Mana 4325 - Mana 4325 - Compensation Compensation AdministrationAdministration

Fall Semester, 2002Fall Semester, 2002

Dr. Ray GullettDr. Ray Gullett

Types of Returns to Types of Returns to Employees in Exchange Employees in Exchange

for Workfor Work

Financial CompensationFinancial Compensation

Relational Forms of ReturnRelational Forms of Return

Compensation As Compensation As ExchangeExchange

Is a Is a PartPart of What the of What the Employee Receives for His or Employee Receives for His or

Her Services to the Her Services to the Organization Organization

Total Returns in ExchangeTotal Returns in Exchangefor Workfor WorkTotal Returns in ExchangeTotal Returns in Exchangefor Workfor Work

TOTAL COMPENSATION FORMS

•Direct: Cash

•Indirect: Benefits & Services

RELATIONAL FORMS

Recognition & StatusEmployment Security

Learning Opportunities Challenging Work

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

Compensation - What Do Compensation - What Do We Include?We Include?

Base payBase pay - should reflect the - should reflect the “worth” of the job itself or the “worth” of the job itself or the skill levels of workers skill levels of workers May include “cost of living” May include “cost of living”

adjustmentsadjustments Merit payMerit pay - rewards the - rewards the

individual for past performance - individual for past performance - as increments to base payas increments to base pay

Compensation - What Do Compensation - What Do We Include?We Include?

Incentive payIncentive pay - pay tied to - pay tied to current performance; Formula current performance; Formula specified in advancespecified in advance

Services & benefitsServices & benefits - sometimes - sometimes called “fringes” (today averages called “fringes” (today averages 42% of total payroll costs)42% of total payroll costs)

Total Compensation FormsTotal Compensation FormsTotal Compensation FormsTotal Compensation Forms

DIRECTDIRECT

Base payBase pay Merit payMerit pay IncentivesIncentives Cost of living Cost of living

adjustmentsadjustments

DIRECTDIRECT

Base payBase pay Merit payMerit pay IncentivesIncentives Cost of living Cost of living

adjustmentsadjustments

INDIRECTINDIRECT

Protection Protection programsprograms

Paid time away Paid time away from workfrom work

Employee services Employee services and allowancesand allowances

INDIRECTINDIRECT

Protection Protection programsprograms

Paid time away Paid time away from workfrom work

Employee services Employee services and allowancesand allowances

Compensation Model - 3 Compensation Model - 3 PartsParts

ObjectivesObjectives

Strategic issues (policy areas)Strategic issues (policy areas)

Techniques Techniques

ObjectivesObjectives EfficiencyEfficiency - control of costs, high - control of costs, high

quality, customer drivenquality, customer driven

EquityEquity - fairness of pay, both - fairness of pay, both procedural & outcomeprocedural & outcome

ComplianceCompliance - obeying governmental - obeying governmental regulations regarding compensationregulations regarding compensation

Strategic Issues (Policies) -Strategic Issues (Policies) -Guidance for Achieving the Guidance for Achieving the ObjectivesObjectives

Internal consistencyInternal consistency - does pay - does pay reflect relative job worth?reflect relative job worth?

External competitivenessExternal competitiveness - how - how does our pay compare to that of does our pay compare to that of other organizations?other organizations?

Strategic Issues (Policies) -Strategic Issues (Policies) -Guidance for Achieving the Guidance for Achieving the ObjectivesObjectives

Employee contributionsEmployee contributions - are - are individuals recognized through pay individuals recognized through pay for differences in performance?for differences in performance?

AdministrationAdministration - how well is the - how well is the pay system managed?pay system managed?

Compensation Techniques Compensation Techniques - Implementation for - Implementation for PoliciesPolicies

• Job (or work) analysis, descriptions, & Job (or work) analysis, descriptions, & specificationsspecifications

• Job evaluationJob evaluation• Pay surveysPay surveys• Pay structure designPay structure design• Merit pay systemsMerit pay systems• Incentive plansIncentive plans• Design of supplementary Design of supplementary

compensationcompensation

Pay Systems and Pay Systems and Strategies: The “Best Fit” Strategies: The “Best Fit”

or Contingency Viewor Contingency View

• Warning!Warning! Techniques should Techniques should not be used in a vacuum! not be used in a vacuum!

The human resources &/or The human resources &/or compensation department should compensation department should tailor the compensation plan to the tailor the compensation plan to the organization’s strategic directionorganization’s strategic direction

Compensation Message – Compensation Message – “Best Fit” or Contingency “Best Fit” or Contingency

ViewView

No single best approach No single best approach No best application of techniquesNo best application of techniques Different compensation approaches fit:Different compensation approaches fit:

Different organization strategiesDifferent organization strategiesDifferent external opportunities & Different external opportunities &

threatsthreatsDifferent workforce characteristicsDifferent workforce characteristicsDifferent organization culturesDifferent organization cultures

Other Closely Related Other Closely Related Issues in Compensation Issues in Compensation DesignDesign

Organizational culture & valuesOrganizational culture & values Other HR programsOther HR programs External environmental forcesExternal environmental forces

Economic factorsEconomic factorsPolitical pressuresPolitical pressuresSocietal expectationsSocietal expectations

Employee preferences/union Employee preferences/union expectationsexpectations

KeyKey Steps to Formulate a Steps to Formulate a Compensation StrategyCompensation Strategy

KeyKey Steps to Formulate a Steps to Formulate a Compensation StrategyCompensation Strategy

1. Assess Total Compensation ImplicationsCulture and Values

Social, Economic, and Political ContextGlobal Competitive Pressure

Employee / Union NeedsOther HR Systems

2. Fit Policy Decisions to StrategyObjectives Contributions

Consistency AdministrationCompetitiveness

3. Implement StrategyDesign System to Translate Strategy

into ActionChoose Techniques to Fit Strategy

4. Reassess the FitRealign as Conditions ChangeRealign as Strategy Changes

Alternative Perspective - Alternative Perspective - Best PracticesBest Practices

A “one best way” view of A “one best way” view of compensationcompensation

Two commonly cited best practice Two commonly cited best practice options options

““The New Pay”The New Pay”““High Commitment”High Commitment”

Any Evidence That Pay Any Evidence That Pay Systems Are Developing Systems Are Developing This Way?This Way?

In many industries, new employees In many industries, new employees with scarce skills are entering with with scarce skills are entering with pay levels above more senior pay levels above more senior peoplepeopleSigning bonuses & other perks have Signing bonuses & other perks have

been commonbeen common Less marketable employees have Less marketable employees have

been given small pay adjustments been given small pay adjustments to keep the average downto keep the average down

Growth in Real Hourly Growth in Real Hourly CompensationCompensation

Declining since mid – 1998Declining since mid – 1998

Less than 2% todayLess than 2% today

Incentive PayIncentive Pay

About 4% of all workers in 1991About 4% of all workers in 1991

Approximately 10% of all workers Approximately 10% of all workers todaytoday

Stock options & bonuses available Stock options & bonuses available to some workers in 70% of firms to some workers in 70% of firms surveyedsurveyed