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COMPENSATION

COMPENSATION. Compensation: An Overview. Compensation - Total of all rewards provided employees in return for services Direct financial compensation - Pay received in the form of wages, salaries, bonuses, and commissions

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COMPENSATION

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  1. COMPENSATION

  2. Compensation: An Overview • Compensation- Total of all rewards provided employees in return for services • Direct financial compensation - Pay received in the form of wages, salaries, bonuses, and commissions • Indirect financial compensation- All financial rewards not included in direct compensation • Nonfinancial compensation- Satisfaction a person receives from job itself or from work environment

  3. Compensation Financial Non-Financial Components of a Total Compensation Program External EnvironmentInternal Environment Direct Wages Salaries Commissions Bonuses Indirect (Benefits) Legally Required Benefits Social Security Unemployment Compensation Workers’ Compensation Family & Medical Leave Voluntary Benefits Payment for Time Not Worked Health Care Life Insurance Retirement Plans Employee Stock Option Plans Supplemental Unemployment Benefits Employee Services Premium Pay Unique Benefits The Job Skill Variety Task Identify Task Significance Autonomy Feedback Job Environment Sound Policies Competent Employees Congenial Coworkers Suitable Status Symbols Working Conditions Workplace Flexibility Flextime Compressed Work Week Job Sharing Flexible Compensation Telecommuting Part-time Work Modified Retirement

  4. Equity Theory • Input:Outcome ratio for self • Input:Outcome ratio for referen • Perception of ratios affects future performance

  5. Equity in Financial Compensation • Equity- Fair pay treatment for employees • External equity- Firm's employees are paid comparably to workers who perform similar jobs in other firms • Internal equity - Exists when employees are paid according to relative value of their jobs within same organization

  6. Equity in Financial Compensation (Continued) • Employee equity- Individuals performing similar jobs for same firm are paid according to factors unique to employee, such as performance level or seniority • Team equity- More productive teams are rewarded more than less productive groups

  7. Determinants of Individual Financial Compensation • Organization • Labor market • Job • Employee

  8. Compensation Policies • Pay leaders – pay higher wages and salaries • Market rate, or going rate– pay what most employers pay for same job • Pay followers– pay below market rate because poor financial condition or believe they do not require highly capable employees

  9. The Labor Market as a Determinant of Financial Compensation • Compensation surveys • Expediency • Cost of living • Labor unions • Society • Economy • Legislation

  10. Determining internal equity

  11. The Job as a Determinant of Financial Compensation • Job itself continues to be a factor, especially in those firms that have internal pay equity as a primary consideration • Organizations pay for value they attach to certain duties, responsibilities, and other job-related factors such as working conditions

  12. Job Analysis and Job Descriptions • Before organization can determine relative difficulty or value of jobs, must first define content • This is done by analyzing jobs

  13. Job Evaluation • Firm determines the relative value of one job in relation to another • Point factor system most widely used • Determine compensible factors • Set weights for each • Assign points • Decide pay classifications

  14. Job Pricing • Placing a dollar value on worth of a job • Pay grades - Grouping of similar jobs to simplify pricing jobs • Wage curve - Fitting of plotted points to create a smooth progression between pay grades • Pay ranges - Minimum and maximum pay rate with enough variance between the two to allow for a significant pay difference

  15. Job Pricing (Continued) • Broadbanding– Collapses many pay grades into a few wide bands or improve effectiveness • Single rate system- Pay ranges are not appropriate for some workplace conditions such as some assembly line • Adjusting pay rates- Overpaid and underpaid jobs

  16. Scatter Diagram of Evaluated Jobs Illustrating the Wage Curve, Pay Grades, and Pay Ranges Average Pay per Hour (Current Rates or Market Rates) $19.80 5 18.50 4 17.20 3 15.90 Wage Curve Pay Ranges for Pay Grades 2 14.60 14.00 1 13.30 12.90 12.00 100 200 300 400 500 Evaluated Points 1 2 3 4 5 Pay Grades Summary Evaluated Points Pay Grade Minimum Midpoint Maximum 0- 99 1 $12.00 $13.30 $14.60 100-199 2 13.30 14.60 15.90 200-299 3 14.60 15.90 17.20 300-399 4 15.90 17.20 18.50 400-500 5 17.20 18.50 19.80

  17. Broadbanding and Its Relationship to Traditional Pay Grades and Ranges Grade 5 Grade 4 Grade 3 Average Pay Per Hour Grade 2 Band B Grade 1 Band A Low High Job Worth

  18. Employee as a Determinant of Financial Compensation • Performance-based Pay • Skilled-based Pay • Competency-based Pay • Seniority • Experience • Membership in the organization • Potential • Political Influence • Luck

  19. Primary Determinants of Individual Financial Compensation The OrganizationCompensation Policies Organizational Politics Ability to Pay The Employee Job Performance Merit Pay Variable Pay Competency-Based Pay Seniority Experience Organization Membership Potential Political Influence Luck The Labor MarketCompensation Surveys Expediency Cost of Living Labor Unions Society The Economy Legislation Job Pricing Individual Financial Compensation The Job Job Analysis Job Descriptions Job Evaluation Collective Bargaining

  20. Performance-Based Pay • Merit pay - Pay increase given to employees based on their level of performance as indicated in the appraisal • Variable pay - Compensation based on performance (bonus) • Piecework – Employees paid for each unit they produce

  21. Skill-Based Pay Compensates on basis of job-related skills and knowledge • Employees and departments benefit when employees obtain additional skills • Appropriate where work tends to be routine and less varied • Must provide adequate training opportunities or system becomes a demotivator

  22. Competency-Based Pay Compensates on basis of demonstrated expertise

  23. Seniority • Length of time an employee has been associated with the company, division, department, or job • Labor unions tend to favor seniority

  24. Experience Regardless of nature of job, very few factors have a more significant impact on performance than experience

  25. Membership in the Organization • Some components of individual financial compensation are given to employees regardless of particular job they perform or their level of productivity • Intended to maintain a high degree of stability in the workforce and to recognize loyalty

  26. More factors affecting individual pay • Membership in the organization • Potential • Political influence • Luck • Compensation for special groups • Team-based pay

  27. Group-based pay for performance • Profit sharing– distribution of predetermined percentage of firm’s profits to employees • Gainsharing – incentive payment based upon improved company performance • Scanlon plan– reward to employees for savings in labor costs resulting from employees’ suggestions

  28. Executive Compensation Critical factor in attracting and retaining best managers

  29. Determining Executive Compensation Firms typically prefer to relate salary growth for the highest-level managers to overall corporate performance

  30. Types of Executive Compensation • Base salary • Short-term (annual) incentives or bonuses • Long-term incentives and capital appreciation plans • Stock option plans • Indexed stock option plans • Executive benefits (Perks) • Golden parachutes

  31. HR’s Role in Executive Compensation HR executives who know their company’s business must play key role in assuring reasonable and ethical behavior

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