MA GLOBAL BUSINESS

CORE COURSE IN
HUMAN RESOURCE MANAGEMENT IN THE GLOBAL ENVIRONMENT
Academic year
2007 - 2008

REWARD
MANAGEMENT

SABER (KNOWLEDGE)
Money value and meaning in organizational context
Money influence on organizational behaviour
Goals and basic principles in compensation
Key questions on compensation
Elements that integrate compensation
Indirect compensation
Management of information On successful completion of this class, students will be able
SABER to:
Critical analysis
HACER/ Problem Solving
ESTAR/ Open problems ‰Locate compensation in the global human resources
Group Working management system
SER Team and group working ‰Reflect effects compensation has over other organizational
(SKILLS) Learning Resources variables
Self-evaluation ‰Analyze the components of a compensation system and know
Critical analysis how to use them
Respond to feedback ‰Reflect the link between compensation and employee
Autonomy
Self critical

Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved.

6.1. Goals and basic principles

6.2. Key questions in compensation systems
6.3. Elements of compensation
6.4. Indirect compensation or benefit

We understand compensation References

as all the financial returns,
tangible services and benefits
that receive employees in the
organization
(Milkovich y Newman, 2002).
Gomez-Mejía, L.R., Balkin, D.B. and Cardy, R.L (2004).
Managing Human Resources. International Edition. Pearson,
Prentice-Hall.
Noe, R., Hollenbeck, J., Gerhart, B., and Wright, P.(2002),
Human Resource Management, McGraw Hill

1
 1. Goals and basic principles
Importance of compensation systems (Claver, 1995):

9 Influence over organizational efficacy

9 Important cost from the total costs
9 Source of Problems

Different approaches

Firms: the most quality and Employees will try to

quantity and the less cost get more compensation

1. Goals and basic principles

Reward Management Criteria
1. Equity: internal vs external
2. Compensation: fix vs variable
3. Individual performance vs group
4. Retribution based on position vs performance
5. Elitism vs equality
6. Salary over or below market
7. Financial vs non financial remuneration
8. Public vs secret remuneration
9. Centralised decisions vs decentralised

2. Key questions in compensation

systems

Conditions
Compensation influence behaviours to get the strategy (Lawler,
1995).
Conditions (Armstrong, 1995):

1. Policies and retribution fit.

2. Support key values in organisation
3. Fit culture and managers styles.
4. Manage and say explicit behaviours that want the organisation.
5. Must attract and retain employees.

2
 2. Key questions in compensation
systems
Firm models concerning compensation
Gomez Mejía (1992)

Algorithmic model Experimental model

Based on position Based on performance
Behaviour control Results control
Seniority Present and future skills

How to develop a compensation

system?
1. Job Analysis

2. Job description. 3. Job specification.

4. Determination of the relative worth of each position

through a process established before

5. Hierarchical of positions.

6. Position classification by levels

External 1. Check market value through

2. Final establishment of a reference points or key positions
Equity Compensation system.

Criteria to establish compensation

Individual salary inside the compensation interval of each
assignment. position: experience, seniority,
performance

2. Key questions in compensation

systems
Conditionings of the compensation
system

„ The labour market

„ The state
„ Unions
„ Technological changes
„ Internal factors

3
 3. Components of compensation

Total retribution

Basic Salary Salaries incentives /Variable Indirect compensation

Benefits

3. Components of compensation
Others

Rewards x job Vacations, retirement, …

Rewards x service Extra hours, …

Rewards x effort Seniority raise

Fitting salaries
(level of life)

Rewards x Basic Salary Rewards in benefits

performance (internal-position and external-market)

Source: Adpated from Davis, 1972 (cited in Chiavenato, 1988)

3. Components of compensation

Six myths about salary by Pfeffer

(Harvard Business Review, Remuneration and incentive systems,
p. 163-164, Deusto ed.)

1. Price of work and labour costs are the same

2. If prices of work are reduced labour costs are also reduced
3. Labour costs are an important percentage of total costs in a firm
4. Keep labour costs low creates a potent and sustenaible competitive
advantage
5. Salaries rewards/Incentives improve outcomes
6. People work, mainly, by money

4
 Compensation in Travel Agency
Geisha, SL?
1. Incorporation, compensation varies considering four aspects:
• Individual characteristics of employee (experience, skills and
aptitudes)
• Tasks and functions to develop
• Market situation in the moment of hiring
• And competency (number of valid candidates to the position)
2. Periodical negotiation during staying in the firm. It is searched
the continue improvement considering:
• Constant improvement from a qualitative and quantitative point
of view
• Level of responsibility
• Profitability of position for the firm
• Results balance of the department or business unit
• Results balance of the firm

Compensation in Travel Agency

Geisha, SL?
„ Negotiation can be followed by a salary over labour agreement
„ Negotiation from agencies labour agreement: 16 monthly in 16,
14, or 12 payments depending the firm. In Gheisa Travel Agency
there are 12 monthly, so the other 4 are paid inside each month.
„ Salary are composed by the next concepts: basic salary, 4
payments divided by twelve months, and transport plus.

