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Chapter

1
The Pay
Model

Screen graphics created by:


Jana F. Kuzmicki, PhD
Troy State University-Florida and Western Region

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Learning Objectives 1-3

After discussing Chapter 1, students


should be able to:
1. Explain how perceptions of compensation differ among
society, stockholders, managers and employees.
2. Discuss the difference between cash compensation (direct
compensation) and benefits (indirect compensation) and
define each of the direct and indirect forms of
compensation.
3. Explain how the employment relationship combines both
transactional and relational returns to form an implicit
contract between employers and employees.
4. Explain the three main components of a pay model.
5. Understand how the pay model integrates objectives,
policies, and techniques into a compensation system.
6. Be able to distinguish empirical research from surveys
and opinions.

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Chapter Topics
 Compensation: Definition, Please?
 Forms of Pay
 The Employment Relationship
Combines Transactional and
Relational Returns
A Pay Model
 Book Plan
 Caveat Emptor - Be an Informed
Consumer
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Key Questions and Issues


 How do differing perspectives affect our
views of compensation?
 What can a pay system do for an
organization? For an employee?
 How does the pay model help organize
one’s thinking about compensation?
 Under what circumstances would one of
the four basic pay policies be
emphasized relative to the others?
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Contrasting Perspectives of
Compensation
Society’ Stockholders’
s Views Views

Managers’
Employees’
Views
Views
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Exhibit 1.1: Hourly 1-7

Compensation
Costs for Production Workers

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Exhibit 1.2: Labor Costs as a 1-8

Percentage of Revenues, Airline


Industry

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What Is Compensation?

Compensation refers to
all forms of financial
returns and tangible
services and benefits
employees receive as
part of an employment
relationship.
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Exhibit 1.3: Total Returns


for Work

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Forms of Pay
Direct Pay Forms Indirect Pay Forms

 Cash Compensation:  Benefits:Income


Base Protection

 Cash Compensation:  Benefits: Work/Life


Merit Pay / Cost-of- Focus
Living Adjustments
 Benefits: Allowances
 Cash Compensation:
Incentives

 Long-Term Incentives
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Relational Returns from


Work
Recognition Employment
& Status Security

Challenging Learning
Work Opportunities
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What Is an Implicit
Employment Contract?

An unwritten
understanding between
employers and employees
over their reciprocal
obligations and returns;
employees contribute
toward achieving the goals
of the employer in
exchange for returns given
by the employer and valued
by the employee.

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Exhibit 1.4: Framework for 1-14

Analyzing Employment
Relationships
HIGH PAY – LOW COMMITMENT HIGH PAY – HIGH COMMITMENT
High

Hired Guns Cult - like


TRANSACTIONAL

(Stockbrokers) (Microsoft)

LOW PAY – LOW COMMITMENT LOW PAY – HIGH COMMITMENT

Workers as Commodity Family


Low

(Employers of Migrant (Starbucks)


Farm Workers)

Low High
RELATIONAL
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Exhibit 1.5: THE PAY MODEL

POLICIES TECHNIQUES OBJECTIVES

Work Descriptions Evaluation/ INTERNAL


ALIGNMENT
analysis certification STRUCTURE
EFFICIENCY

Performanc
Market Surveys Policy PAY
COMPETITIVENESS definitions lines STRUCTURE e
• Quality
• Customers
Seniority Performance Merit INCENTIVE

CONTRIBUTORS based based guidelines PROGRAMS Stockholder
s
• Costs

MANAGEMENT Costs Communication Change EVALUATION FAIRNESS

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Compensation Objectives

Efficiency

Fairness

Compliance

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Exhibit 1.6: Pay Objectives


at Medtronic and AES
Medtronic AES
 Support objectives and increased Our guiding principles are to act with
complexity of business integrity, treat people fairly, have fun,
 Minimize increases in fixed costs and be involved in projects that provide
social benefits. This means we will
 Emphasize performance through
variable pay and stock  Help AES attract self-motivated,
dependable people who want to keep
 Competitiveness aligned with
learning new things
financial performance: 50th
percentile performance paid at 50th  Hire people who really like the place
percentile of market. 75th percentile and believe in the AES system
performance paid at 75th of market.  Pay what others are paid both inside
and outside AES, but hire people who
are willing to take less to join AES
 Use teams of employees and managers
to manage the compensation system
 Make all employees stockholders

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Pay System Policies


Internal alignment
 Focus - Comparisons among jobs or skill levels
inside a single organization
External competitiveness
 Focus - Compensation relationships external to
the organization: comparison with competitors
Employee contributions
 Focus - Relation emphasis placed on employee
performance
Management
 Focus - Policies related to managing the pay
system
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Pay System Techniques


Include methods used to operationalize
policy decisions and link decisions to overall
compensation objectives
Examples of techniques
 Internal consistency
 Job analysis
 Job evaluation

 External competitiveness
 Pay surveys
 Employee contributions
 Incentiveplans
 Performance-based pay increases

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Caveat Emptor -
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Be An Informed Consumer
 Does the research measure anything
useful?
 Does the study separate correlation
from causation?
 Are there alternative explanations?

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