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Chapter 1

The Pay Model



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Learning Objectives

• Compensation - Defnition

• Forms o pay

•

! pay model

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Perspectives oCompensation

Society’s Views

Stockholders’ Views

Employees’ Views

Managers’ Views

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• "ociety• Considers pay as a meas#re o j#stice

• $ob benefts- %e&ection o j#stice in

society• "toc'holders

• (sing stoc' to pay employees creates a

sense o o)nership• Lin'ing e*ec#tive pay to company

perormance increases stoc'holders+ret#rns

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• Managers• Major e*pense

• Can be #sed to,• n&#ence employee behaviors• mprove organi.ational perormance

• /mployees•

Major so#rce o fnancial sec#rity• /ntitlement or being an employee o

the company

• %e)ard

or a job )ell done

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ncentive and "orting /0ects oPay on /mployers 2ehaviors

• Pay a0ects motivational intensity3direction3 and persistence

• Incentive efect, Degree to )hich pay

in&#ences individ#al and aggregatemotivation

• Sorting efect, /0ect that pay can

have on the composition o the)or'orce

• 4o) an organi.ation pays3 can res#lt insorting e0ects

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5hat is Compensation6

• !ll orms o fnancial ret#rns andtangible services and beneftsemployees receive as part o an

employment relationship

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Forms o Pay

• Total compensation

• Pay received directly as cash andindirectly as benefts

• Relational returns

• !re psychological

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/*hibit 178 - Total %et#rnsor 5or'

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Forms o Pay

• 2ase )age

• Cash that an employer pays in ret#rnor the )or' perormed

• ! #nction o the s'ill or ed#cation anemployee possesses

• "alary-Pay or employees,

•5ho are e*empt rom reg#lations o theFair Labor "tandards !ct 9FL"!:

• s calc#lated at an ann#al or monthly rate

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Forms o Pay

• 5age-Pay or )or'ers,

• Covered by overtime and reportingprovisions o the Fair Labor "tandards !ct

•

s calc#lated on ho#rly basis• Merit pay;Cost-o-living adj#stments

• Periodic adj#stments to base )ages onthe basis o changes in,

• 5hat other employers are paying or same)or'

• Overall cost o living

• /*perience or s'ill1-11

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Forms o Pay

• Pay increases are given in recognitiono past )or' behavior

• "ame increases given to everyone3

regardless o perormance• ncentives 9<ariable pay:

• %elated to perormance

• Do not increase base )age• Potential si.e o the payment )ill

generally be 'no)n beorehand

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Forms o Pay

• !re one-time payments

• May be long-term 9stoc' options: or short-term

• 2enefts• ncome protection

• Medical ins#rance3 retirement programs3 andlie ins#rance

• 5or';lie balance

• <acations3 fnancial planning3 reerrals or childand elder care3 and telecomm#ting

•

!llo)ances 1-1$

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Forms o Pay

• Total earning opport#nities• Comparison o today+s initial o0ers to

consideration o #t#re

• %elational ret#rns rom )or'• =onfnancial ret#rns that s#bstantially

impact employee behavior

•

=et)or' o ret#rns• Created by di0erent orms o pay

• (se#l i bon#ses and developmentopport#nities )or' together

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! Pay Model

• 2asic b#ilding bloc's

• Compensation objectives

• Policies that orm the o#ndation o the

compensation system

• Techni>#es that ma'e #p thecompensation system

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/*hibit 17? - The Pay Model

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Compensation Objectives

• @#ide the design o the pay system

• "erve as standards or j#dging thes#ccess o the pay system

• Compliance - Conorming to ederaland state compensation reg#lations

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Fo#r Policy Choices

• nternal alignment

• Compares jobs or s'ill levels inside asingle organi.ation

• Pertains to the pay rates or employeesdoing,

• />#al )or'

•Dissimilar )or'

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Fo#r Policy Choices

• Pay relationships a0ect employeedecisions to,

• "tay )ith the organi.ation

• 2ecome more &e*ible by investing inadditional training

• "ee' greater responsibility

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Fo#r Policy Choices

• /*ternal competitiveness

• Pay comparisons )ith competitors

• Pay is Amar'et driven

• Objective,

• To ens#re that pay is s#Bcient to attractand retain employees

• To control labor costs to ens#re competitivepricing o prod#cts; services

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Fo#r Policy Choices

• /mployee contrib#tions

• (nderstanding the basis or j#dgingperormance3 helps perceive pay as air

• Management

• %ight people get the right pay orachieving the right objectives in the

right )ay

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Pay Techni>#es

• Tie the o#r basic policies to the payobjectives

• Many variations e*ist

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