Components of

Compensation
How Do We Determine How
Much To Pay Employees for
Their Work?
Strategic Compensation Planning
Strategic Compensation Planning
Links the compensation of employees to the
mission, objectives, philosophies, and culture of
the organization. (strategic congruence)
Serves to mesh the monetary payments made to
employees with specific functions of the HR
program in establishing a pay-for-performance
standard.
Seeks to motivate employees through
compensation.
Linking Compensation to
Organizational Objectives
Value-added Compensation
Evaluating the individual components of the
compensation program (pay and benefits) to see if
they advance the needs of employees and the
goals of the organization.
How does this compensation practice benefit the
organization?
Does the benefit offset the administrative cost?
Compensation Management and
Other HRM Functions
Pay rates affect selectivity Selection
Selection standards affect
level of pay required
Pay can motivate training
Training and
Development
Increased knowledge leads
to higher pay
Training and development may
lead to higher pay
Compensation
Management
A basis for determining
employees rate of pay
Aid or impair recruitment Recruitment
Supply of applicants
affects wage rates
Low pay encourages
unionization
Labor Relations
Pay rates determined
through negotiation
Function How
Concept
Components of Total Compensation
Public
Protection
(legally required)
Social Security
Unemployment
Disability
Public
Protection
Pensions
Savings
Supplemental
unemployment
Insurance
Paid leave
Training
Work breaks
Sick days
vacation
Holidays
Personal
Miscellaneous
Benefits
Legal advice
Eldercare
Daycare
Wellness
Counseling
Moving
Perks
Basic Salary
basic
shift
premium
Performance-Based Pay
Stock Options
Bonuses
Merit
Incentive
Direct Compensation Indirect Compensation (Benefits)
Intrinsic Rewards
(nonmonetary)
job security
Status symbols
Social rewards
Task-self rewards
Extrinsic Rewards (monetary)
Total Compensation
The Concepts of
Expectancy Theory
&
Equity Theory
Intrinsic Rewards
(non-monetary)
The motivation one receives from performing the work
Intrinsic Rewards
(non-monetary)
Joy from actually doing the job
Socializing with others at work
Pride derived from producing or
something/providing service
Security from belonging
Motivation Theories
Maslow, Herzberg, McGregor, etc.
Expectancy Theory and Pay
Expectancy Theory
A theory of motivation that holds that
employees should exert greater work effort
if they have reason to expect that it will
result in a reward that they value.
Employees also must believe that good
performance is valued by their employer
and will result in their receiving the
expected reward.
Value
Of reward
Perceived
Effort Rewarded
Role
Perceptions
Extrinsic
Rewards
Performance
Employee
Effort
Abilities
& Traits
Intrinsic
Rewards
Perceived
Equitable
rewards
Satisfaction
Porter-Lawler Expectancy Model
Relationship between Pay Equity and Motivation
Doing More and Receiving Less Doing the Same and Receiving the Same Doing Less and Receiving More
The greater the perceived disparity between my input/output ratio and
the comparison persons input/output ratio, the greater the motivation
to reduce the inequity.
Pay-for-Performance and Expectancy Theory
Equity Theory
Pay, benefits,
opportunities, etc.
OUTCOME
INPUTS
OUTCOME
INPUTS
A person evaluates fairness by comparing their ratio with others.
effort, ability,
experience etc.
?
the same,
more or less
< = >
Three Employee Views of the Pay
Decision
Pay Level- Same job in Different organizations

Pay Structure - Different jobs in Same organization

Individual Pay Differences - Different people in Same job
Market Pressures
in Developing Pay Levels
Product-market competition
upper bound on labor cost
staffing level
average cost per employee
Labor-market competition
lower bound on pay levels
Deciding What to Pay
Product-market competition
upper bound on labor cost
staffing level
average cost per employee
Labor-market competition
lower bound on pay levels
Total Compensation - Extrinsic
Direct Indirect
Bonuses
Gainsharing
Security Plans
Pensions
Employee Services
Educational assistance
Recreational programs
Commissions
Wages / Salaries
Insurance Plans
Medical
Dental
Life
Time Not Worked
Vacations
Breaks
Holidays
Direct Compensation
What an employee gets $$$ for performing work


Factors Affecting the Wage Mix
Davis-Bacon Act
1931
Required minimum wage, prevailing wage
rates, 1 overtime premium payments by
federal contractors.
Walsh-Healy Act
1936
Required overtime payments after 8 daily
or 40 regular work hours for workers on
federal contracts.
Fair Labor
Standards Act
(FLSA) 1938
(as Amended)
Interstate commerce clause used to cover
workers except agricultural and
exempted (managerial) employees, child
labor (under 16) is prohibited.
Government Regulation of Compensation
(Federal Wage Laws)
The Equal Pay Act: The Jurys Still Out
Has the Equal Pay Act been effective in raising the wages of women relative to the wages of
men? That depends on whom you ask and the importance you place on government statistics.
Fifty-nine cents on the dollar was the rallying cry of the womens movement more than thirty
years ago to illustrate the large gap between the wages of women and men. That is, for every
dollar that a man made, a woman earned fifty-nine cents. Currently, government wage figures
based on the usual weekly earnings of full-time wage and salary workers peg womens average
pay at 80.1 percent of mens compensation. Unfortunately, the gain in womens wages relative to
mens wages has not changed significantly in recent years, as the following figures show.
Source: Median usual weekly earnings of full-time wage and salary workers by sex, age, race, and Hispanic or Latino ethnicity, current
dollars 19792004. Unpublished tabulations from Current Population Survey, Bureau of Labor Statistics, 2004. Data at www.bls.gov.
The Wage Curve

