CHAPTER 11 COMPENSATION PowerPoint Presentation by Charlie Cook Copyright © 2002 South-Western. All rights reserved

Copyright © 2002 South-Western. All rights reserved.11–2 The Importance of Compensation Attract employeesAttract employees Retain employeesRetain employees Motivate employeesMotivate employees Compliance with pay lawsCompliance with pay laws Administrative simplicityAdministrative simplicity Cost effectivenessCost effectiveness Which goals would be most critical for a technology company such as Visionary Design Systems?Which goals would be most critical for a technology company such as Visionary Design Systems? Attract employeesAttract employees Retain employeesRetain employees Motivate employeesMotivate employees Compliance with pay lawsCompliance with pay laws Administrative simplicityAdministrative simplicity Cost effectivenessCost effectiveness Which goals would be most critical for a technology company such as Visionary Design Systems?Which goals would be most critical for a technology company such as Visionary Design Systems?

Copyright © 2002 South-Western. All rights reserved.11–3

Copyright © 2002 South-Western. All rights reserved.11–4 Think of Something that was unfair. Explore what it is and why it was unfair.Explore what it is and why it was unfair.

Copyright © 2002 South-Western. All rights reserved.11–5 Critical Thinking Questions: 1.Why do most private firms choose to have a pay secrecy policy? Do they work? Does pay secrecy fit with a high commitment HR system where employee participation is a strong element of corporate culture? 2. Should a manager receive higher pay than the subordinates that she/he supervises? 1.Why do most private firms choose to have a pay secrecy policy? Do they work? Does pay secrecy fit with a high commitment HR system where employee participation is a strong element of corporate culture? 2. Should a manager receive higher pay than the subordinates that she/he supervises?

Copyright © 2002 South-Western. All rights reserved.11–6 Critical Thinking Questions: 3.What are the strategic advantages of paying below the market for pay? Can a firm sustain this pay choice? 4. Why would a firm decide to pay above the market? Is this choice open to all firms in an industry or sector? 3.What are the strategic advantages of paying below the market for pay? Can a firm sustain this pay choice? 4. Why would a firm decide to pay above the market? Is this choice open to all firms in an industry or sector?

Copyright © 2002 South-Western. All rights reserved.11–7 Equity Theory Internal equityInternal equity –Fairness of pay differentials between different jobs in the organization can be established by job ranking, job classification, point systems and factor comparisons. External equityExternal equity –Fairness of organizational compensation levels relative to external compensation is assessed by collecting wage and salary information to guide in setting the organization’s pay strategy to lead, meet or lag labor market wages. Internal equityInternal equity –Fairness of pay differentials between different jobs in the organization can be established by job ranking, job classification, point systems and factor comparisons. External equityExternal equity –Fairness of organizational compensation levels relative to external compensation is assessed by collecting wage and salary information to guide in setting the organization’s pay strategy to lead, meet or lag labor market wages.

Copyright © 2002 South-Western. All rights reserved.11–8 Equity Theory (cont’d) Individual EquityIndividual Equity –Fairness about pay differentials among individuals who hold the same job in the organization is established by using: Seniority-based pay systems that reward longevity with the organization.Seniority-based pay systems that reward longevity with the organization. Merit-based pay systems that reward employee performance.Merit-based pay systems that reward employee performance. Incentive plans that allow employees to receive part of their compensation based on their job performance.Incentive plans that allow employees to receive part of their compensation based on their job performance. Skills-based pay systems where compensation is based on employees possessing skills that the firm values.Skills-based pay systems where compensation is based on employees possessing skills that the firm values. Team-based pay plans that encourage cooperation and flexibility in employees.Team-based pay plans that encourage cooperation and flexibility in employees. Individual EquityIndividual Equity –Fairness about pay differentials among individuals who hold the same job in the organization is established by using: Seniority-based pay systems that reward longevity with the organization.Seniority-based pay systems that reward longevity with the organization. Merit-based pay systems that reward employee performance.Merit-based pay systems that reward employee performance. Incentive plans that allow employees to receive part of their compensation based on their job performance.Incentive plans that allow employees to receive part of their compensation based on their job performance. Skills-based pay systems where compensation is based on employees possessing skills that the firm values.Skills-based pay systems where compensation is based on employees possessing skills that the firm values. Team-based pay plans that encourage cooperation and flexibility in employees.Team-based pay plans that encourage cooperation and flexibility in employees.

Copyright © 2002 South-Western. All rights reserved.11–9 Equity Theory (cont’d)

Copyright © 2002 South-Western. All rights reserved.11–10 Equity Theory (cont’d)

Copyright © 2002 South-Western. All rights reserved.11–11 Why Pay Secrecy? The compensation employees get is privileged information to both the partiesThe compensation employees get is privileged information to both the parties Pay secrecy diminishes an opportunity for comparison among employees and organization's exposure to perceived inequalityPay secrecy diminishes an opportunity for comparison among employees and organization's exposure to perceived inequality Though perfectly justifiable pay differences are complicated and difficult to explain reasons, especially if people doing similar jobs are lined at different pay levels under different market conditionsThough perfectly justifiable pay differences are complicated and difficult to explain reasons, especially if people doing similar jobs are lined at different pay levels under different market conditions The compensation employees get is privileged information to both the partiesThe compensation employees get is privileged information to both the parties Pay secrecy diminishes an opportunity for comparison among employees and organization's exposure to perceived inequalityPay secrecy diminishes an opportunity for comparison among employees and organization's exposure to perceived inequality Though perfectly justifiable pay differences are complicated and difficult to explain reasons, especially if people doing similar jobs are lined at different pay levels under different market conditionsThough perfectly justifiable pay differences are complicated and difficult to explain reasons, especially if people doing similar jobs are lined at different pay levels under different market conditions

