STRATEGIC HRM

COMPENSATION
CH#11

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 Compensation

 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 , medical, education, accommodation,
Transportation etc.

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 Equity
 Equity Theory
– Proposes that employees perceive what they get
from a job situation (outcomes) in relation to what
they put in (inputs) and then compare their
inputs-outcomes ratio with the inputs-outcomes
ratios of relevant others.
• If the ratios are perceived as equal then a state of equity
(fairness) exists.
• If the ratios are perceived as unequal, inequity exists and
the person feels under- or over-rewarded.
• When inequities occur, employees will attempt to do
something to rebalance the ratios (seek justice).

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 Forms of Equity
 External Equity
External equity refers to how a job’s pay rate in one
company compares to the job’s pay rate in other
companies.
 Internal Equity
Internal equity refers to how fair job’s rate is when
compared to other jobs within the same company for
instance, is the sales manager’s pay fair, when
compared to what the production manager is earning.
 Internal equity involves the perceived fairness of pay
differentials among different jobs within an
organization.
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 Forms of Equity
 Individual Equity
 Individual equity refers to the fairness of an
individual’s pay as compared with what his or her co-
workers are earning for the same or very similar
within the company, based on each individual’s
performance.
 Procedural Equity
Procedural equity refers to the perceived fairness of
the processes and procedures used to make decision
regarding the allocation of pay.

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 Addressing Equity Issues
 Salary surveys
Surveys of what other employers are paying ? To
monitor and maintain external equity.
 Job analysis and job evaluation
Use job analysis and comparisons of each job. To
maintain internal equity.
 Performance appraisal and incentive pay
To maintain individual equity.
 Communications, grievance mechanisms, and
employees’ participation
To help ensure that employees view the pay process
as transparent and fair.
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 Legal Considerations in Compensation
 Fair Labor Standards Act (1938)
This act provides for minimum wages, maximum hours,
overtime pay, and child labor protection. The law,
amended many times, covers most employees
 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, gender,
or national origin.

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 PRICING MANAGERIAL AND PROFESSIONAL JOBS

 What Determines Executive Pay?

 Three main factors: job complexity (span of control,
the number of functional divisions over which the
executive has direct responsibility and management
level), the employer’s ability to pay (total profit and
rate of return), and the executive’s human capital
(educational level, field of study, work experience)
accounted for about two-thirds of executive
compensation variance.

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 PRICING MANAGERIAL AND PROFESSIONAL JOBS

 Elements of Executive Pay Salary is traditionally

the cornerstone of executive compensation. On it,
employers layer benefits, incentives, and perquisites.
Boards are boosting the emphasis on performance-
based pay.
 Managerial Job Evaluation The basic approach is
to classify all executive and management positions
into a series of grades, each with a salary range.

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