Chapter-01: The Pay Model

Lecture 1 & 2
 Lesson plan:
◆ Compensation: Definition from different perspectives
◆ Determining Pay rates
◆ Overview of compensation Laws
◆ Strategic Compensation
◆ Forms of pay
◆ A Pay Model
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 Definitions

◆ Compensation:
◆ Compensation refers to all forms of financial returns
and tangible services and benefits employees receive
as part of an employment relationship.
◆ Compensation is a systematic approach to providing
monetary value to employees’ in exchange for work
performed.

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 Determining Pay Rates

Employee compensation
– All forms of pay or rewards going to employees and
arising from their employment.
Direct financial payments
– Pay in the form of wages, salaries, incentives,
commissions, and bonuses.
Indirect financial payments
– Pay in the form of financial benefits such as
insurance.
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 Overview of Compensation Laws

Davis-Bacon Act (1931)

– A law that sets wage rates for laborers employed by
contractors working for the federal government.
Walsh-Healey Public Contract Act (1936)
– A law that requires minimum wage and working
conditions for employees working on any government
contract amounting to more than $10,000.

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 Overview of Compensation Laws (cont’d)

◆Title VII of the 1964 Civil Rights Act

◆– This act makes it unlawful for employers to
discriminate against any individual with
respect to hiring, compensation, terms,
conditions, or privileges of employment
because of race, color, religion, sex, or
national origin.
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 Overview of Compensation Laws (cont’d)

Fair Labor Standards Act (1938)

– This act provides for minimum wages, maximum hours,
overtime pay for nonexempt employees after 40 hours
worked per week, and child labor protection. The law
has been amended many times and covers most
employees.
Equal Pay Act (1963)
– An amendment to the Fair Labor Standards Act
designed to require equal pay for women doing the
same work as men. 11–7
 Strategic Compensation

Strategic compensation
– Using the compensation plan to support
the company’s strategic aims.
– Focuses employees’ attention on the
values of winning, execution, and speed,
and on being better, faster, and more
competitive..

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 Comparable Worth
Comparable worth
– Refers to the requirement to pay men and women
equal wages for jobs that are of comparable (rather
than strictly equal) value to the employer.
– Seeks to address the issue that women have jobs
that are dissimilar to those of men and those jobs
often consistently valued less than men’s jobs.

11–
 Compensation and Women
Factors lowering the earnings of women:
Women’s starting salaries are traditionally lower.
Salary increases for women in professional jobs do not reflect their
above-average performance.
– In white-collar jobs, men change jobs more frequently, enabling
them to be promoted to higher-level jobs over women with more
seniority.
– In blue-collar jobs, women tend to be placed in departments with
lower-paying jobs.
 Contrasting Perspectives of Compensation

Society’s Views Stockholders’ Views

Global Views

Employees’ Views Managers’ Views

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 Compensation: Definition

Society’s Views

• Pay as a measure of justice (the gender pay gap should not

be practiced).
• Benefits are viewed as a reflection of equity(being fair) and
justice in society.

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 Compensation: Definition

Stockholders’ View’s

• Using stock to pay employees creates a sense

of ownership that will improve performance
which in turn increases stockholder wealth.

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 Compensation: Definition

Managers’ Views

• A major expense(competitive pressures, both global and local,

force managers to consider the affordability of their
compensation decision).
• Used to influence employee behaviors and to improve the
organization’s performance. Employee payment affects on the
quality of their work, attitude towards customers and their
willingness to be flexible, learn new skills or suggest
innovations.
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 Compensation: Definition

Employees’ Views

• Major source of financial security as pay plays a vital role in a

person’s economic and social well-being.
• Return in an exchange between employer and themselves.
• Entitlement for being an employee of the company.
• Reward for a job well done.

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 Compensation: Definition

Global Views- Vive la difference

• China: Traditional meaning of compensation providing

necessities of life replaced with dai yu which refers how
employees are being treated by giving wages benefits, training
opportunities and so on.
• Japan: Traditional word kyuyo which is made up of two
separate characters (kyu and yo), both meaning ´´giving
something´´

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 Forms of Pay- A Network of Returns/Total Returns for
Work

Total Returns

Total Compensation Relational Returns

• Recognition & Status

• Employment Security
Cash Benefits • Challenging Work
Compensation
• Learning
• Life, Health, and Opportunities
• Base
Disability Insurance
• Merit/Cost of • Work/Life Programs
Living • Allowances
• Short-term
Incentives
•17 Long-term
 Relational Returns from Work

◆ A. Relational Returns
 Psychological in nature (nonfinancial returns from work have a substantial
effect on employees’ behavior). Relational returns include following four
things which create employee engagement:
Employment
Recognition & Security
Status
Employee
Engagement

Learning
Challenging Work Opportunities
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 Total Compensation

B. Total Compensation
1. Cash Compensation/Transactional
I. Base Wage
 Base wage is the cash compensation that an employer pays for the work
performed.
 Base wage tends to reflect the value of the work or skill.
 Some pay systems set base wage as a function of the skill or education an
employee possesses.
 Identify difference between wage and salary.

