1. MGTO 231 Human Resources Management Compensation I Dr. Kin Fai Ellick WONG

2. Prologue Have you ever asked the following questions?  Why the salary for some jobs are higher than the salary for other jobs?  Why are there bonuses for some jobs but not for other jobs?  If I were a manager, how do I know the salary for a newly created job? You may find the answers in the following two classes

3. Outline Some basic concepts of compensation Designing a compensation system  Internal vs. external equity  Fixed vs. variable pay  Performance vs. membership  Job vs. individual pay  To be continued in next lesson

4. Outline Some basic concepts of compensation Designing a compensation system  Internal vs. external equity  Fixed vs. variable pay  Performance vs. membership  Job vs. individual pay  To be continued in next lesson

5. Some basic concepts

6. Elements of compensation Total compensation  The package of quantified rewards an employee receives for his/her labors Base compensation Pay incentives Indirect compensation / benefits

7. Total Compensation Base Compensation Pay Incentives Benefits

8. Base compensation The fixed pay an employee receives on a regular basis  Salary or hourly wages  The most standard part about pay  Will be extensively discussed in this and next lessons

9. Pay incentives A program designed to reward employees for good performance  Bonuses, profit sharing  Will be further discussed in the lesson “Pay for Performance”

10. Indirect benefits Benefits  Health insurance, housing scheme, annual leave Perquisites, perks  Car, parking, club member, etc.

11. Strategic aspects Compensation constitutes the single most important cost in the firm  60% or even higher of the total cost The pay strategy should be consistent with overall business strategy  Hi-tech industry: Research & Development  Thus, the following questions should be asked frequently, and answered accurately:

12. What types of activities should be rewarded with higher salaries?  Hi-tech firms: R & D activities Which employee groups should receive special treatments when limited pay resources are allocated?  Hi-tech firms: researchers in R & D

13. Outline Some basic concepts of compensation Designing a compensation system  Internal vs. external equity  Fixed vs. variable pay  Performance vs. membership  Job vs. individual pay  To be continued in next lesson

14. Nine criteria for developing a compensation system Internal vs. external equity Fixed vs. variable pay Performance vs. membership Job vs. individual pay Egalitarianism vs. elitism Below-market vs. above-market compensation Monetary vs. non-monetary rewards Open vs. secret pay Centralized vs. decentralized of pay decisions

15. Nine criteria for developing a compensation system Internal vs. external equity Fixed vs. variable pay Performance vs. membership Job vs. individual pay Egalitarianism vs. elitism Below-market vs. above-market compensation Monetary vs. non-monetary rewards Open vs. secret pay Centralized vs. decentralized of pay decisions

16. Internal vs. external equity Fairness or justice in pay is an important issue Perception of unfairness could minimize the impact of a compensation system (e.g., it could decrease the morale of workers and de-motivate them) Fair pay is one that employees generally view as equitable

17. Internal equity  The perceived fairness of the pay structure within a firm External equity  The perceived fairness in pay relative to what other employers are paying for the same type of labor

18. What is perceived to be fair? Internal Equity  Employees compare what they bring to the firm to what they receive in return (i.e., outcome/input ratio)  Employees compare this ratio with that of other employees within the firm  Internal equity is met when one’s outcome/input ratio is equivalent to that of others

19. External Equity  The salary is perceived as fair when it fits with the demand-supply labor market  The more the demand, or the lower the supply, then the higher the salary  External equity is met when the salary is set at a point where the supply of labor equals the demand for labor

20. Nine criteria for developing a compensation system Internal vs. external equity Fixed vs. variable pay Performance vs. membership Job vs. individual pay Egalitarianism vs. elitism Below-market vs. above-market compensation Monetary vs. non-monetary rewards Open vs. secret pay Centralized vs. decentralized of pay decisions

21. Fixed vs. variable pay Some organizations choose to pay a high proportion of total compensation in the form of base pay (i.e., relatively fixed pay): HK government, education units (HKUST) Some choose to pay a high proportion of total compensation in the form of variable pay: investment bank

22. In general, the percent of salary in the form of bonus increases as the base salary increases Those in higher level positions earn more, but their compensations are more subject to risk The more the proportion of variable pay, the more risk sharing there is between the employee and the firm

23. Nine criteria for developing a compensation system Internal vs. external equity Fixed vs. variable pay Performance vs. membership Job vs. individual pay Egalitarianism vs. elitism Below-market vs. above-market compensation Monetary vs. non-monetary rewards Open vs. secret pay Centralized vs. decentralized of pay decisions

24. Performance vs. membership Performance-contingent compensation  Outcome oriented, Piece-rate plans  Pay based on units produced: 膠降落傘  Commission Membership-contingent compensation  All received the same or similar wage in a given job (with minimum satisfactory performance)

25. Nine criteria for developing a compensation system Internal vs. external equity Fixed vs. variable pay Performance vs. membership Job vs. individual pay Egalitarianism vs. elitism Below-market vs. above-market compensation Monetary vs. non-monetary rewards Open vs. secret pay Centralized vs. decentralized of pay decisions

26. Job vs. individual pay Job pay  Regardless of ability and performance, the pay is based on jobs. Highly qualified individuals will not be paid more on the same job Individual pay  Knowledge-based, or skill-based pay system  Paid on the basis of the jobs they can do or talents they have that can be successfully applied to a variety of tasks and situations

27. Which is better? Research findings have the following suggestions Job-based tends to work best in situations where  Technology is stable, jobs do not change often  Employees do not need to cover for one another frequently  Turnover is relatively low  Employees are expected to move up through the ranks over time

28. Individual-based compensation programs are more suitable when:  The firm has a relatively educated workforce with both the ability and the willingness to learn different jobs  The company’s technology and organizational structure change frequently  Employee participation and teamwork are encouraged throughout the organization  Opportunities for upward mobility are limited

29. Nine criteria for developing a compensation system Internal vs. external equity Fixed vs. variable pay Performance vs. membership Job vs. individual pay Egalitarianism vs. elitism Below-market vs. above-market compensation Monetary vs. non-monetary rewards Open vs. secret pay Centralized vs. decentralized of pay decisions