mgto 231 human resources management compensation i dr. kin fai ellick wong

MGTO 231Human Resources ManagementCompensation I

Dr. Kin Fai Ellick WONG

Prologue

Have you ever asked the following questions? Why the salary for some jobs are higher than the

salary for other jobs? Why are there bonuses for some jobs but not for

other jobs? If I were a manager, how do I know the salary for a

newly created job?

You may find the answers in the following two classes

Outline

Some basic concepts of compensation Designing a compensation system

Internal vs. external equityFixed vs. variable payPerformance vs. membershipJob vs. individual payTo be continued in next lesson

Outline

Some basic concepts of compensation Designing a compensation system

Internal vs. external equityFixed vs. variable payPerformance vs. membershipJob vs. individual payTo be continued in next lesson

Some basic concepts

Elements of compensation

Total compensationThe package of quantified rewards an

employee receives for his/her labors Base compensation Pay incentives Indirect compensation / benefits

Total CompensationTotal Compensation

Base CompensationBase Compensation

Pay IncentivesPay Incentives

BenefitsBenefits

Base compensation

The fixed pay an employee receives on a regular basisSalary or hourly wagesThe most standard part about payWill be extensively discussed in this and next

lessons

Pay incentives

A program designed to reward employees for good performanceBonuses, profit sharingWill be further discussed in the lesson “Pay

for Performance”

Indirect benefits

BenefitsHealth insurance, housing scheme, annual

leave Perquisites, perks

Car, parking, club member, etc.

Strategic aspects Compensation constitutes the single

most important cost in the firm60% or even higher of the total cost

The pay strategy should be consistent with overall business strategyHi-tech industry: Research & DevelopmentThus, the following questions should be

asked frequently, and answered accurately:

What types of activities should be rewarded with higher salaries?Hi-tech firms: R & D activities

Which employee groups should receive special treatments when limited pay resources are allocated?Hi-tech firms: researchers in R & D

Outline

Some basic concepts of compensation Designing a compensation system

Internal vs. external equityFixed vs. variable payPerformance vs. membershipJob vs. individual payTo be continued in next lesson

Nine criteria for developing a compensation system

Internal vs. external equity Fixed vs. variable pay Performance vs. membership Job vs. individual pay Egalitarianism vs. elitism Below-market vs. above-market compensation Monetary vs. non-monetary rewards Open vs. secret pay Centralized vs. decentralized of pay decisions

Nine criteria for developing a compensation system

Internal vs. external equity Fixed vs. variable pay Performance vs. membership Job vs. individual pay Egalitarianism vs. elitism Below-market vs. above-market compensation Monetary vs. non-monetary rewards Open vs. secret pay Centralized vs. decentralized of pay decisions

Internal vs. external equity

Fairness or justice in pay is an important issue

Perception of unfairness could minimize the impact of a compensation system (e.g., it could decrease the morale of workers and de-motivate them)

Fair pay is one that employees generally view as equitable

Internal equityThe perceived fairness of the pay structure

within a firm External equity

The perceived fairness in pay relative to what other employers are paying for the same type of labor

What is perceived to be fair?

Internal EquityEmployees compare what they bring to the

firm to what they receive in return (i.e., outcome/input ratio)

Employees compare this ratio with that of other employees within the firm

Internal equity is met when one’s outcome/input ratio is equivalent to that of others

External EquityThe salary is perceived as fair when it fits with

the demand-supply labor market The more the demand, or the lower the

supply, then the higher the salaryExternal equity is met when the salary is set

at a point where the supply of labor equals the demand for labor

Nine criteria for developing a compensation system

Internal vs. external equity Fixed vs. variable pay Performance vs. membership Job vs. individual pay Egalitarianism vs. elitism Below-market vs. above-market compensation Monetary vs. non-monetary rewards Open vs. secret pay Centralized vs. decentralized of pay decisions

Fixed vs. variable pay

Some organizations choose to pay a high proportion of total compensation in the form of base pay (i.e., relatively fixed pay): HK government, education units (HKUST)

Some choose to pay a high proportion of total compensation in the form of variable pay: investment bank

In general, the percent of salary in the form of bonus increases as the base salary increases

Those in higher level positions earn more, but their compensations are more subject to risk

The more the proportion of variable pay, the more risk sharing there is between the employee and the firm

Nine criteria for developing a compensation system

Internal vs. external equity Fixed vs. variable pay Performance vs. membership Job vs. individual pay Egalitarianism vs. elitism Below-market vs. above-market compensation Monetary vs. non-monetary rewards Open vs. secret pay Centralized vs. decentralized of pay decisions

Performance vs. membership

Performance-contingent compensationOutcome oriented, Piece-rate plansPay based on units produced: 膠降落傘Commission

Membership-contingent compensationAll received the same or similar wage in a

given job (with minimum satisfactory performance)

Nine criteria for developing a compensation system

Internal vs. external equity Fixed vs. variable pay Performance vs. membership Job vs. individual pay Egalitarianism vs. elitism Below-market vs. above-market compensation Monetary vs. non-monetary rewards Open vs. secret pay Centralized vs. decentralized of pay decisions

Job vs. individual pay

Job pay Regardless of ability and performance, the pay is

based on jobs. Highly qualified individuals will not be paid more on the same job

Individual pay Knowledge-based, or skill-based pay system Paid on the basis of the jobs they can do or talents

they have that can be successfully applied to a variety of tasks and situations

Which is better?

Research findings have the following suggestions Job-based tends to work best in situations where

Technology is stable, jobs do not change often Employees do not need to cover for one another

frequently Turnover is relatively low Employees are expected to move up through the ranks

over time

Individual-based compensation programs are more suitable when: The firm has a relatively educated workforce with both

the ability and the willingness to learn different jobs The company’s technology and organizational

structure change frequently Employee participation and teamwork are encouraged

throughout the organization Opportunities for upward mobility are limited

Nine criteria for developing a compensation system

Internal vs. external equity Fixed vs. variable pay Performance vs. membership Job vs. individual pay Egalitarianism vs. elitism Below-market vs. above-market compensation Monetary vs. non-monetary rewards Open vs. secret pay Centralized vs. decentralized of pay decisions