Basic Factors in Determining Pay Rates

• Employee compensation:
includes all forms of pay going to employees and arising from their
employment.
• direct financial payments:
(wages, salaries, incentives, commissions, and bonuses).
• indirect financial payments
(financial benefits like employer-paid insurance and vacations).
Direct financial payments
• Time-based pay still predominates. Blue collar and clerical workers
receive hourly or daily wages, for instance. Others, like managers or
Web designers, tend to be salaried and paid weekly, monthly, or
yearly.
• Pay for performance. For example, piecework ties compensation to
the amount of production (or number of “pieces”) the worker turns
out. Sales commissions tie pay to sales.
• This means creating a compensation package that produces the
employee behaviors the firm needs to achieve its competitive
strategy. Put another way, the rewards should provide a clear
pathway between each reward and specific business goals.
• Total rewards encompass traditional pay, incentives, and benefits, but
also “rewards” such as more challenging jobs (job design), career
development, and recognition.
Equity and Its Impact on Pay Rates:

• the equity theory of motivation postulates that people are motivated to maintain a balance
between what they perceive as their contributions and their rewards.
• In compensation, one can address external, internal, individual, and procedural 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 refers to how fair the job’s pay 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 earns?).
Individual equity refers to the fairness of an individual’s pay as compared with what his or her
coworkers are earning for the same or very similar jobs within the company, based on each
person’s performance.
Procedural equity refers to the “perceived fairness of the processes and procedures used to
make decisions regarding the allocation of pay.”