COMPENSATION:

Introduction

Nancy Brown Johnson

1/05

Why is compensation
important?
Society
Firm
Individual

What are the elements of

compensation?
Base pay
Incentives
Fringe benefits

What are different forms of

payment?
Cash
Benefits

Payment for time not worked

Non-pecuniary benefits (gym
memberships, child care)
Intrinsic

Exchange Theory
Pay is an exchange for efforts
Implicit Social Contract

beliefs about mutual obligations

Implicit Psychological Contract
Temporal Quality

amount of time in job & career

Pay, benefits,
opportunities, etc.

OUTCOME
INPUTS

Equity Theory
the same
more or less

<=>

OUTCOME
INPUTS

effort, ability,
experience etc.

A person evaluates fairness by comparing their ratio with others.

IRWIN
a Times Mirror Higher Education Group, Inc., company, 1997

Equity Theory
Workers compare their compensation
with others
If unequal workers attempt to restore
equity

Workers Restore Equity by:

Reducing input
Attempting to get raise
Quitting
Psychological Adjustment

Compensation Model

Internal Equity
Comparison of Jobs
Jobs worth to the Employer

Similarities and differences in

work content
Relative contribution to
organization objectives
Accomplished through job
evaluation

External Equity
Value of the job to

the labor market

Assessed through

wage surveys

Individual Equity
Relative pay between

individuals doing the

same job
Influences motivation

Organizational Justice
Perceived fairness of the pay

system
Outcomes
Process Issues
Interactions
Influences Commitment,
Organization Citizenship

Strategic Perspectives
The strategy balances 4 types of equity
Best Practice
Contingency:

organizations will have pay systems that fit

with their business strategy
organizations that have fit will outperform
those without fit
Strategic Decisions include:
pay level, pay structure, individual rewards,
team rewards, pay administration

Best Practice v. Strategy

Debate
Best practice - there are a set of

compensation practices that are good

for all firms.
Strategy - the set of compensation
practices that are good for firms will
vary based upon the firms goals.

Best Practice Examples*

High wages
Guarantee of Employment Security
Use incentives; share gains
Employee Ownership
Participation & Empowerment
Teams
Smaller pay differences
*Source: Pfeffer, Competitive
Advantage Through People,

Summary
There are four key elements to equity
The strategic contingency view is that some

firms may weight those elements differently

depending on firm objectives
The best practice view is that there are good
practices that all firms should engage in no
matter what their strategy.

Summary (continued)
Equity forms the basis for

compensation management
Strategy guides the organization in the
balancing of equity components
The test is whether the compensation
system reinforces sustained competitive
advantage