Impacts an employers ability to attract and retain employees. Ensure optimal levels of employee performance in meeting the organizations strategic objectives. Compensations components Direct compensation in the form of wages or salary Base pay (hourly, weekly, and monthly) Incentives (sales bonuses and or commissions) Indirect compensation in the form of benefits Legally required benefits (e.g., Social Security) Optional (e.g., group health benefits) Theory Behind Compensation Equity Theory Comparing inputs and outputs of a similar co-worker Perceived inequity affects employee effort
Expectancy Theory People are motivated by intrinsic and extrinsic outcomes they desire. People will only be motivated if outcome is possible. People will only be motivated if outcome is contingent.
Equity Theory Internal equity Comparison of my input / reward ratio with that of similar others. Employees may seek to address imbalance by changing their inputs. Fairness of pay differentials between different jobs in the organization can be established by job ranking, job classification, point systems and factor comparisons. External equity Fairness of organizational compensation levels relative to similar jobs in other organizations. Monkeys Demand Equal Pay A recent study shows brown capuchin monkeys refused to play along when they saw another monkey get a better payoff for performing the same work.
The monkeys were trained to trade a granite token for a piece of cumber. When the reward was the same for both monkeys, they took the cucumber 95 percent of the time.
But it was a different story when one monkey was given something better -- namely, a grape. Then, the other monkey often pitched a fit -- either throwing the token, refusing to eat the cucumber or giving it to the other monkey.
Associated Press 2003
Equity Theory Fairness about pay differentials among individuals who hold the same job can be established by using: Seniority-based pay systems that reward longevity. Merit-based pay systems that reward employee performance. Incentive plans that allow employees to receive part of their compensation based on their job performance. Skills-based pay systems. Team-based pay plans that encourage cooperation and flexibility in employees. Types of Base Pay Systems Job-based Pay the job (not the person) Market-based (external equity focus) Point factor-based (internal equity focus) Skills / knowledge-based Pay the person (not the job) 62% of F1000 firms used some type of skill based pay in 1999
Job Based Pay Attraction Depends on market pricing Motivation No performance impact Skill Development Learn job-related and upward mobility skills Culture Bureaucratic, hierarchical Structure Hierarchical, individual jobs and differentiation Cost Good control of individual pay Individual Skill/Knowledge Based Pay Attraction Attracts learning-oriented individuals, high skills individuals Motivation Little performance impact Skill Development Motivates needed skill development Culture Learning, self-managing Structure Flat or team-based Cost Higher individual pay When to Use a Job-based Pay Policy A job-based pay work best in situations where: Job duties are stable. Skills are generic. Employees move up through the ranks over time. Jobs are fairly standardized within the industry. Drawbacks of a job-based pay system Discounts individual ability. Discourages lateral movement. Tends to be bureaucratic, mechanistic, and inflexible. Employees perceptions of equity are more important than market or point data.
Individual-based Compensation Individual-based compensation works when: The firm has a relatively educated workforce. Employees often do different jobs Technology changes frequently. Employee participation and teamwork are encouraged. Opportunities for upward mobility are limited. Opportunities to learn new skills are present. The costs of employee turnover and absenteeism in terms of lost production are high. Pricing Jobs First conduct job analysis Qualifications KSAs Non-quantitative methods Job Ranking (create hierarchy of jobs) Job Classification (create groups of similar jobs) Quantitative Methods Point factor systems Compare compensable factors Market pricing Compensable Factors Hay Factors Know-how Problem solving Accountability National Position Evaluation Plan (MAA) Skill Effort Responsibility Job Conditions
Characteristics in the job that the organizational values and that help achieve its objectives. Pricing Jobs Variable Pay Incentives Linking performance to pay Individual Bonuses, piece-rates, stock options Team Bonuses and awards Plant / Unit / Business Gainsharing, profit sharing Corporation ESOPs
Line of sight is the perceived link between individual behavior and the reward.
Individual Merit Attraction Good for high performers Motivation Good line of sight Skill Development Learn skills that lead to rewarded performance Culture Performance oriented, job focused Structure Individual and independent jobs Cost Depends on the size of the awards Team Incentives Attraction Good if team performs well Motivation Moderate line of sight Skill Development Encourages team skills Culture Team focused Structure Team-based and integrated Cost High if significant awards given Organizational Plans Attraction Good if organization performs well Motivation Weak line of sight Skill Development Encourages broad understanding of business Culture Business involvement Structure Organization wide integration Cost Possible self-funding if based on performance improvement Pay for Performance Requires 1. Definition of performance How are we going to measure and compare people?
2. Distribution of performance Can we distinguish high and low performers?
3. Decide the increase for each level of performance. How large a difference between high and low performers?
Key Strategic Issues in Compensation Determining compensation relative to the market. Striking a balance between fixed and variable compensation. Deciding whether or not to utilize team-based versus individual pay. Creating the appropriate mix of financial and non- financial compensation. Developing a cost-effective compensation program that results in high performance. New Thinking for the New Millennium Strategic approaches to may compensation (pay) systems more responsive: Pay the person for individual worth (knowledge, skills and competencies) rather than for the value of a job they perform. Reward excellence through a pay for performance compensation that establishes a clear relationship between a significant amount of pay and attainment of organizational objectives. Individualize the pay system to give employees choices in how they are rewarded and what reward they receive.