COMPENSATION

Why is compensation important? Society Firm Individual

What are the elements of compensation? Base pay Incentives Fringe benefits

What are different forms of payment? Cash Benefits Payment for time not worked Non-pecuniary benefits (gym memberships, child care) Intrinsic

Exchange Theory Pay is an exchange for efforts Implicit Social Contract beliefs about mutual obligations Implicit Psychological Contract Temporal Quality amount of time in job & career

Equity Theory ? < = > OUTCOME INPUTS OUTCOME INPUTS the same Pay, benefits, opportunities, etc. the same more or less OUTCOME INPUTS OUTCOME INPUTS < = > ? effort, ability, experience etc. A person evaluates fairness by comparing their ratio with others.

Equity Theory Workers compare their compensation with others If unequal workers attempt to restore equity

Workers Restore Equity by: Reducing input Attempting to get raise Quitting Psychological Adjustment

Compensation Model

Internal Equity Comparison of Jobs Jobs worth to the Employer Similarities and differences in work content Relative contribution to organization objectives Accomplished through job evaluation

External Equity Value of the job to the labor market Assessed through wage surveys

Individual Equity Relative pay between individuals doing the same job Influences motivation

Organizational Justice Perceived fairness of the pay system Outcomes Process Issues Interactions Influences Commitment, Organization Citizenship

Strategic Perspectives The strategy balances 4 types of equity Best Practice Contingency: organizations will have pay systems that fit with their business strategy organizations that have “fit” will outperform those without “fit” Strategic Decisions include: pay level, pay structure, individual rewards, team rewards, pay administration

Best Practice v. Strategy Debate Best practice - there are a set of compensation practices that are good for all firms. Strategy - the set of compensation practices that are good for firms will vary based upon the firm’s goals.

Best Practice Examples* High wages Guarantee of Employment Security Use incentives; share gains Employee Ownership Participation & Empowerment Teams Smaller pay differences *Source: Pfeffer, Competitive Advantage Through People, 1994

Summary There are four key elements to equity The strategic contingency view is that some firms may weight those elements differently depending on firm objectives The best practice view is that there are good practices that all firms should engage in no matter what their strategy.

Summary (continued) Equity forms the basis for compensation management Strategy guides the organization in the balancing of equity components The test is whether the compensation system reinforces sustained competitive advantage