Chapter One

Compensation: A Component of
Human Resource Systems
 What Influences Pay?

 Chris Smith and Pat

Jones are both
computer programmers.
 Chris earns $45,000,
while Pat earns
$35,000.
 What could cause this
difference?
 Equity Policies
Internal External
Consistency Competitiveness

Employee
Administration
Contributions
 Compensation Department’s
Main Goals
 Internal equity --Internal consistency
» Relative value of each job among all jobs within a company
» Value of the job, regardless of the person in the job
» Jobs that require greater qualifications, more responsibilities, and more-
complex job duties should receive higher pay than other jobs.
» Done through job analysis and job evaluation
 External equity—Market-competitiveness
» Jobs within a company are paid similarly to same jobs outside
» Companies’ pay policies fit with business objectives
» Done through strategic analysis and salary surveys
 Individual equity--Recognizing individual contributions
» Pay people differently within jobs according to job performance.
» Done through pay grades and ranges
 Compensation Techniques
 INTERNAL:
 Job Analysis, Job Descriptions, Job Evaluation,
Internal Work Structure
 EXTERNAL:
 Market definitions, Market surveys,
Policy lines, Pay structures
 INDIVIDUAL:
 Seniority based, Performance based,
Incentive guidelines, Incentive programs
 ADMINISTRATION:
 Planning,Budgeting,Communicating, Evaluating
 What is Compensation?
 Intrinsic compensation
» Reflects employees’ psychological mind sets that
result from performing their jobs.
» Through effective job design
 Extrinsic compensation
» Rewards given you by others
» Includes both monetary and non-monetary (e.g.,
benefits) rewards.
» Through compensation systems
 Exhibit 1-1
The Influence of Core Job Characteristics on Intrinsic
Compensation and Subsequent Benefits to Employers

Core Job Critical Psychological Benefit to

Characteristics State Employers

Skill variety Experienced Lower turnover

Task identity meaningfulness of
Task significance the work Lower
absenteeism
Experienced
Autonomy
responsibility for Enhanced job
work outcomes performance

Feedback Gained knowledge Greater job

of results from satisfaction
work activities
 Exhibit 1-3

Elements of Core Compensation

 Base Pay (recurring)
» Hourly pay/wage
» Annual salary
 How Base Pay is Adjusted Over Time
» Cost-of-living adjustments (COLAs)
» Seniority pay
» Merit pay
» Incentive pay or variable pay
» Pay-for-knowledge and skill-based pay
 Exhibit 1-4

Elements of Fringe Compensation (1 of 3)

 Social Security Act of 1935
» Unemployment insurance
» Retirement insurance
» Benefits for dependents
» Disability benefits
» Medicare
 State compulsory disability laws
» Workers’ Compensation
 Family and Medical Leave Act of 1993 (12
weeks of annual unpaid leave)
 Exhibit 1-4

Elements of Fringe Compensation (2 of 3)

 Discretionary Benefits
» Protection Programs
– Income protection programs
– Health protection programs
» Pay for time-not-worked
– Holidays
– Vacation
– Sick leave
– Personal leave
– Jury duty
– Funeral leave
– Military leave
– Cleanup, preparation, travel time
 Exhibit 1-4

Elements of Fringe Compensation (3 of 3)

 Discretionary Benefits (cont.)
» Services
– Employee assistance programs (EAPs)
– Family assistance programs
– Tuition reimbursement
– Transportation services
– Outplacement assistance
– Wellness programs
 Strategic vs. Tactical Decisions
 Strategic decisions guide activities in the market
 Tactical decisions support the fulfillment of strategic decision
Strategic General Tactical Specific Tactical
Decisions HR Decisions HR Decisions
(Compensation)
Competitive Recruitment and Seniority pay
strategy Selection Merit pay
HR strategy Performance Incentive pay
Compensation appraisal Benefit options
strategy Compensation Etc.
Training
 Competitive Strategy
 Planned use of resources to promote & sustain competitive
advantage
 Lowest-cost strategy
» Efficient-scale, cost minimization
» Southwest Airlines, Wal-Mart
» Employee roles: repetitive, predictable behaviors, short-term focus,
individual activity, concern for quantity, primary concern for results.
 Differentiation Strategy
» Unique products: design image, technology, etc
» Build brand loyalty, price premium, invest in R&D
» Iams company, Saks Fifth Avenue
» Employee roles: creative behavior, long-term focus, cooperative and
interdependent behavior, risk taking, openness to novel work.
 Compensation and…
 Recruitment, Selection
 Labor-Management
» $ to get top candidates,
Relations
signing bonus, benefits » Collective bargaining
agreements, pay,
 Performance Appraisal COLAs, incentives
» Basis for merit pay and  Employee Termination
incentives
» Severance pay, pension,
 Training early retirement
» Pay for knowledge  Legislation
 Career Development » Income and continuity,
» Promotions, lateral safety, work hours, pay
moves discrimination, disabilities
and family needs
Stakeholders of the Compensation
System

 Employees
 Line managers
 Executives
 Unions
 U.S. government