CompensationCompensation

is the set of rewards that organizations provide to individuals in return for their willingness to perform various jobs and tasks within the organization.

Internal equityin compensation refers to comparisons that

employees make to other employees within the same organization.

External equityin compensation refers to comparisons employees

make to others performing similar jobs in different organizations.

Reward andReward andmotivatemotivate

InternalInternalequityequity

ExternalExternalequityequity

LegalLegal compliance compliance

CompensatioCompensationn

ExpenseExpensecontrolcontrol

Wages versus SalariesWagesgenerally refer to hourly compensation paid to

operating employees; the basis for wages is time.

SalarySalary is income that is paid an individual not on theis income that is paid an individual not on the

basis of time, but on the basis of performance.basis of time, but on the basis of performance.

Anticipation of Anticipation of setting pay levelsetting pay level

DeterminationDeterminationof market payof market pay

Pay belowPay belowmarket ratemarket rate

Pay above Pay above market ratemarket rate

Pay market Pay market raterate

Pay Pay above above market market

raterate

Pay at Pay at marketmarket

raterate

Pay Pay below below market market

raterate

• Attracts better employeesAttracts better employees• Minimizes voluntary Minimizes voluntary

turnoverturnover• Fosters strong culture and Fosters strong culture and

competitive superiority competitive superiority

• Additional compensation Additional compensation costscosts

• Sense of entitlementSense of entitlement

• Higher quality of human Higher quality of human resources at midrange of resources at midrange of market-driven compensation market-driven compensation costscosts

• Does not attract higher Does not attract higher performersperformers

• Turnover will vary with labor Turnover will vary with labor demands of competing firmsdemands of competing firms

• Lower compensation costsLower compensation costs• Useful in labor markets Useful in labor markets

where unemployment is where unemployment is highhigh

• Lower-quality employeesLower-quality employees• Low morale/job satisfactionLow morale/job satisfaction• Higher turnover; especially Higher turnover; especially

among high performersamong high performers

AdvantagesAdvantagesDisadvantagesDisadvantages

Factors contributing to a firm’s compensation strategyFactors contributing to a firm’s compensation strategy

Relationship of overall strategy to compensation strategyRelationship of overall strategy to compensation strategy

Growth rate of firm and demand for human resourcesGrowth rate of firm and demand for human resources

Financial condition of the firm (i.e., ability to pay)Financial condition of the firm (i.e., ability to pay)

Overall attractiveness of firm (i.e., location, culture)Overall attractiveness of firm (i.e., location, culture)

Legal context of federal, state, and local labor regulationsLegal context of federal, state, and local labor regulations

Union influence and presence in labor marketUnion influence and presence in labor market

Pay Surveys and CompensationPay surveysare surveys of compensation paid to

employees by other employers in a particular geographic area, an industry, or an occupational group.

assist firms in avoiding problems of external equity when attempting to set compensation strategy for themselves.

FactorFactorcomparisoncomparison

method method

Job rankingJob rankingmethodmethod

ClassificationClassificationsystemsystem

Point systemPoint systemJob Job

EvaluationEvaluationRegression-Regression-

based systembased system

Job Evaluation and Job WorthFactor comparison methodassesses jobs on a factor-by-factor basis, using

a factor comparison scale as a benchmark.Regression-based system

uses a statistical technique called multiple regression to develop an equation that establishes the relationship between different dimensions of the job and compensation.

Factor Comparison Method of Job EvaluationSix steps:

Comparison factors are selected and defined.Benchmark or key jobs are identified.Benchmark jobs are ranked on each

compensation factor.A part of each benchmark job’s wage rate is

allocated to each job factor.Two sets of ratings are prepared, based on the

ranking and the assigned wages, to determine the consistency demonstrated by the evaluators.

A job comparison chart is developed to display the benchmark jobs and the monetary values that each job receives for each factor.

Wage and Salary AdministrationManaging compensationallows the organization to control compensation

costs and to maintain a compensation structure that fits the needs of both the organization and its employees. As organizational circumstances change, it may become necessary to modify or change the compensation strategy.

Determining individual wageshas its basis in the organization’s awarding

differential compensation to employees on the basis of qualifications, seniority, or other job-related factors.

Wage and Salary AdministrationPay secrecyrefers to the extent to which an individual’s

compensation in an organization is secret.Arguments for pay secrecy

An individual’s compensation is a private matter and not for public knowledge.

Knowing pay levels fosters jealousy and resentment.Argument against pay secrecy

Public knowledge about an open-pay system creates proper perceptions of equity and motivates performance.

Pay compressionoccurs when individuals of substantially different levels

of experience or seniority are paid similar wages or salaries.