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Chapter 1 The Pay Model McGraw-Hill/Irwin Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved. Chapter Topics Compensation: Definition Forms of Pay A Pay Model 1-2 Perspectives of C...
Chapter 1 The Pay Model McGraw-Hill/Irwin Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved. Chapter Topics Compensation: Definition Forms of Pay A Pay Model 1-2 Perspectives of Compensation Society’s Stockholders’ Views Views Employees’ Managers’ Views Views 1-3 Perspectives of Compensation (cont.) Society Considers pay as a measure of justice Benefits as a reflection of justice in society Stockholders Using stock to pay employees creates a sense of ownership and improves performance Linking executive pay to company performance supposedly increases stockholders' returns 1-4 Perspectives of Compensation (cont.) Managers Major expense Used to influence employee behaviors and to improve the organization's performance 1-5 Perspectives of Compensation (cont.) Employees Major source of financial security Return in an exchange between employer and themselves Entitlement for being an employee of the company Reward for a job well done 1-6 Perspectives of Compensation (cont.) Incentive and sorting effects of pay on employers’ behaviors Incentive effect - degree to which pay influences individual and aggregate motivation among the employees Sorting effect - effect that pay can have on the composition of the workforce 1-7 What is Compensation? Compensation refers to all forms of financial returns and tangible services and benefits employees receive as part of an employment relationship 1-8 Exhibit 1.4: Total Returns for Work 1-9 Forms of Pay Base wage It is the cash compensation that an employer pays for the work performed Some pay systems set base wage as a function of the skill or education an employee possesses A distinction is often made in the United States between wage and salary 1-10 Forms of Pay Merit pay/cost-of-living adjustments Merit increases are given in recognition of past work behavior Cost-of-living adjustments give the same increases to everyone, regardless of performance 1-11 Forms of Pay (cont.) Incentives (variable pay) Tie pay increases directly to performance Do not increase base wage; must be reearned each pay period Potential size of the payment will generally be known beforehand Are one-time payments, and do not permanently increase labor costs May be long-term (stock options) or short-term 1-12 Forms of Pay (cont.) Benefits Income protection (Medical insurance, retirement programs, life insurance, and savings plans) Work/life balance (vacations, jury duty, financial planning, referrals for child and elder care, telecommuting, nontraditional schedules, nonpaid time off) Allowances 1-13 Forms of Pay (cont.) A present-value perspective shifts comparison of today's initial offers to consideration of future bonuses, merit increases, and promotions Relational returns from work (nonfinancial returns) have a substantial effect on employees’ behavior 1-14 Forms of Pay (cont.) Network of returns is more likely to be useful if bonuses, development opportunities, and promotions all work together 1-15 A Pay Model Three basic building blocks: Compensation objectives Policies that form the foundation of the compensation system Techniques that make up the compensation system 1-16 Exhibit 1.5: The Pay Model 1-17 Compensation Objectives Guide the design of the pay system Serve as the standards for judging the success of the pay system 1-18 Four Policy Choices Internal alignment Compares jobs or skill levels inside a single organization Pertains to the pay rates both for employees doing equal work and for those doing dissimilar work 1-19 Four Policy Choices (cont.) Pay relationships within an organization affect employee decisions to: Stay with the organization Become more flexible by investing in additional training Seek greater responsibility 1-20 Four Policy Choices (cont.) External competitiveness Focus – pay comparisons with competitors Pay is ‘market driven’ Objective: To ensure that pay is sufficient to attract and retain employees To control labor costs to ensure competitive pricing of products/ services 1-21 Four Policy Choices (cont.) Employee contributions Directly affects employees’ attitudes and work behaviors Management Focus - right people get the right pay for achieving the right objectives in the right way 1-22 Pay Techniques Techniques tie the four basic policies to the pay objectives Many variations exist 1-23