EMPLOYEE COMPENSATION

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EMPLOYEE COMPENSATION

• Definition All forms of financial returns and
  tangible services and benefits employees receive
  as part of an employment relationship.
• Objectives
• Efficiency
• Attract and retain qualified employees
• Control costs
• Motivate high performance
• Equity
• Compliance

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The Perceived Equity of PayA Comparison of
Ratios

• My Pay vs. Others Pay
• My qualifications Others qualifications
• My work done Others work done
• My product value Others product value

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Step 1 Internal Consistency

• Focus on internal comparisons
• Assessing similarities and differences among jobs
  within a single organization, and the relative
  contribution of the jobs to organization
  objectives.
• Establishing equal pay for jobs of equal worth
  and acceptable pay differentials for jobs of
  unequal worth.

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Internal Consistency (contd)

• Key considerations
• Egalitarian v. hierarchical structure
• Single v. multiple structures
• Job-based v. person-based structure
• Key activity Evaluation of worth
• Ranking (most subjective)
• Classification
• Point method (least subjective)

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Developing the Point Method

• Select compensable factors
• Characteristics of jobs that the organization
  values and chooses to pay for
• Consider the work, the organization, and the Ees
• Assign relative weights to each factor
• Reflect relative importance of the factor
• Weights should total to 100
• Weights are the same for all jobs
• Define factor degrees
• Represent different levels of requirements
  associated with each factor

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Implementing the Point Method

• Evaluate the worth of each job
• Read the job description
• Select the appropriate degree for each factor
• Multiply the degree by the factor
• Total the points for all factors
• Summarize your results
• Degrees/points for each factor for each job
• Summary job structure
• Total points for each job, in descending order

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Step 2 External Competitiveness

• Focus on external comparisons
• Pay relationships among organizations competing
  in the external labor market
• Pay comparisons for the same jobs across
  different organizations

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External Competitiveness Key Activities

• 1. Setting a pay policy relative to competitors
• Options
• Lead
• Lag
• Match
• Variable
• Constraints/Considerations
• Organizational conditions
• Labor market conditions
• Product market conditions

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External Competitiveness Key Activities (contd)

• Measuring the market
• The myth of the market wage
• Estimating the market pay line
• Salary (j.e. points) (x)
• Regression analysis
• Pay per point
• Creating a pay policy line
• Creating pay grades/bands and ranges

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COMPARABLE WORTH

• Definition A doctrine that maintains that women
  performing jobs judged to be equal on some
  measure of inherent worth should be paid the same
  as men.
• The Problem The earnings gap
• The Cause
• Differences in human capital, or
• Occupational crowding into low-paying jobs
• Choice or discrimination?

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Step 3 Recognizing Employee Contributions

• Focus on comparisons of individual employees
  doing the same job for the same firm.
• Key Issues
• Should differences in employee contributions be
  recognized (flat rates v. ranges)?
• What type(s) of contributions should be rewarded
  (seniority, performance)?
• At what level of performance (individual v.
  group) should pay increases be determined?
• Which technique should be used to reward
  differences in contributions?

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Should Pay Be Tied to Performance?

• Impact on equity objectives
• Is it fair to base pay on performance?
• Is it fair not to base pay on performance?
• What do employees believe?
• Impact on efficiency objectives
• Can pay be used to improve performance?
• What is the impact of pay-for-performance on
  turnover?

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To What Level of Performance Should Pay Increases
be Tied?

• Individual-level performance
• Theoretically establishes a close link between
  individual performance and pay
• Encourages competition
• Discourages focus on team work

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• Group-level performance
• Aligns the interests of employees with those of
  the group
• Encourages team work and flexibility
• Weakens the link between individual performance
  and pay
• Free rider problem
• Ties pay to outcomes over which employees have
  limited control

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Choosing a Technique for Rewarding Performance
An Expectancy Theory Framework

• Effort Task/Goal Reward
• Accomplishment
• Expectancy Instrumentality Valence

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Assessing the Likely Impact of a
Pay-for-Performance Plan on Motivation

• The Analysis
• To what outcome is the pay increase tied?
• Are employees likely to believe they can do it?
• How much control do employees have over the
  outcome?
• Do employees have the needed skills, knowledge,
  and abilities?
• If not, expectancy perceptions are low.

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The Analysis (contd)

• Do employees believe that, if they reach the
  goal, a reward will follow?
• Consider employee relations
• Consider the firms ability to pay
• If not, then instrumentality perceptions are low
• Is the reward valued by employees?
• Just noticeable difference (JND)