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Summarizing our Learning
Society’s Views
Stockholders’ Views
Employees’ Views
Managers’ Views
The word compensation may be defined as • all forms of financial returns and tangible services and benefits, which an employee receive in his/her tenure of employment. • a system of rewards to motivate employees, so that organizations can achieve its intended goals and objectives.
Considers both intrinsic (psychological) and extrinsic (tangible) components of compensation. Extrinsic compensation covers both the monetary and non-monetary rewards, intrinsic compensation reflects employees’ psychic satisfaction through job accomplishment.
Compensation refers to all forms of financial returns and tangible services and
benefits employees receive as part of an
employment relationship
• Acquire qualif ied personnel• Retain current employees• Reward desired behaviour• Control costs• Comply with legal regulations• Further administrative efficiency
Enhance Dignity and Satisfaction from Work Performed
Enhance Physiological Health, Intellectual Growth, and Emotional Maturity
Promote Constructive Social Relationships with Co-workers
Design Jobs that Require Adequate Attention and Effort
Allocate Sufficient Resources to Perform Work Assignments
Grant Sufficient Control over the Jobs to Meet Personal Demands
Offer Supportive Leadership and Management
Non-financial Compensation Non-financial Compensation SystemSystem
Three basic building blocks:• Compensation objectives• Policies that form the foundation of the
compensation system• Techniques that make up the compensation
system
Internal alignment, often called internal equity, refers to the pay relationships
among different jobs/skills/competencies within a single organization.
Pay structure refers to the array of pay rates for different work or skills within a single organization.
The number of levels, the differentials in pay between the levels, and the criteria
used to determine those differences describe the structure.
An internal pay structure can be defined by • Number of levels of work• Pay differentials between the levels• Criteria or basis used to determine those levels
and differentials
Pay structure is hierarchical in nature, based on:• Number of levels• Reporting relationships
The pay differences among levels Pay is determined by:
• Knowledge/ skills involved• Working conditions• Valued addition to the company
Intention of these differentials:• To motivate people to strive for promotion to a
higher-paying level
Job-based structures relies on the work content – tasks, behaviors, responsibilities
Person-based structure shifts the focus to the employee• Skills, knowledge, or competencies the
employee possesses• Whether or not they are used in the particular
job In reality, both job-and-person-based
structures are included
The systematic process of collecting information that identifies
similarities and differences in the work.
Job-based structures look at what people are doing and the expected outcomes
Skill- and competency based structures look at the person
Job evaluation – process of systematically determining the relative worth of jobs to create a job structure for the organization
The evaluation is based on a combination of:• Job content• Skills required• Value to the organization• Organizational culture• External market
Skill-based structures link pay to the depth or breadth of the skills, abilities, and knowledge person acquires that
are relevant to the work.
In contrast, a job-based plan pays employees for the job to which they are assigned, regardless of the skills they
possess.
Skill plans can focus on • Depth based
Specialist• Breadth based:
Generalist/ multiskilled based
Systematic process of identifying and
collecting information about skills required to
perform work in an organization.
Several perspectives on what competencies are and what they are meant to accomplish• Skill that can be learned and developed or a trait
that includes attitudes and motives?• Focus on the minimum requirements that the
organization needs to stay in business or focus on outstanding performance?
• Characteristics of the organization or of the employee?
Core competencies• Related to mission statements expressing
organization’s philosophy, values, business strategies, and plans
Competency sets• Translate each core competency into action
Competency indicators• Observable behaviors that indicate the level of
competency within each set
Organizations seem to be moving away from the vagueness of self-concepts, traits, and motives
Greater emphasis on business-related descriptions of behaviors “that excellent performers exhibit much more consistently than average performers”
Competencies are becoming “a collection of observable behaviors that require no inference, assumption or interpretation”
External competitiveness refers to pay relationships among organizations - an
organization’s pay relative to its competitors.
Pay level refers to the average of the array of rates paid by an employer: (base + bonuses + benefits + value of stocks) /
number of employees.
Pay forms are the various types of payments, or pay mix,
that make up total compensation.
Control Costs
Attract and Retain Employees
EXTERNAL COMPETITIVENESS EXTERNAL COMPETITIVENESS
LABOR MARKET FACTORS
Nature of Demand
Nature of Supply
LABOR MARKET FACTORS
Nature of Demand
Nature of Supply
PRODUCT MARKET FACTORS
Degree of Competition
Level of Product Demand
PRODUCT MARKET FACTORS
Degree of Competition
Level of Product Demand
ORGANIZATION FACTORS
Industry, Strategy, Size
Individual Manager
ORGANIZATION FACTORS
Industry, Strategy, Size
Individual Manager
Three conventional pay-level policies:• To lead• To meet• To follow competition
Newer policies emphasize flexibility among:• Policies for different employee groups• Pay forms for individual employees• Elements of the employee relationship that
company wishes to emphasize in its external competitiveness policy
Employer of Choice
Lead Policy
Lag Policy
Flexible Policies
Pay with Competition
(Match)
Shared Choice
A survey is the systematic process of collecting and making judgments about the compensation paid by other employers
Surveys provide the data for translating policy into pay levels, pay mix, and structures
An employer conducts or participates in a survey for a number of reasons: • Adjust the pay level in response to changing
rates paid by competitors • Set the mix of pay forms relative to that paid by
competitors• Establish or price a pay structure• Analyze pay-related problems • Estimate the labor costs of product/service
market competitors
Who should be involved?
How many employers?• Publicly Available Data• “Word-of-mouse”• Where are the standards?
Which Jobs to include?• Benchmark-job approach• Low-High approach• Benchmark conversion approach
What information to collect?• Organization data• Total compensation data
Employers want employees to perform in ways that lead to better organizational performance
Organizational strategy is the guiding force that determines what kinds of employee behaviors are needed
Do people join a firm because of pay?
Do people stay in a firm (or leave) because of pay?
Do employees more readily agree to develop job skills because of pay?
Do employees perform better on their jobs because of pay?
Efficiency• Strategy• Structure• Standards
Objectives Measures Eligibility Funding
Equity/Fairness• Distributive justice• Procedural justice
Compliance• Comply with existing laws• Enhance and maintain firm’s reputation
Pay for performance plans signal a movement away from
entitlements
Pay will vary with some measure of individual, team, or
organizational performance
Merit Pay Lump-Sum Bonuses Individual Spot Awards Individual Incentive Plans
Uses a constellation of measures• Pinpoints areas of success• Indicates areas to improve
Categories of measures• Financial results• Process improvements• Customer service• Innovation
Forces discussions about priorities among different measures
Outcome – Objectives with different weights in terms of importance
Employee Stock Ownership Plans Employee Stock Ownership Plans (ESOPs)(ESOPs)
Performance Plans (Performance Performance Plans (Performance Share and Performance Unit)Share and Performance Unit)
Broad-Based Option Plans (BBOPs)Broad-Based Option Plans (BBOPs)
Used for several organizational decisions• To guide allocation of merit increases
Performance ratings are influenced by:• Employee behaviors observed by raters• Organization values• Competition among departments• Differences in status between departments• Economic conditions
Employees often frustrated about the appraisal process• Appraisals are too subjective• Possibility of unfair treatment by a supervisor
Experts argue that rather than throwing out the entire performance appraisal process, total-quality-management principles should be applied to improving it
Ranking - Rater compares employees against each other
Rating - Rater evaluates employees on some absolute
standard (measured on a continuum scale)
Essay - Rater answers open-ended questions in essay form
describing employee performance
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