Chapter 1: The Pay Model PDF

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