1. COMPENSATION

2. Why is compensation important?
Society
Firm
Individual

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

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

5. 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

6. 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.

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

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

9. Compensation Model

10. 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

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

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

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

14. 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

15. 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.

16. 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

17. 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.

18. 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