Example of salaries in four positions

Compensation Questionnaire 2004
PriceWaterhouseCoopers
Minimum Maximum

Puesto Concepto Q1 Q2 Q3
Director General Retribución
Fixed salaryfija 100.670 134.125 198.624
General manager R. Variable a corto plazo 22.560 43.540 84.530
Variable salary
R. Total
Total 2
salary 117.201 163.147 267.937
Director de Marketing Retribución
Fixed salaryfija 64.345 86.135 110.175
Marketing Manager R. Variable
Variable a corto plazo
salary 8.942 16.494 22.813
Total
R. salary
Total 2 73.353 99.850 128.120
Director de RRHH Retribución
Fixed salaryfija 68.100 87.410 104.560
HR Manager R. Variable
Variable a corto plazo
salary 6.340 12.530 18.730
Total
R. salary
Total 2 76.450 98.790 125.125
Técnico de RRHH Retribución
Fixed salaryfija 23.000 27.221 31.112
HR Technician R. Variable
Variable a corto plazo
salary 1.128 2.222 3.878
Total
R. salary
Total 2 24.123 29.878 34.430

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 Salary examples in the tourism sector
Agreement in Valencia
4 and 5 stars hotels (year 2001, in pts.)
Basic Salary Extras

Compensation levels Monthly Hours Holiday

day
salary

First 143.007 1.692 12.535

Second 137.711 1.633 12.073

Third 129.765 1.535 11.363

Fourth 124.467 1.479 10.916

Fifth 117.448 1.393 10.293

Sixth 79.444 - -

Waiter rooms 126.218 1.496 11.294

Compensating performance
Merit Pay (Campbell, Campbell y Chia, 1998). Problems:

„ Weak measures of performance

„ Low acceptation of the feedback from supervisor
„ Limited desire of merit reward: not attractive for employee
„ Merit links disperse: time delayed
„ Potential consequences not voluntaries: focus on activities

Compensating performance
Higher flexibility Armstrong (1995)
„ Increasing variable proportion based on performance
„ Avoid rigid hierarchical structures
„ Introduce payment systems that reward employees that gain skills and
competencies
„ Do not use mechanical systems to calculate the performance payment
„ Relate compensation increasing with merit and with market data,
avoiding reward the same to all
„ Let employees a higher election of benefits to receive (Cafeteria
Benefits).
„ Admit quick responses to problems caused by the scarcity of
resources and by market worth pressure, and the flexibility of the way
to arrive to an agreement in a proper way.

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 Compensating performance
Consider… (Baron y Kreps, 1999):

„ Loose efficacy if the employee can control the outcomes

not in the planned way
„ It has the value of the following and sorting of the
employee tasks
„ It focus in the desired behaviours
„ Groupal rewards: free-rider problem

Compensating performance
Lower probability to be effective (Baron y Kreps, 1999):

z The more complex the technology

z The more ambiguity in tasks
z The more focus in cooperativism in organization culture
z The more the strategy focus on quality or innovation
z The more the link between inputs and outputs is diffuse
z The more the trust in intrinsic motivation
z The more the perception on inequity
z The more the culture is against monetary differences

Compensating performance
Trends in performance compensation

Tower Perrins study, 50 large companies in the Spanish economy:

The Spanish companies will tend more to increase the differences
in compensation, rating 70% as something preference in the
HR strategies
1. Stimulate and retain the best (70%)
2. Improve the internal equity (16%)
3. Managers loyalty (15%)
4. Improve competitiveness (13%)
5. Focus on “understanding individually”

In the next three years

1. Increase differences in performance compensation (12%)
2. Increase the number of employees participating in variable compensation plans
3. Modify the professional classification and job analysis (33%)
4. Increase the team goals value over the individual (33%)
5. Introduce different compensation structures for different groups (33%)
6. Introduce individual increasing by individual merit or performance (30%)
7. Increase the managers responsibility over compensation systems (30%)

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 4. Benefits
Why do not give the money directly to the employee?
„ The low cost of many employees
„ Effects in behaviour and quality of employees
„ Fiscal advantages
„ Impact on productivity
z Attract and retain the best
z Motivation
„ Toward a more symbolic interaction with organisation

4. Benefits
Company services toward the employee. Affect in many
cases also to the employee's family.
Advantages for the company Advantages for the employee
„ More employee's motivation „ Offer assistance to solve personal
„ Reduce absenteeism and rotation problems
„ Higher loyalty „ Increase job satisfaction
„ Higher wellbeing „ Contribute to the personal development
„ Facilitate recruitment and retention and wellbeing
„ Higher productivity „ Offer means to improve social
relationships
„ Show the company culture
„ Reduce insecure feelings
„ Offer an extra compensation
„ Reduce dissatisfaction causes

4. Benefits
Examples

„ Benefits related with health

„ Benefits related with wellbeing in the position and
organization
„ Benefits in education and information
„ Benefits in economic affairs
„ Benefits in recreation

Case of cafeteria benefits