Wage Curve
A curve in a scattergram representing the relationship
between relative worth of jobs and wage rates.
Pay Grades
Groups of jobs within a particular class that are paid the same
rate.
Rate Ranges
A range of rates for each pay grade that may be the same for
each grade or proportionately greater for each successive
grade.
Red Circle Rates
Payment rates above the maximum of the pay range.
Freehand Wage Curve
Single Rate Structure
Wage Structure with Increasing Rate Ranges
The Wage Curve
Competence-based Pay, (also skill-based
pay or knowledge-based pay)
Compensation for the different skills or increased
knowledge employees possess rather than for the
job they hold in a designated job category.
Greater productivity, increased employee learning and
commitment to work, improved staffing flexibility to meet
production or service demands, and the reduced effects
of absenteeism and turnover,
Broadbanding
Collapses many traditional salary grades into a
few wide salary bands.
The Wage Curve
Merit Pay - annual base pay increases linked to
performance appraisals (step increases)
Incentive Pay - performance not linked to base pay;
usually measured as physical output
Profit Sharing based upon measure of
organizational performance; not a part of base salary
Ownership -
Gain Sharing
Executive Compensation
History
Business Leader
wages expected to
rise dramatically!
1940-1950
Conservative Corporate Pay

Post Depression Era
Little Foreign Competition
Executive Pay Rises Slower than Worker Pay
Boom Period
Stock Options Introduced
1960s
Conglomerates Emerge

Corporations Diversify Assets

Stock Options Become Popular

Foreign Competition Begins

1970s
Decade of Change

1970 - 1974
Recession/Stock market Declines
Stock Options Lose Favor

1975 1980
Baseball Free Agency
Bull Market Begins
Stock Options Regain Popularity



1980s
Executive Compensation Takes Off!

Stock Options Overtake Salaries

Free Agency in Organizations

Joint Ventures/Mergers/Takeovers

U.S. Threatened by Foreign Competition

Golden Parachutes
1990s
Dot Com Bust & Ethics Issues

Corporate Profits Remain High
Accounting Scandals
Enron
Arthur Anderson
Deloitte & Touche
Ernst & Young
Etc.

2000s
New Century of Change/Correction
September 11, 2001
Corporations on Trial
Sarbanes-Oxley (SOX)
Performance Based Pay
Do more with less
ERP (Enterprise Resource Planning)
associating/controlling pay via computer
Financial Accounting standards Board (FASB)
landmark change (2004) that required companies
to expense options on financial statements


Indirect Compensation

Dealing with employee benefits
Social Insurance
(legally required)
Social Security
About 8% employer and employee tax on wages
Additional Medicaid tax of 1.45%
Also includes dependent coverage and Long-term Disability

Unemployment Compensation
Tax rate on employers is based on use/environment
Eligibility: work 1 year - not on strike, quit or fired for cause

Workers Compensation
Disability, medical care, death benefit & rehabilitation
2/3 of earnings are tax free
Rate based on risk and organizations experience rating
Types of Employee Benefits
Required By Law Discretionary
Health care
Unemployment Insurance
Workers Compensation
Payment for time not worked
Supplemental
Unemployment Benefits
Social Security
Unpaid leave (FMLA)
Life and LT care insurance
Retirements and pensions
Social Security Insurance
Benefits paid are determined by an
individuals life-time earnings
Provides long-term disability benefits
Social Security Act (1935)
A payroll tax on both employees and employers
Old Age and Survivors Insurance (OASI)
Must work 40 quarters in an occupation
covered by Act to qualify for benefits
Unemployment Insurance
Federal payroll tax on employer and employee
Tax is refunded to states which individually administer
unemployment compensation programs.
Unemployment benefits vary from state to state.
Involuntarily unemployed workers are eligible for up to 26
weeks of unemployment benefits.
Benefit is based on an employees recent earnings.
Unemployed workers are required to seek suitable
employment.
Workers Compensation
Insurance
Workers Compensation Insurance
Federal- or state-mandated insurance (funded by
an employer payroll tax) provided to workers to
defray the loss of income and cost of treatment
due to work-related injuries or illness.
Factors influencing the employers insurance rate:
The risk of injury or illness for an occupation
Each states level of benefits for injuries sustained by
employees varies.
The companys frequency and severity of employee
injuries (the companys experience rating).
Workers Compensation Insurance
Covers Employers Covers Employees
Cost of injury
Negligent co-workers
Contributory negligence
Temporary, Permanent,
Partial or Total Disability
Assumed employment risk
Survivors Insurance
Injury is a cost of doing business
Growth of Employee Benefits:
Percentage of Wages and Salaries
Percentage
1929 55 65 75 86 88 90 93 96
40%
30%
20%
10%
3.0
17.0
21.5
30.0
35.5
41.3
37.9
36.7
41.3