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• Pay objectives (Strategic) guide the design of the pay system and are standards for judging success.

Compensation Objectives (Strategic):

• Efficiency is improving performance, increasing quality, and controlling costs.
• Fairness (procedural fairness) is the process used to make pay decisions.
• Compliance is conforming to federal, provincial and territorial laws and regulations.

Strategic Policies

• Strategic policies form the foundation of the compensation system
• Four strategic policy choices exist:
  • Internal Alignment
  • External Competitiveness
  • Employee Contributions
  • Management

Internal Alignment:

• Compares jobs or skill levels inside a single organization.
• Relates to pay rates for employees doing equal work or dissimilar work.

External Competitiveness:

• Pay comparisons with external competitors.
• Pay is 'market-driven' to attract, retain employees, and control costs.

Employee Contributions:

• Relative emphasis placed on performance.
• Decides if someone should be paid more due to better performance/seniority and if all employees should share in the organization's financial success.
• Degree of performance emphasis is an important policy decision due to its affect on attitudes/behaviors.

Management:

• Effective management of the pay system.
• Ensuring the right people get the right pay to achieve the right objectives.

Techniques:

• Techniques are used by HR/Mgmt and make up the compensation system.
• Techniques tie to the four basic policies as they relate to pay objectives.
• Many variations exist and are independent but also interdependent.
• Compensation includes all forms of financial returns, tangible services, and benefits employees receive as part of an employment relationship.

4 Perspectives:

• Society
• Stakeholders
• Managers
• Employees

Society:

• Some see pay as a measure of justice
• Laws and regulations try to eliminate the gap between male/female earnings differentials.
• Benefits may also be seen as a reflection of equality/justice in society.
• Compensation increases often seen as the reason for rising prices.

Stakeholders:

• Some say using stock to pay employees creates a sense of ownership
• Others argue it dilutes stockholder wealth.
• Stockholders have a particular interest in executive pay.
• Linking executive pay to company performance increases stockholders' returns.

Managers:

• Influenced in two ways:
  • Compensation is a major expense that must be managed.
  • Compensation is a major determinant of employee attitudes and behaviors.

Employees

• Employees may see compensation as:
  • A return in an exchange
  • An entitlement for being an employee
  • An incentive to take/stay in a job and invest in performing well
  • A form of security

Total Rewards:

• Total Rewards are categorized in two ways (Connected): total compensation and relational returns.
• Total Compensation includes all forms of compensation: pay received directly as cash and indirectly as benefits.
• Organizations do not have to offer Benefits. Relational Returns
• Are psychological; Impacts the employment relationship

Forms of Pay (Compensation):

• Base Pay: Cash an employer pays for work performed based on skill/education.
• Merit Increases: Increments to base pay based on performance needed to be given although organizations should
• Cost-of-Living Adjustment (COLA): Made to base pay based on changes in living costs (e.g., minimum wage).
• Incentives (or bonuses) paid in a lump sum rather than becoming part of base pay, based on perfomance.

Benefits:

• Insurance and Pension
• Life, health (medical/dental/vision), and disability insurance, and retirement programs.
• Work/Life Balance
• Includes time away from work, access to services, and flexible work arrangements.
• Allowances often grow out of short supply (e.g., housing, car).

Total Earnings Opportunities:

• Present value: a "Stream of Earnings"
• Comparison of initial job offers to consideration of future bonuses, merit increases, & promotions.
• Relational Returns from Work
• Nonfinancial returns that impact employee behavior
• A Network of Returns is created by different forms of pay useful if bonuses, development opportunities, and promotions all work together.

Forms of Compensation:

• Anything an employer is willing to offer for an individual's time, skills, knowledge, and commitment.
• Total compensation:
• Monetary (base pay, merit increase, bonus) + Benefits
• Monetary compensation:
• Base Pay: Monetary compensation for work performed
• Merit Increase: An addition to base pay based on past performance
• Merit Bonus (Lump Sum Bonus): One-time lump sum, based on past performance
• Short-Term Incentives: One-time re-earned payments.
• Long-Term Incentives (Stock Grants, Option to buy stock at fixed price): Payments based on multi-year results.

Types of Benefits:

• REQUIRED: Income Protection (Social Security, Workers Compensation, Unemployment Insurance) and VOLUNTARY (Medical Insurance, Retirement Program, Savings Plan)
• Miscellaneous Benefit examples include: Time Off, Child Care, Counseling, Financial Planning, Flexible Work Arrangements, etc.

Total Compensation Package:

• Total compensation is 3 forms of pay.
• The challenge is designing the total compensation package so that it helps the organization to succeed.
• Benefits make up 45-47% of $1.00 of pay.