Chapter 9: Managing Compensation

The purpose of compensation is to attract, motivate, and maintain employees. An

employee’s pay is a statement of worth to an employer. There are two types of
compensation: Direct and Indirect Compensation
Direct compensation includes wages/salaries, commission, bonuses, and gainsharing.
Indirect compensation includes time-off, insurance plans, security plans, and employee
services.

Strategic compensation links the compensation of employees to the missions, objectives,

philosophies, and culture of the organization. It serves to mesh the monetary payments
made to employees with specific functions of the HR program in establishing a pay-for-
performance standard. Furthermore, it seeks to motivate employees through
compensation. There are three important aspects of a strategic compensation:
(1)compensation through organizational objectives, (2) the pay for performance
standard, and (3) motivating employees through compensation.
(1) Compensation through managements objectives includes value added
compensation which evaluates individual components of the compensation
program(pay and benefits) to see if they advance the needs of employees and the
goals of the organization.
(2) The pay for performance standard is the standard by which management ties
compensation to employee effort and performance. It refers to a wide range of
compensation options.
(3) Motivating employees through compensation is an employee`s perception that
compensation received is of equal value for the work performed. It is a motivation
theory that explains how people respond to situations in which they have received
less(or more) than they deserve.

Note- the basis for compensation is/are: wages, salaries, and piecework. Pay secrecy is an
organization policy prohibiting employees from revealing their compensation information
to anyone.

The wage-mix of both internal and external factors plays an important role in determining
wage rates for jobs.
Internal factors: employee’s compensation strategy, worth of a job, relative work of an
employee, and the employer’s ability to pay.
External factors: labour marker conditions, area wage rates, cost of living (which is
based on the CPI index) (escalator clause), and collective bargaining (real wages).

Note—Escalator clauses are clauses in collective agreements that provide for quarterly
cost-of-living adjustments in wages, basing the adjustments on changes in the consumer
price index. And, Real wages are wage increases larger than rises in the consumer price
index; that is, the real earning power of wages.

Job evaluation systems determine the relative worth of jobs in order to establish which
job should be paid more than others.
Different job evaluations include i)nonquantitative and ii)quantitative evaluations

i) Nonquantitative evaluations:
Job Ranking System—the oldest system of job evaluation by which jobs are arrayed on
the basis of their relative worth.
Job Classification system—is a system of job evaluation in which jobs are classified and
grouped according to a series of predetermined wage grades. Successive grades require
increasing amounts of job responsibility, skill, knowledge, ability, or other factors
selected to compare jobs.

ii) Quantitative evaluations:

Point System—is a quantitative job evaluation procedure that determines the relative
value of a job by the total points assigned to it. It permits jobs to be evaluated
quantitatively on the basis of factors or elements—compensable factors—that constitute
the job. (the point manual is a complimentary handbook)
(a Factor Comparison System is also quantitative)

Work valuation systems are job evaluation systems that seek to measure a job’s worth
through its value to the organization. Jobs are valued relative to financial, operational, or
customer service objectives of the organization.

The hay profile method is used for evaluating jobs in managerial positions. It is a job
evaluation technique using three factors— knowledge, mental activity, and accountability
—to evaluate executive and managerial positions.

A wage and salary survey is a survey of the wages paid to employees of other employers
in the surveying organization’s relevant labour market. It helps maintain internal and
external pay equity for employees.
The wage curve consists of pay grades(jobs within a particular class that are paid the
same rate), rate ranges (a range of rates for each pay grade that may be the same for each
pay grade or proportionately greater for each successive grade), and red circle rates
(payments above the maximum of the pay range). Broadbanding is the collapse of many
different salary grades into a few wide salary bands.

For Gov’t regulation of organizational compensation, consider the Canadian Labour

Code, Employment Standards Act, and Pay Equity.
Significant compensation issues in today’s work environment are: Equal pay for equal
work, Wage-rate compensation, and Wage-rate compression (compression of pay
differentials between job classes, particularly the pay differentials between hourly
workers and their managers).

Factor comparison system

Review broadbanding and Employment standards act…