Chapter One

Compensation: A Component
of Human Resource Systems

What Influences Pay?

Mr. KJAN and Mr. Rathor are both

computer programmers.

KJAN earns PKR. 45-K while Rathor

earns PKR. 35-K.

What could cause this difference?

Equity Policies

Internal
Consistency

External
Competitiveness

Employee
Contributions

Administration

Compensation Departments 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

Compensation Departments Goals

External equity Market - 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

Compensation Departments Goals

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

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

Elements of Core Compensation?

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 (FMLA)

(12 weeks of annual unpaid leave)

Elements of Fringe Compensation?

Discretionary Benefits:
Protection Program
Income protection programs
Health protection programs

Pay for time-not-worked

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

Elements of Fringe Compensation?

Discretionary Benefits:
Services
Wellness programs
Tuition reimbursement
Transportation services
Outplacement assistance
Family assistance programs
Employee assistance programs (EAPs)

Strategic vs. Tactical Decisions

Strategic decisions guide activities in the market

Tactical decisions support the fulfillment of strategic decision
Specific Tactical HR
Decisions
(Compensation)

General Tactical HR
Decisions

Strategic Decisions

Recruitment and
Selection

Seniority pay

Merit pay

Incentive pay

Competitive strategy

HR strategy

Performance
appraisal

Compensation
strategy

Compensation

Benefit options

Training

Etc.

Competitive Strategy

Low-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.

Planned use of resources to promote & sustain competitive

advantage

Competitive Strategy

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

Performance Appraisal
Basis for merit pay and incentives

Training
Pay for knowledge

Career Development
Promotions, lateral moves

Compensation and

Labor-Management Relations
Collective bargaining agreements, pay, COLAs, incentives

Employee Termination
Severance pay, pension, early retirement

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