McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc. All rights reserved. 1-1 Compensation

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc. All rights reserved. 1-2 Key Questions and Issues  How do differing perspectives affect our views of compensation?  What can a pay system do for an organization? For an employee?  How does the pay model help organize one’s thinking about compensation?  Under what circumstances would one of the four basic pay policies be emphasized relative to the others?

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc. All rights reserved. 1-3 Society’s Views Stockholders’ Views Employees’ Views Managers’ Views Contrasting Perspectives of Compensation

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc. All rights reserved. 1-4  Society View: Pay as a measure of Justice.  Stockholders: Executive pay is of Special interest.

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc. All rights reserved. 1-5  Managers: Compensation influences their Success in two ways 1.It is major expense. 2.Uses to influence employee behaviors and improving organization behavior.  Employees: It is return for work they perform and major source of their financial security.

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc. All rights reserved. 1-6 Compensation refers to all forms of financial returns and tangible services and benefits employees receive as part of an employment relationship. What Is Compensation?

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc. All rights reserved. 1-7 Exhibit 1.3: Total Returns for Work

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc. All rights reserved. 1-8 Direct Pay Forms  Cash Compensation: Base  Cash Compensation: Merit Pay / Cost-of- Living Adjustments  Cash Compensation: Incentives  Long-Term Incentives Indirect Pay Forms  Benefits: Income Protection  Benefits: Work/Life Focus  Benefits: Allowances Forms of Pay

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc. All rights reserved. 1-9  Total Returns are  1.Total Compensation: They include pay received directly as cash. base, merit, incentives, cost-of-living adjustments., etc 2.Relational Returns: Learning opportunities, status, challenging work are psychological.

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc. All rights reserved  Base: base wage is the cash compensation that an employer pays for the work performed. Base wage differs based on experience, skills and value of work  Wage is fixed regular payment for the work onhourly basis  Salary to pay for employees who are do not receive overtime payment. Calculation monthly or annually.

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc. All rights reserved  Merit Pay/Cost-of-Living Adjustments: Merit increases are given as increments to the base pay in recognition of past work behavior. Cost –of-living adjustments give the same percent across the board to everyone, regardless of performance.

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc. All rights reserved  Incentives: Incentives paid directly to performance.  Incentives are different with merit payment 1.incentives do not increase the base wage and must be re-earned each pay period. 2.Incentives payment will generally known beforehand 3.Incentives are one-time payments they do not have a permanent effect on labour cost. 4.Performance and incentives are proportionate. 5.Incentives are frequently referred to as variable pay.

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc. All rights reserved  Long term incentives: Long term incentives are intended to focus employees efforts on multi year results. Ex stock options or ownership.

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc. All rights reserved Benefits:  Income Protection: The benefits including income protection, work/life balance services, and allowances.  Medial insurance, retirement programms,life insurance and savings plans are common benefits.

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc. All rights reserved  Work/Life Focus: Integrate work and life responsibilities include time away from the work.  Allowances: Often grow out of whatever is in short supply.

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc. All rights reserved Relational Returns from Work Recognition & Status Employment Security Challenging Work Learning Opportunities

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc. All rights reserved An unwritten understanding between employers and employees over their reciprocal obligations and returns; employees contribute toward achieving the goals of the employer in exchange for returns given by the employer and valued by the employee. What Is an Implicit Employment Contract?

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc. All rights reserved POLICIESTECHNIQUESOBJECTIVES EFFICIENCY Performance Quality Customers Stockholders Costs FAIRNESS COMPLIANCE COMPETITIVENESS Market Surveys Policy PAY definitions lines STRUCTURE CONTRIBUTORS Seniority Performance Merit INCENTIVE based based guidelines PROGRAMS MANAGEMENT Costs Communication Change EVALUATION Exhibit 1.5: THE PAY MODEL ALIGNMENT Work Descriptions Evaluation/ analysis certification INTERNAL STRUCTURE

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc. All rights reserved Compensation Objectives Efficiency Fairness Compliance

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc. All rights reserved  Internal alignment  Focus - Comparisons among jobs or skill levels inside a single organization  External competitiveness  Focus - Compensation relationships external to the organization: comparison with competitors  Employee contributions  Focus - Relation emphasis placed on employee performance  Management  Focus - Policies related to managing the pay system Pay System Policies

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc. All rights reserved Thank you