Chapter 1 The Pay Model © 2014 by McGraw-Hill Education.  This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner.  This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 

Learning Objectives Compensation - Definition Forms of pay A pay model 1-2

Perspectives of Compensation Society’s Views Stockholders’ Views Employees’ Views Managers’ Views 1-3

Perspectives of Compensation Society Considers pay as a measure of justice Job benefits- Reflection of justice in society Stockholders Using stock to pay employees creates a sense of ownership Linking executive pay to company performance increases stockholders' returns 1-4

Perspectives of Compensation Managers Major expense Can be used to: Influence employee behaviors Improve organizational performance Employees Major source of financial security Entitlement for being an employee of the company Reward for a job well done 1-5

Incentive and Sorting Effects of Pay on Employers’ Behaviors Pay affects motivational intensity, direction, and persistence Incentive effect: Degree to which pay influences individual and aggregate motivation Sorting effect: Effect that pay can have on the composition of the workforce How an organization pays, can result in sorting effects 1-6

What is Compensation? All forms of financial returns and tangible services and benefits employees receive as part of an employment relationship 1-7

Forms of Pay Total compensation Relational returns Pay received directly as cash and indirectly as benefits Relational returns Are psychological 1-8

Exhibit 1.4 - Total Returns for Work 1-9

Forms of Pay Base wage Cash that an employer pays in return for the work performed A function of the skill or education an employee possesses Salary-Pay for employees: Who are exempt from regulations of the Fair Labor Standards Act (FLSA) Is calculated at an annual or monthly rate 1-10

Forms of Pay Merit pay/Cost-of-living adjustments Wage-Pay for workers: Covered by overtime and reporting provisions of the Fair Labor Standards Act Is calculated on hourly basis Merit pay/Cost-of-living adjustments Periodic adjustments to base wages on the basis of changes in: What other employers are paying for same work Overall cost of living Experience or skill 1-11

Forms of Pay Incentives (Variable pay) Pay increases are given in recognition of past work behavior Same increases given to everyone, regardless of performance Incentives (Variable pay) Related to performance Do not increase base wage Potential size of the payment will generally be known beforehand 1-12

Forms of Pay Benefits Are one-time payments May be long-term (stock options) or short-term Benefits Income protection Medical insurance, retirement programs, and life insurance Work/life balance Vacations, financial planning, referrals for child and elder care, and telecommuting Allowances 1-13

Forms of Pay Total earning opportunities Relational returns from work Comparison of today's initial offers to consideration of future Relational returns from work Nonfinancial returns that substantially impact employee behavior Network of returns Created by different forms of pay Useful if bonuses and development opportunities work together 1-14

A Pay Model Basic building blocks Compensation objectives Policies that form the foundation of the compensation system Techniques that make up the compensation system 1-15

Exhibit 1.5 - The Pay Model 1-16

Compensation Objectives Guide the design of the pay system Serve as standards for judging the success of the pay system Compliance - Conforming to federal and state compensation regulations 1-17

Four Policy Choices Internal alignment Compares jobs or skill levels inside a single organization Pertains to the pay rates for employees doing: Equal work Dissimilar work 1-18 18

Four Policy Choices Pay relationships affect employee decisions to: Stay with the organization Become more flexible by investing in additional training Seek greater responsibility 1-19 19

Four Policy Choices External competitiveness Pay comparisons with competitors Pay is ‘market driven’ Objective: To ensure that pay is sufficient to attract and retain employees To control labor costs to ensure competitive pricing of products/ services 1-20 20

Four Policy Choices Employee contributions Management Understanding the basis for judging performance, helps perceive pay as fair Management Right people get the right pay for achieving the right objectives in the right way 1-21

Pay Techniques Tie the four basic policies to the pay objectives Many variations exist 1-22 22