Copyright © 2002 South-Western. All rights reserved.11–12 Why Pay Secrecy? Pay secrecy can prevent embarrassing situations by shielding under-paid and under-performing employees.Pay secrecy can prevent embarrassing situations by shielding under-paid and under-performing employees. Managers enjoy more freedom in administering pay in a pay secrecy organization, as the difference in the pay need not be explained to others.Managers enjoy more freedom in administering pay in a pay secrecy organization, as the difference in the pay need not be explained to others. Pay secrecy can prevent embarrassing situations by shielding under-paid and under-performing employees.Pay secrecy can prevent embarrassing situations by shielding under-paid and under-performing employees. Managers enjoy more freedom in administering pay in a pay secrecy organization, as the difference in the pay need not be explained to others.Managers enjoy more freedom in administering pay in a pay secrecy organization, as the difference in the pay need not be explained to others.

Copyright © 2002 South-Western. All rights reserved.11–13 Why NOT Pay Secrecy? Open communication and build trustOpen communication and build trust An open pay system drives the point home to employees that the management believes in fair and open policies.An open pay system drives the point home to employees that the management believes in fair and open policies. Open pay policies not only take power and control from the managers but politics are also less likely to surface resulting in merit getting rewarded.Open pay policies not only take power and control from the managers but politics are also less likely to surface resulting in merit getting rewarded. When pay information is kept as secret, employees make inaccurate perceptions. Further more, those perceptions work against increasing motivation.When pay information is kept as secret, employees make inaccurate perceptions. Further more, those perceptions work against increasing motivation. –Hence, to maximise motivation employees need to know how performance is defined and measured and finally rewarded. Open communication and build trustOpen communication and build trust An open pay system drives the point home to employees that the management believes in fair and open policies.An open pay system drives the point home to employees that the management believes in fair and open policies. Open pay policies not only take power and control from the managers but politics are also less likely to surface resulting in merit getting rewarded.Open pay policies not only take power and control from the managers but politics are also less likely to surface resulting in merit getting rewarded. When pay information is kept as secret, employees make inaccurate perceptions. Further more, those perceptions work against increasing motivation.When pay information is kept as secret, employees make inaccurate perceptions. Further more, those perceptions work against increasing motivation. –Hence, to maximise motivation employees need to know how performance is defined and measured and finally rewarded.

Copyright © 2002 South-Western. All rights reserved.11–14

Copyright © 2002 South-Western. All rights reserved.11–15 Job Evaluation: Point System Method

Copyright © 2002 South-Western. All rights reserved.11–16 Five Levels of the Compensable Factor “Technical Skills”

Copyright © 2002 South-Western. All rights reserved.11–17

Copyright © 2002 South-Western. All rights reserved.11–18 Job Evaluation Methods

Copyright © 2002 South-Western. All rights reserved.11–19 Key Strategic Issues in Compensation Determining compensation relative to the market.Determining compensation relative to the market. Striking a balance between fixed and variable compensation.Striking a balance between fixed and variable compensation. Deciding whether or not to utilize team-based versus individual pay.Deciding whether or not to utilize team-based versus individual pay. Creating the appropriate mix of financial and non- financial compensation.Creating the appropriate mix of financial and non- financial compensation. Developing a cost-effective compensation program that results in high performance.Developing a cost-effective compensation program that results in high performance. Determining compensation relative to the market.Determining compensation relative to the market. Striking a balance between fixed and variable compensation.Striking a balance between fixed and variable compensation. Deciding whether or not to utilize team-based versus individual pay.Deciding whether or not to utilize team-based versus individual pay. Creating the appropriate mix of financial and non- financial compensation.Creating the appropriate mix of financial and non- financial compensation. Developing a cost-effective compensation program that results in high performance.Developing a cost-effective compensation program that results in high performance.

Copyright © 2002 South-Western. All rights reserved.11–20 Reading 11.1: Compensating Teams Reasons for tailoring compensation to individuals:Reasons for tailoring compensation to individuals: –Motivation comes from within the individual as opposed to the group. –The development of skills and behaviors is an individual undertaking. –Fairness in dealing with teams does not mean equal pay for all. –Team compensation is not a payoff but a means of nurturing behavior that benefits the team. Reasons for tailoring compensation to individuals:Reasons for tailoring compensation to individuals: –Motivation comes from within the individual as opposed to the group. –The development of skills and behaviors is an individual undertaking. –Fairness in dealing with teams does not mean equal pay for all. –Team compensation is not a payoff but a means of nurturing behavior that benefits the team.

Copyright © 2002 South-Western. All rights reserved.11–21 Reading 11.2: New Thinking for the New Millennium Strategic approaches to may compensation (pay) systems more responsive: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. Strategic approaches to may compensation (pay) systems more responsive: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.