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Strategic Compensation Design and Evaluation for Organizational Success

Learn how to design and evaluate a strategic compensation program, ensuring alignment with industry standards, laws, and organizational goals. Explore pay-for-performance standards, motivators, equity bases, and job evaluation methods.

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Strategic Compensation Design and Evaluation for Organizational Success

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  1. Chapter 9Managing Compensation

  2. Learning Outcomes • Distinguish a strategic compensation program from one that is non-strategic • Determine how to design pay systems • Estimate whether or not a pay system is consistent within the firm as well as comparable to industry standards and government laws • Be able to design a compensation scorecard

  3. Figure 9.1 - Compensation Components

  4. Figure 9.2 - Compensation Alignment

  5. Goals of Strategic Compensation Policy • Compensation of employees in ways that enhance motivation and growth • To reward employees’ past performance • To remain competitive in the labor market • To maintain salary equity among employees • To mesh employees’ future performance with organizational goals • To control the compensation budget • To attract new employees • To reduce unnecessary turnover

  6. Pay-for-Performance Standard • Standard by which managers tie compensation to employee effort and performance • Refers to a wide range of compensation options • Includes merit-based pay, bonuses, salary commissions, job and pay banding, team/group incentives, and gainsharing programs

  7. Motivating Employees through Compensation • Pay equity: Employee’s perception that compensation received is equal to the value of the work performed • Distributive fairness - Motivation theory that explains how people respond to situations in which they feel they have received less/more than they deserve

  8. Kinds of Pay Equity

  9. Bases for Compensation • Hourly work • Piecework • Salaried employees • Nonexempt employees • Exempt employees

  10. Figure 9.6 - Factors Affecting the Pay Mix

  11. Important Terms in Pay Mix • Consumer price index (CPI) • Measure of the average change in prices over time in a fixed market basket of goods and services • Escalator clauses • Labor agreements clauses that provide for quarterly cost-of-living adjustments in wages, basing the adjustments on changes in the CPI • Real wages • Wage increases larger than rises in the CPI, that is, the real earning power of wages

  12. Job Evaluation • Systematic process of determining the relative worth of jobs in order to establish which jobs should be paid more than others within an organization • Methods of comparison • Rank the value of jobs from highest to lowest • Classify jobs so they can be benchmarked internally and externally • Award points to each job based on how much they are linked to organizational objectives

  13. Wage and Salary Surveys • Survey of the wages paid to employees of other employers in the surveying organization’s relevant labor market • Labor market - Area from which employers obtain certain types of workers • Collecting survey data • HRIS and salary surveys • Employer-initiated surveys

  14. Wage Curve, Pay Grades, and Rate Ranges

  15. Figure 9.7 - Freehand Wage Curve

  16. Competence-Based Pay • Pay based on an employee’s skill level, variety of skills possessed, or increased job knowledge • Systems represent fundamental change in the attitude of management regarding: • How work should be organized • How employees should be paid for their work efforts • Encourages employees to acquire training when new or updated skills are needed by an organization

  17. Minimum Wage and Pay Compression • Pay rate compression: Compression of pay between new and experienced employees caused by the higher starting salaries of new employees • Differential between hourly workers and their managers • Reasons for pay compression are market based than government based

  18. Compensation Assessment • Assessing the effectiveness of compensation system is important to linking compensation with strategy • Measures • Help the company detect potential compensation problems • Make compensation decisions more transparent • Improve the alignment of compensation decisions with organizational objectives

  19. Compensation Assessment • Compensation scorecard: Displays the results for all the measures that a company uses to monitor and compare compensation among internal departments or units • Creates a comparative tool within the organization that can reinforce desired outcomes that are unique to the company’s strategy

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