Compensation

Compensation is the set of rewards that organizations provide to individuals in return for their willingness to perform various jobs and tasks within the organization. Internal equity in compensation refers to comparisons that employees make to other employees within the same organization. External equity in compensation refers to comparisons employees make to others performing similar jobs in different organizations.

Basic Internal Purposes of Compensation External

equity

equity

Expense control

Compensatio n

Legal compliance

Reward and motivate

Wages versus Salaries

Wages generally refer to hourly compensation paid to operating employees; the basis for wages is time.

Salary is income that is paid an individual not on the basis of time, but on the basis of performance.

Strategic Options for Compensation

Anticipation of setting pay level

Determination of market pay

Pay below market rate

Pay market rate

Pay above market rate

Organizational Pay Rates Pay

Additional compensation costs Sense of entitlement

Disadvantages

Advantages

above market rate

Attracts better employees Minimizes voluntary turnover Fosters strong culture and competitive superiority Higher quality of human resources at midrange of market-driven compensation costs Lower compensation costs Useful in labor markets where unemployment is high

Does not attract higher performers Turnover will vary with labor demands of competing firms Lower-quality employees Low morale/job satisfaction Higher turnover; especially among high performers

Pay at market rate Pay below market rate

Determinants of Compensation Factors contributing to a firms compensation strategy Strategy

Relationship of overall strategy to compensation strategy Growth rate of firm and demand for human resources Financial condition of the firm (i.e., ability to pay) Overall attractiveness of firm (i.e., location, culture) Legal context of federal, state, and local labor regulations Union influence and presence in labor market

 Pay surveys Pay Surveys and Compensation

are surveys of compensation paid to employees by

other employers in a particular geographic area, an industry, or an occupational group. assist firms in avoiding problems of external equity when attempting to set compensation strategy for themselves.

Determining a Wage and Salary Structure Job ranking Classification

method

system

Regressionbased system

Job Evaluation

Point system

Factor comparison method

 Factor comparison method Job Evaluation and Job Worth

assesses jobs on a factor-by-factor basis, using a factor

comparison scale as a benchmark.

Regression-based system uses a statistical technique called multiple regression to develop an equation that establishes the relationship between different dimensions of the job and compensation.

Factor Comparison Method of Job Evaluation

Six steps: Comparison factors are selected and defined. Benchmark or key jobs are identified. Benchmark jobs are ranked on each compensation factor. A part of each benchmark jobs wage rate is allocated to each job factor. Two sets of ratings are prepared, based on the ranking and the assigned wages, to determine the consistency demonstrated by the evaluators. A job comparison chart is developed to display the benchmark jobs and the monetary values that each job receives for each factor.

Wage and Salary Administration

Managing compensation allows the organization to control compensation costs and to maintain a compensation structure that fits the needs of both the organization and its employees. As organizational circumstances change, it may become necessary to modify or change the compensation strategy. Determining individual wages has its basis in the organizations awarding differential compensation to employees on the basis of qualifications, seniority, or other job-related factors.

Wage and Salary Administration Pay secrecy

refers to the extent to which an individuals compensation in an

organization is secret. Arguments for pay secrecy

An individuals compensation is a private matter and not for public knowledge. Knowing pay levels fosters jealousy and resentment. Public knowledge about an open-pay system creates proper perceptions of equity and motivates performance.

Argument against pay secrecy

Pay compression
occurs when individuals of substantially different levels of

experience or seniority are paid similar wages or salaries.