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Rewards and Compensation

Rewards and Compensation. Nature of Compensation. Types of Rewards Intrinsic Intangible, psychological, and social effects of compensation Extrinsic Tangible, monetary, and non-monetary effects of compensation Types of Compensation Direct compensation

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Rewards and Compensation

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  1. Rewards and Compensation

  2. Nature of Compensation • Types of Rewards • Intrinsic • Intangible, psychological, and social effects of compensation • Extrinsic • Tangible, monetary, and non-monetary effects of compensation • Types of Compensation • Direct compensation • The employer exchanges monetary rewards for work done. • Indirect compensation • Employer-provided benefits—like health insurance—that are provide employees for being a member of the organization.

  3. Components of a Compensation System

  4. Strategic Compensation • Objectives of a Strategically Supportive Compensation System: • Legal compliance with all appropriate laws and regulations • Cost effectiveness for the organization • Internal, external, and individual equity for employees • Performance enhancement for the organization

  5. Compensation Philosophies • Entitlement Philosophy • Assumes that individuals who have worked another year are entitled to pay increases, with little regard for performance differences. • Pay-for-Performance Philosophy • Requires that compensation changes reflect individual performance differences.

  6. Continuum of Compensation Philosophies

  7. Compensation Approaches

  8. Compensation System Design Issues Host-Country Nationals Third-Country Nationals Global Compensation Issues Expatriates

  9. Typical Components of Expatriate Compensation

  10. Individual vs. Team Rewards Using Team-Based Reward Systems Use skill-based pay for the base. Make system simple and understandable. Use variable pay based on business entity performance Distribute variable rewards at the team level Maintain a high degree of employee involvement

  11. Perceptions of Pay Fairness Equity The perceived fairness between what a person does (inputs) and what the person receives (outcomes). ExternalEquity Employee compensation viewed as equitable in relation to the compensation of employees performing similar jobs in other organizations. InternalEquity Employees receive compensation in relation to the knowledge, skills, and abilities they use in their jobs as well as their responsibilities and accomplishments. Procedural Justice Perceived fairness of the process and procedures used to make decisions about employees. Distributive Justice Perceived fairness in the distribution of outcomes. Pay Openness/Secrecy The degree of openness or secrecy that an organization allows regarding its pay system.

  12. Development of a Base Pay System • Job Evaluation • Formal, systematic means to identify the relative worth of jobs within an organization. • Evaluating every job in the organization on: • Skills, Effort, Responsibility and Working Conditions • Job Evaluation Committees – • Committees whose task is to conduct job evaluations as may be required and/or to determine compensable factors. Most often chaired by key compensation officials from human resources. Membership should be a diverse as possible to ensure widespread input.

  13. Compensation Administration Process

  14. Labor Market Conditions Compensation Strategyof the Organization Area Wage Rates WAGE MIX Worth of the Job Cost of Living Employee’s Relative Worth Collective Bargaining Employer’s Ability to Pay Legal Requirements Components of the Wage Mix

  15. Factors Affecting the Wage Mix

  16. The Wage Mix—Internal Factors • Compensation Strategy • Setting organization compensation policy to lead, lag, or match competitors’ pay. • Worth of a Job • Establishing the internal wage relationship among jobs and skill levels. • Relative Worth of an Employee • Rewarding individual employee performance • Ability-to-Pay • Having the resources and profits to pay employees.

  17. The Wage Mix—External Factors • Labor Market Conditions • Availability and quality of potential employees is affected by economic conditions, government regulations and policies, and the presence of unions. • Area Wage Rates • A firm’s formal wage structure of rates is influenced by those being paid by other area employers for comparable jobs.

  18. The Wage Mix—External Factors • Cost of Living • Local housing and environmental conditions can cause wide variations in the cost of living for employees. • Inflation can require that compensation rates be adjusted upward periodically to help employees maintain their purchasing power.

  19. The Wage Mix—External Factors • Collective Bargaining • Escalator clauses in labor agreements that provide for quarterly upward cost-of-living wage adjustments for inflation to protect employees’ purchasing power. • Unions bargain for real wage increases that raise the standard of living for their members. • Real wages are increases larger than rises in the consumer price index; that is, the real earning power of wages.

  20. Job Evaluation Ranking Classification Job Evaluation Methods FactorComparison PointMethod

  21. Valuing Jobs Using Market Pricing • Market Pricing • Use of pay survey data to identify the relative value of jobs based on what other employers pay for similar jobs. • Advantages of Market Pricing • Ties organizational pay levels to what is actually occurring in the market, without being distorted by “internal” job evaluation. • Communicates to employees that the compensation system is “market linked,” rather than distorted by internal issues.

  22. Valuing Jobs Using Market Pricing (cont’d) • Disadvantages of Market Pricing • It relies on market survey data that is limited or may have been gathered in methodologically sound ways. • The responsibilities of a specific job in a company may be somewhat different from those of the “matching” job identified in the survey. • The market data’s scope (range of sources) is another concern. • Tying pay levels to market data can lead to wide fluctuations based on market conditions.

  23. Pay Surveys • Pay Survey • Collection of data on compensation rates for workers performing similar jobs in other organizations. • Benchmark Jobs • Jobs found in many organizations and performed by several individuals who have similar duties that are relatively stable and require similar KSAs. • Internet-Based Pay Surveys • Pay survey questionnaires are distributed electronically rather than as printed copies.

  24. Using Pay Surveys Participants Broad-based Survey Data Relevance Job Matches Timeliness Methodology

  25. Pay Structures • Job Family • A group of jobs having common organizational characteristics. • Common Pay Structures • Hourly and salaried • Office, plant, technical, professional, managerial • Clerical, information technology, professional, supervisory, management, and executive • Pay Grades • Groupings of individual jobs having approximately the same job worth.

  26. Establishing Pay Structures

  27. Pay Structures (cont’d) • Market Banding • Grouping jobs into pay grades based on similar market survey amounts. • Market Line • Graph line that shows the relationship between job value as determined by job evaluation points and job value as determined by pay survey rates. • Shows the distribution of pay for the surveyed jobs, allowing a linear trend line to be developed by the least-squares regression method.

  28. Pay Ranges • Broadbanding • The practice of using fewer pay grades having broader pay ranges that in traditional systems. • Benefits • Encourages horizontal movement of employees • Is consistent with trend towards flatter organizations • Creates a more flexible organization • Encourages competency development • Emphasizes career development

  29. Determining Pay Increases • Performance and Merit Increases • Merit Pay • Merit pay programs reward employees with permanent incrses to base pay according to differences in performance. • Just noticeable difference (JND) • The minimum pay increase that employees will see as making a substantial change in compensation. Sometimes referred to as just-meaningful pay.

  30. Determining Pay Increases (cont’d) • Seniority • Time spent in an organization or on a particular job that is used to determine eligibility for organizational rewards and benefits. • Cost-of-Living Adjustments (COLA) • A percentage increase in wages to maintain real wages in a period of economic inflation. • Adjustments are tied to changes in an economic measure (e.g., the Consumer Price Index). • Lump-Sum Increases (LSI) • A one-time payment of all or part of a yearly pay increase that does not increase base wages.

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