Chapter One

Compensation: A Component of
Human Resource Systems

What Influences Pay?

Chris Smith and Pat
Jones are both
computer programmers.
Chris earns $45,000,
while Pat earns
$35,000.
What could cause this
difference?

Equity Policies
Internal
Consistency

External
Competitiveness

Employee
Contributions

Administration

Compensation
Departments Main Goals

Internal equity --Internal consistency

Relative value of each job among all jobs within a company
Value of the job, regardless of the person in the job
Jobs that require greater qualifications, more responsibilities, and
more-complex job duties should receive higher pay than other jobs.
Done through job analysis and job evaluation

External equityMarket-competitiveness
Jobs within a company are paid similarly to same jobs outside
Companies pay policies fit with business objectives
Done through strategic analysis and salary surveys

Individual equity--Recognizing individual contributions

Pay people differently within jobs according to job performance.
Done through pay grades and ranges

Compensation Techniques

INTERNAL:
Job Analysis, Job Descriptions, Job Evaluation,
Internal Work Structure

EXTERNAL:
Market definitions, Market surveys,
Policy lines, Pay structures

INDIVIDUAL:
Seniority based, Performance based,
Incentive guidelines, Incentive programs

ADMINISTRATION:
Planning,Budgeting,Communicating, Evaluating

What is Compensation?

Intrinsic compensation
Reflects employees psychological mind sets that
result from performing their jobs.
Through effective job design

Extrinsic compensation
Rewards given you by others
Includes both monetary and non-monetary (e.g.,
benefits) rewards.
Through compensation systems

The Influence of Core Job Characteristics on

Intrinsic Compensation and Subsequent
Benefits to Employers
Core Job
Characteristics
Skill variety
Task identity
Task significance
Autonomy

Feedback

Critical Psychological
State
Experienced
meaningfulness of
the work
Experienced
responsibility for
work outcomes
Gained knowledge
of results from
work activities

Benefit to
Employers
Lower turnover
Lower
absenteeism
Enhanced job
performance
Greater job
satisfaction

Exhibit 1-3

Elements of Core
Compensation

Base Pay (recurring)

Hourly pay/wage
Annual salary
How Base Pay is Adjusted Over Time
Cost-of-living adjustments (COLAs)
Seniority pay
Merit pay
Incentive pay or variable pay
Pay-for-knowledge and skill-based pay

Exhibit 1-4

Elements of Fringe
Compensation (1 of 3)

Social Security Act of 1935

Unemployment insurance
Retirement insurance
Benefits for dependents
Disability benefits
Medicare

State compulsory disability laws

Workers Compensation

Family and Medical Leave Act of 1993 (12

weeks of annual unpaid leave)

Exhibit 1-4

Elements of Fringe
Compensation (2 of 3)

Discretionary Benefits
Protection Programs
Income protection programs
Health protection programs

Pay for time-not-worked

Holidays
Vacation
Sick leave
Personal leave
Jury duty
Funeral leave
Military leave
Cleanup, preparation, travel time

Exhibit 1-4

Elements of Fringe
Compensation (3 of 3)

Discretionary Benefits (cont.)

Services

Employee assistance programs (EAPs)

Family assistance programs
Tuition reimbursement
Transportation services
Outplacement assistance
Wellness programs

Strategic vs. Tactical

Decisions

Strategic decisions guide activities in the market

Tactical decisions support the fulfillment of strategic decision

Strategic
Decisions

General Tactical Specific Tactical

HR Decisions
HR Decisions
(Compensation)

Competitive
strategy
HR strategy
Compensation
strategy

Recruitment and
Selection
Performance
appraisal
Compensation
Training

Seniority pay
Merit pay
Incentive pay
Benefit options
Etc.

Competitive Strategy

Planned use of resources to promote & sustain competitive

advantage
Lowest-cost strategy
Efficient-scale, cost minimization
Southwest Airlines, Wal-Mart
Employee roles: repetitive, predictable behaviors, short-term focus,
individual activity, concern for quantity, primary concern for results.

Differentiation Strategy

Unique products: design image, technology, etc

Build brand loyalty, price premium, invest in R&D
Iams company, Saks Fifth Avenue
Employee roles: creative behavior, long-term focus, cooperative and
interdependent behavior, risk taking, openness to novel work.

Compensation and

Recruitment, Selection

$ to get top candidates,

signing bonus, benefits

Career Development
Promotions, lateral
moves

Employee Termination
Severance pay, pension,
early retirement

Training
Pay for knowledge

Collective bargaining
agreements, pay, COLAs,
incentives

Performance Appraisal
Basis for merit pay and
incentives

Labor-Management
Relations

Legislation
Income and continuity,
safety, work hours, pay
discrimination, disabilities
and family needs

Stakeholders of the
Compensation System
Employees
Line managers
Executives
Unions
U.S. government