Compensation

COMPENSATION

Compensation: An Overview• Compensation - Total of all rewards provided employees

in return for their services

• Direct financial compensation - Pay that a person receives

in the form of wages, salaries, bonuses, and commissions

• Indirect financial compensation - All financial rewards

that are not included in direct compensation

• Nonfinancial compensation - Satisfaction that a person

receives from the job itself or from the work environment

Equity in Financial Compensation

• Equity - Fair pay treatment for employees

• External equity - Jobs are fairly compensated in

comparison to the similar jobs in the labour market.

• Internal equity - Exists when employees are paid

according to the relative value of their jobs within the

same organization

Equity in Financial Compensation (Continued)

• Employee equity - Individuals performing similar jobs for the same firm are paid according to factors unique to the employee, such as performance level or seniority

• Team equity - More productive teams are rewarded more than less productive groups

Determinants of Individual Financial Compensation

• Organization• Labor market• Job• Employee

The Organization as a Determinant of Financial Compensation

• Compensation policies

• Organizational politics

• Ability to pay

The Labor Market as a Determinant of Financial Compensation

• Compensation surveys

• Cost of living

• Labor unions

• Society

• Economy

• Legislation

Compensation Surveys

• What are other firms paying?

• Geographic area of survey

• Specific firms to contact

• Jobs to include

Cost of Living

• When prices rise over a period of time and pay does not, real pay is actually lowered

• Some firms may index pay increases to the

inflation rate

Labor Unions

• Collective bargaining between management

and unions as “wages, hours, and other

terms and conditions of employment.”

• Unions may attempt to create, Pressure

Society

• Government has sometimes responded to

public opinion and stepped in to encourage

businesses to hold down wages and prices

• Businesses in a local labor market are also

concerned

The Economy

• Affects financial compensation decisions

• Depressed economy generally increases the

labor supply

• Cost of living often rises as the economy

expands

Compensation Legislation

• Minimum Wages Act 1948

• Payment of Wages Act 1936

• Bonus Act 1956

• Wage Boards

• Pay Commissions

The Job as a Determinant of Financial Compensation

• Job itself continues to be a factor, especially in

those firms that have internal pay equity as a

primary consideration

• Organizations pay for the value they attach to

certain duties, responsibilities, and other job-

related factors such as working conditions

The Employee as a Determinant of Financial Compensation

• Performance-Based Pay

• Seniority

• Experience

• Membership in the organization

• Potential

• Political influence

• Luck

• Special employee classes

Performance-Based Pay

• Merit pay - Pay increase given to employees based on their level of performance as indicated in the appraisal

• Variable pay - Compensation based on performance (bonus)

• Skill-based pay - System that compensates employees on the basis of job-related skills and knowledge they possess

• Competency-based pay - Compensation plan that rewards employees for their demonstrated expertise

Seniority

• Length of time an employee has been

associated with the company, division,

department, or job

• Labor unions tend to favor seniority

Experience

• Has potential for enhancing a person's

ability to perform

• Possibility can only be realized if the

experience acquired is positive

Potential

• Organizations do pay some individuals

based on their potential

• Many young employees are paid well

because of their potential

Political Influence

• Should not be used to determine financial

compensation

• To deny its existence would be unrealistic

• A person's pull or political influence may sway

pay and promotion decisions

Special Employee Classes

• Compensation for professionals

• Compensation for sales employees