MGTO 231 Human Resources Management

MGTO 231Human Resources Management Compensation I Dr. Kin Fai Ellick WONG

Prologue • Have you ever asked the following questions? • Why the salary for some jobs are higher than the salary for other jobs? • Why are there bonuses for some jobs but not for other jobs? • If I were a manager, how do I know the salary for a newly created job? • You may find the answers in the following two classes

Outline • Some basic concepts of compensation • Designing a compensation system • Internal vs. external equity • Fixed vs. variable pay • Performance vs. membership • Job vs. individual pay • To be continued in next lesson

Some basic concepts

Elements of compensation • Total compensation • The package of quantified rewards an employee receives for his/her labors • Base compensation • Pay incentives • Indirect compensation / benefits

Base compensation • The fixed pay an employee receives on a regular basis • Salary or hourly wages • The most standard part about pay • Will be extensively discussed in this and next lessons

Pay incentives • A program designed to reward employees for good performance • Bonuses, profit sharing • Will be further discussed in the lesson “Pay for Performance”

Indirect benefits • Benefits • Health insurance, housing scheme, annual leave • Perquisites, perks • Car, parking, club member, etc.

Strategic aspects • Compensation constitutes the single most important cost in the firm • 60% or even higher of the total cost • The pay strategy should be consistent with overall business strategy • Hi-tech industry: Research & Development • Thus, the following questions should be asked frequently, and answered accurately:

What types of activities should be rewarded with higher salaries? • Hi-tech firms: R & D activities • Which employee groups should receive special treatments when limited pay resources are allocated? • Hi-tech firms: researchers in R & D

Outline • Some basic concepts of compensation • Designing a compensation system • Internal vs. external equity • Fixed vs. variable pay • Performance vs. membership • Job vs. individual pay • To be continued in next lesson

Nine criteria for developing a compensation system • Internal vs. external equity • Fixed vs. variable pay • Performance vs. membership • Job vs. individual pay • Egalitarianism vs. elitism • Below-market vs. above-market compensation • Monetary vs. non-monetary rewards • Open vs. secret pay • Centralized vs. decentralized of pay decisions

Internal vs. external equity • Fairness or justice in pay is an important issue • Perception of unfairness could minimize the impact of a compensation system (e.g., it could decrease the morale of workers and de-motivate them) • Fair pay is one that employees generally view as equitable

Internal equity • The perceived fairness of the pay structure within a firm • External equity • The perceived fairness in pay relative to what other employers are paying for the same type of labor

What is perceived to be fair? • Internal Equity • Employees compare what they bring to the firm to what they receive in return (i.e., outcome/input ratio) • Employees compare this ratio with that of other employees within the firm • Internal equity is met when one’s outcome/input ratio is equivalent to that of others

External Equity • The salary is perceived as fair when it fits with the demand-supply labor market • The more the demand, or the lower the supply, then the higher the salary • External equity is met when the salary is set at a point where the supply of labor equals the demand for labor

Fixed vs. variable pay • Some organizations choose to pay a high proportion of total compensation in the form of base pay (i.e., relatively fixed pay): HK government, education units (HKUST) • Some choose to pay a high proportion of total compensation in the form of variable pay: investment bank

In general, the percent of salary in the form of bonus increases as the base salary increases • Those in higher level positions earn more, but their compensations are more subject to risk • The more the proportion of variable pay, the more risk sharing there is between the employee and the firm

Performance vs. membership • Performance-contingent compensation • Outcome oriented, Piece-rate plans • Pay based on units produced: 膠降落傘 • Commission • Membership-contingent compensation • All received the same or similar wage in a given job (with minimum satisfactory performance)

Job vs. individual pay • Job pay • Regardless of ability and performance, the pay is based on jobs. Highly qualified individuals will not be paid more on the same job • Individual pay • Knowledge-based, or skill-based pay system • Paid on the basis of the jobs they can do or talents they have that can be successfully applied to a variety of tasks and situations

Which is better? • Research findings have the following suggestions • Job-based tends to work best in situations where • Technology is stable, jobs do not change often • Employees do not need to cover for one another frequently • Turnover is relatively low • Employees are expected to move up through the ranks over time

Individual-based compensation programs are more suitable when: • The firm has a relatively educated workforce with both the ability and the willingness to learn different jobs • The company’s technology and organizational structure change frequently • Employee participation and teamwork are encouraged throughout the organization • Opportunities for upward mobility are limited

MGTO 231 Human Resources Management