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Chapter 1 - The Pay Model

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80 views3 pages

Chapter 1 - The Pay Model

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burnsburner29
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Chapter 1 – The Pay Model

What is compensation:
- Refers to all forms of financial returns and tangible services and benefits employees
receive as part of an employment relationship.
- Different Perspectives:
o Society
 Some people see pay (and benefits) as a measure of justice.
 Example: Pay inequalities between men and women
 Job losses or gains in a country is partly a function of labour costs and
productivity.
o Stockholders
 Some stockholders say using stock to pay employees creates a sense of
ownership.
 Others argue it dilutes stockholder wealth.
 Stockholders have particular interest in executive pay.
 Linking executive pay to company performance increases
stockholders returns.
o Managers
 Compensation is a major expense that must be managed.
 It is also a major determinant of employee attitudes and behaviours.
o Employees
 Pay is usually a major source of financial security.
 Employees may see compensation as:
 A return in an exchange, an entitlement for being an employee of
the company, an incentive to take/stay in a job and invest in
performing well, or as a reward for having done so.
Total Rewards:
- Total compensation:
o Pay received directly as cash payments, such as base pay, merit pay, cost of living
adjustments, and incentives; and pay received indirectly as benefits, such as
vacation, pensions, and health insurance.
- Relational returns
o Psychological returns, such as recognition and status, employment security,
learning opportunities, challenging work.

Cash Compensation: Base Pay, Merit/COLA & Incentives


- Base Pay: Cash that an employer pays in return for the work performed, based on the
skill or education an employee possesses.
- Merit increases are increments to base pay based on performance.
- A cost-of-living adjustment (COLA) is made to base pay based on changes in costs of
living.
- Incentives (or bonuses) are paid in a lump sum rather than becoming a part of base pay,
based on performance. Can be long or short term.

Benefits:
- Health Insurance:
o Medical/dental/vision, life, and disability insurance.
- Pension:
o Retirement and savings programs.
- Allowances:
o Often grow out of short supply
o Example: housing and transportation allowances in China.

Relational Returns:
- Nonfinancial returns that substantially impact employee behaviour, such as employment
security and learning and developmental opportunities.
- A network of returns: Created by different forms of pay; useful if bonuses, development
opportunities, and promotions all work together.

The Pay Model:


- Three basic building blocks:
o The compensations objectives.
o The policies that form the foundation of the compensation system.
o The techniques that make up the compensation system.

Compensation Objectives:
- Pay objectives guide the design of the pay system and are standards for judging success.
o Efficiency: Improving performance, increasing quality, and controlling costs.
o Fairness: Both the process and outcomes of pay decisions should be fair.
o Compliance: Conforming to federal, provincial, and territorial laws and
regulations.
Examples: Pay System Objectives:
- Medtronic
o Support Medtronic mission and increased complexity of business
o Minimize increases in fixed costs.
o Attract and engage top talent.
o Emphasize personal, team and Medtronic performance.
o Recognize personal and family total well-being.
o Ensure fair treatment.
- Whole Foods
o Increase long-term shareholder value.
o Earn profits through voluntary exchange with our customers.
o Through profits, create capital for growth, prosperity, opportunity, job satisfaction
and job security.
o Support team member happiness and excellence
o Acknowledge team outcomes are collective.

Four Strategic Policies:


1. Internal Alignment
a. Refers to comparisons among jobs or skills levels inside a single organization.
b. Pertains to the pay rates both for employees doing equal work and for those doing
dissimilar work.
c. Pay relationships affect the compensation objectives of efficiency, fairness, and
compliance.
2. External Competitiveness
a. Refers to pay comparisons with competitors external to the organization.
b. Pay is ‘market driven.’
c. Objectives:
i. To ensure that pay is sufficient to attract and retain employees.
ii. To control labor costs to ensure competitive pricing of products/services.
3. Employee Contributions
a. How employees are rewarded.
b. Understanding the basis for judging performance, helps perceive pay as fair.
4. Management
a. Making sure that the right people get the right pay for achieving the right
objectives in the right way.

Pay Techniques:
- Ties to the four basic policies to the pay objectives
- Techniques refer to the tools and mechanisms that are used to achieve the strategic
objectives.
- Many variations of pay techniques exist.

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