in job performance.
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Base Pay Adjustments (Contd)

Incentive Payincentive pay (or variable pay) rewards employees for partially or completely attaining a predetermined work objective. Pay-for-Knowledge Planspay-for-knowledge plans reward managerial, service, or professional workers for successfully learning specific curricula Skill-based Payskill-based pay is used mostly for employees who perform physical work and increases these workers pay as they master new skills.
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Employee Benefits
Discretionary Benefits Legally Required Benefits

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Discretionary Benefits
Three Broad Categories: Protection programsprovide family benefits, promote health, and guard against income loss caused by such catastrophic factors as unemployment, disability, or serious illness Paid time-offprovides employees with pay for time when they are not working Servicesprovides such enhancements as tuition reimbursement and day care assistance to employees and their families
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Legally-Required Benefits
Federal Legislation Designed to: Promote worker safety and health Maintain family income Assist families in crisis Provide assistance in case of Disability Unemployment
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Summary Learning Objective 1

What is compensation? Elements of core compensation Base pay Base pay adjustments Employee benefits Discretionary benefits Legally-required benefits

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Learning Objective 2

Historical perspective on compensation

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Historical Perspective on Compensation

Many employers instituted so-called scientific management practices to control labor costs, as well as welfare practices to maintain control over labor.

Time-and-motion studies analyzed the time it took employees to complete their jobs. These studies literally focused on employees movements and the identification of the most efficient steps to complete jobs in the least amount of time.
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Historical Perspective on Compensation (Contd)

Welfare practices were generous endeavors undertaken by some employers, motivated in part to minimize employees desire for union representation, to promote good management and to enhance worker productivity. Competitive advantage refers specifically to a companys ability to maintain market share and profitability over a sustained period of several years.
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Summary Learning Objective 2

Historical perspective on compensation

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Strategic Versus Tactical Decisions

Strategic decisionsguide the activities of companies in the market Tactical decisionssupport the fulfillment of strategic decisions

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Competitive Strategy

The planned use of company resources Technology Capital Human Resources Two or more years of time span Competitive strategy choices: Lowest cost strategy Differentiation strategy

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Competitive Strategy Choices

Lowest Cost Strategy: focus on being lowest cost producer/seller of goods or services
Differentiation Strategy: focus on offering unique goods or services to the public

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Lowest-Cost Strategy
Effective when Jobs: Include predictable behaviors Have a short-term focus Require autonomous activity Focus on quantity of output

Ex: Ryanair (reduced operations costs)

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Differentiation Strategy
Effective when Jobs: Require highly creative behaviors Have a long-term focus Demand cooperation and independence Involve risk-taking

Ex: P&G differentiates Eukanuba from Iams (Brand image and price premiums)
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