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 Total Compensation

B. Total Compensation
1. Cash Compensation/Transactional
II. Merit Pay/Cost of Living Adjustments
 Periodic adjustment to base wages may be made on the basis of:
* Changes of in the overall cost of living.
* Or, Changes in experience or skill.
 Merit increases are given as increments to the base pay in recognition of
past work behavior.
 Cost of living adjustments- same increases to everyone regardless of
performance.

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 Total Compensation

B. Total Compensation
1. Cash Compensation/Transactional
III. Incentives/Variable Pay
 Incentives tie pay increases directly to performance.
 Does not increase base wage; must be re-earned each pay period.
 Potential size of the incentive payment generally be known in advance.
 Incentives try to influence future behavior.
 Incentives are one time payment, they do not have a permanent effect on
the labor cost.
 Long-term(stock options), and short-term incentives.
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 Total Compensation

B. Total Compensation
1. Cash Compensation/Transactional
III. Incentives/Variable Pay
 Incentives can be tied to the performance of an individual employee, a
team of employees, a total business unit, or some combinations of
individual, team, and unit.
Individual
Incentive Pay Option
Team

Organization
 The performance objective may be expense reduction, volume increases,
customer satisfaction, revenue growth, return on investment, increases in
22 stock value and so on.
 Total Compensation

B. Total Compensation
2. Benefits
I. Income Protection
 Medical insurance, retirement programs, life insurance and saving
plans are common benefits.
 They help protect employees from the financial risks inherent in
daily life.
 Companies can provide these protections to employees cheaper than
employees can obtain them for themselves.

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 Total Compensation

B. Total Compensation
2. Benefits
II. Work/Life Balance
 Time away from work(vacations, jury duty).
 Access to services to meet specific needs(drug counseling, financial
planning, referrals for child and elder care).
 Flexible work arrangements(telecommunicating, non-traditional
schedules, non-paid time off).

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 Total Compensation

B. Total Compensation
2. Benefits
III. Allowances
 Transportation allowances.
 Housing and other allowances must come up with other ways to
retain current employees.
 In many countries, managers assume that a car will be provided
only after negotiation.

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 A Pay Model
Pay model is a framework for examining the pay system in the
organization. It contains three building blocks:
Three Basic Building Blocks:
1. Compensation Objectives – Efficiency, fairness, Compliance.
2. The policies that form the foundation of the compensation
system.
3. The techniques that make up the compensation system.

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 A Pay Model ( Compensation Objectives)

Efficiency: is about improving performance , increasing quality,

delighting customers and stockholders and also controlling labor cost.
Fairness: is fundamental objective of pay system. It ‘ensures fair
treatment’ for all employees’. For example, higher pay for better
performance, and number of years experience or training.
Compliance: as a pay objective conforming to govt/state compensation
policies, labor law and regulations. If there is any changes in laws – it
will reflect in the pay system – to ensured continuous compliance.

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 A Pay Model (Policies)

◆ There are four policy choices which make up the pay system.
a) Internal Alignment
b) External Competitiveness
c) Employee contribution
d) Management of the pay system.

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 Internal Alignment

◆ It is a challenge for managers to determine the appropriate pay for

employees’ performing different work. For example; pay decisions
are based on job similarities and differences within an
organization. (computer programmer, Comp analyst, comp
engineer etc).
◆ Internal alignment is important for pay consistence in the
organization. This approach develops the job structure or hierarchy
based on their job responsibility in the organization.

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 External Competitiveness

◆ One can ask what is the market driven pay structure?

◆ Often employers may set their pay levels higher than their
competitor to attract best applicants.
◆ Therefore, external competitiveness refers to pay comparisons with
competitors so that employers can compensate their employees’ to
attract and retain in the organization.

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 Employee contribution

◆ Related to pay for performance

◆ This is an important decision to make because it directly effects the
employee’s attitude and behaviour.
◆ Ask yourself, if you are a HR manager should you pay one sales
person differently from another if one has better performance? YES
or NO
◆ Motolora – team based pay, corporate profit sharing
◆ GE (General Electric) – Performance based pay
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 Management of the pay system

◆ No system will work in the organization without a competent

management team.
◆ Managing compensation means – what is the impact of the policy,
technique that is based on internal alignment, external
competitiveness and employee contribution.
◆ Well trained managers can adopt suitable compensation plan in the
organization.

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 Techniques

◆ Pay techniques – make up the pay system.

◆ Techniques are varied and it is discussed throughout in our course.
◆ There are many pay system techniques which are varied and none is
universal.
◆ For example; historical pay system is long standing and forgotten
problem. Still the practice continues but logic is not clear. However,
next generation pay system will be more logical.

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 Exhibit 1.5: THE PAY MODEL

POLICIES TECHNIQUES OBJECTIVES

Work Descriptions Evaluation/ INTERNAL

ALIGNMENT
analysis certification STRUCTURE
EFFICIENCY
•
Performance
Market Surveys Policy PAY
COMPETITIVENESS definitions lines STRUCTURE • Quality
• Customers
•
Stockholder
Seniority Performance Merit INCENTIVE
CONTRIBUTORS based based guidelines PROGRAMS s
• Costs
FAIRNESS
MANAGEMENT Costs Communication Change EVALUATION

COMPLIANCE
 The End

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