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

2. McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc. All rights reserved. 1-2 1. Explain how perceptions of compensation differ among society, stockholders, managers and employees. 2. Discuss the difference between cash compensation (direct compensation) and benefits (indirect compensation) and define each of the direct and indirect forms of compensation. 3. Explain how the employment relationship combines both transactional and relational returns to form an implicit contract between employers and employees. 4. Explain the three main components of a pay model. 5. Understand how the pay model integrates objectives, policies, and techniques into a compensation system. 6. Be able to distinguish empirical research from surveys and opinions. Learning Objectives After discussing Chapter 1, students should be able to:

3. McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc. All rights reserved. 1-3 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?

4. McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc. All rights reserved. 1-4 Society’s Views Stockholders’ Views Employees’ Views Managers’ Views Contrasting Perspectives of Compensation

5. McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc. All rights reserved. 1-5 Exhibit 1.1: Hourly Compensation Costs for Production Workers

6. McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc. All rights reserved. 1-6 Exhibit 1.2: Labor Costs as a Percentage of Revenues, Airline Industry

7. McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc. All rights reserved. 1-7 Compensation refers to all forms of financial returns and tangible services and benefits employees receive as part of an employment relationship. What Is Compensation?

8. McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc. All rights reserved. 1-8 Exhibit 1.3: Total Returns for Work

9. McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc. All rights reserved. 1-9 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

10. McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc. All rights reserved. 1-10 Relational Returns from Work Recognition & Status Employment Security Challenging Work Learning Opportunities

11. McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc. All rights reserved. 1-11 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?

12. McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc. All rights reserved. 1-12 Exhibit 1.4: Framework for Analyzing Employment Relationships High Low TRANSACTIONAL LowHigh RELATIONAL

13. McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc. All rights reserved. 1-13 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

14. McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc. All rights reserved. 1-14 Compensation Objectives Efficiency Fairness Compliance

15. McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc. All rights reserved. 1-15  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

16. McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc. All rights reserved. 1-16  Include methods used to operationalize policy decisions and link decisions to overall compensation objectives  Examples of techniques  Internal consistency  Job analysis  Job evaluation  External competitiveness  Pay surveys  Employee contributions  Incentive plans  Performance-based pay increases Pay System Techniques