BA 2204 and BAS 324 Human Resource Management Managing compensation Instructor: Ça ğ rı Topal 1

Compensation Package of quantifiable rewards an employee receives for his or her labor Base compensation Pay incentives Benefits 2

Compensation system Internal vs. external equity Internal equity: perceived fairness of the pay structure within a firm External equity: perceived fairness of pay relative to what other employers are paying for the same type of labor Distributive justice (internal equity) Labor market (external equity) Individual equity 3

Compensation system Fixed vs. variable pay Fixed: pay that is fixed No risk for employees Variable: pay that fluctuates according to some pre-established criterion Risk for both company and employees 4

Compensation system Performance vs. membership Performance: substantial portion of employees’ pay tied to individual or group contributions Mostly flat organizations Membership: same or similar wage to every employee in a given job as long as satisfactory performance achieved Mostly hierarchical organizations 5

Compensation system Job vs. individual pay Job-based: pay based on the value or contribution of a job Limited scope for meaningful difference by an employee Individual-based: pay based on the knowledge and skills of an employee Large scope for meaningful difference by an employee 6

Compensation system Elitism vs. egalitarianism Elitist: pay system with different compensation plans by organizational level and/or employee group and incentives offered only to specific employee groups Egalitarian: pay system with the same compensation plan for most employees and incentives offered to most employees as well 7

Compensation system Below-market vs. above-market Below-market: pay level below the going rate for a particular job in the labor market Commonly used for lower level employees and in small/young firms Above-market: pay level above the going rate for a particular job in the labor market Used only for critical employee groups and in large/mature firms 8

Compensation system Monetary vs. nonmonetary rewards Monetary rewards: cash or payments that can be converted into cash at some future point such as stock or pension plans Emphasizing individual achievement and responsibility Nonmonetary rewards: intangibles such as interesting work, challenging assignments, public recognition, flexible work hours, fitness centers, and day care services Emphasizing organizational commitment 9

Compensation system Open vs. secret pay Open pay: pay information open to all employees Secret pay: pay information known only to the employee concerned and to those responsible for administering the compensation system 10

Compensation system Centralization vs. decentralization Centralized pay: pay decisions tightly controlled in a central location, normally in the HR department at corporate headquarters Decentralized pay: pay decisions delegated throughout the firm, normally to unit managers at different locations and serving different markets 11

Compensation tools or plans Job-based plans-1 Dominant approach Not all jobs are equally important to a firm The most important jobs pay the most Internal equity External equity Individual equity Rational, objective, and systematic Easy and economical to set up and administer 12

Compensation tools or plans Job-based plans-2 Not specific More or less subjective and arbitrary Less applicable to higher organizational levels Less applicable to service jobs Mechanistic and inflexible Biased against so-called woman occupations Based on employers’ not employees’ views Not much applicable to freelancers 13

Compensation tools or plans Skill-based plans-1 Less common approach Workers should be paid by how flexible or capable they are at performing multiple tasks The greater the variety of job-related skills workers possess, the more they get paid Depth skills Horizontal or breadth skills Vertical skills 14

Compensation tools or plans Skill-based plans-2 Creating more flexible workforce Promoting cross-training and substitutability Necessitating fewer supervisors Increasing employees’ control over their compensation Higher compensation and training costs Loss of skills Limited opportunity for pay raise Difficulty in determining skill value Additional bureaucracy and inflexibility 15