Compensation

Compensation
is the set of rewards that organizations provide to
individuals in return for their willingness to perform
various jobs and tasks within the organization.
Internal equity
in compensation refers to comparisons that
employees make to other employees within the
same organization.
External equity
in compensation refers to comparisons employees
make to others performing similar jobs in different
organizations.

Internal
equity

Expense
control

External
equity

Compensatio
n

Reward and
motivate

Legal
compliance

Wages versus Salaries

Wages
generally refer to hourly compensation paid to
operating employees; the basis for wages is time.

Salary
is income that is paid an individual not on the
basis of time, but on the basis of performance.

Anticipation of
setting pay level
Determination
of market pay

Pay below
market rate

Pay market
rate

Pay above
market rate

Disadvantages

Advantages

Additional compensation
costs
Sense of entitlement

Pay
above
market
rate

Attracts better employees

Minimizes voluntary
turnover
Fosters strong culture and
competitive superiority

Does not attract higher

performers
Turnover will vary with labor
demands of competing firms

Pay at
market
rate

Higher quality of human

resources at midrange of
market-driven compensation
costs

Pay
below
market
rate

Lower compensation costs

Useful in labor markets
where unemployment is
high

Lower-quality employees
Low morale/job satisfaction
Higher turnover; especially
among high performers

Factors contributing to a firms compensation strategy

Relationship of overall strategy to compensation strategy
Growth rate of firm and demand for human resources
Financial condition of the firm (i.e., ability to pay)
Overall attractiveness of firm (i.e., location, culture)
Legal context of federal, state, and local labor regulations
Union influence and presence in labor market

Pay
Surveys and
Pay surveys
are surveys of compensation paid to
Compensation
employees by other employers in a particular
geographic area, an industry, or an
occupational group.
assist firms in avoiding problems of external
equity when attempting to set compensation
strategy for themselves.

Job ranking
method

Regressionbased system

Classification
system

Job
Evaluation

Factor
comparison
method

Point system

Job
Evaluation
and
Job
Factor comparison method
assesses jobs on a factor-by-factor basis, using
Worth
a factor comparison scale as a benchmark.

Regression-based system
uses a statistical technique called multiple
regression to develop an equation that
establishes the relationship between different
dimensions of the job and compensation.

Factor Comparison Method of Job Evaluation

Six steps:
Comparison factors are selected and defined.
Benchmark or key jobs are identified.
Benchmark jobs are ranked on each
compensation factor.
A part of each benchmark jobs wage rate is
allocated to each job factor.
Two sets of ratings are prepared, based on the
ranking and the assigned wages, to determine
the consistency demonstrated by the evaluators.
A job comparison chart is developed to display
the benchmark jobs and the monetary values
that each job receives for each factor.

Wage
and
Salary
Managing
compensation
allows the organization to control compensation
Administration
costs and to maintain a compensation structure

that fits the needs of both the organization and its

employees. As organizational circumstances
change, it may become necessary to modify or
change the compensation strategy.

Determining individual wages

has its basis in the organizations awarding
differential compensation to employees on the
basis of qualifications, seniority, or other jobrelated factors.

Wage and Salary

Pay secrecy
Administration
refers to the extent to which an individuals

compensation in an organization is secret.

Arguments for pay secrecy

An individuals compensation is a private matter and not for

public knowledge.
Knowing pay levels fosters jealousy and resentment.

Argument against pay secrecy

Public knowledge about an open-pay system creates proper

perceptions of equity and motivates performance.

Pay compression
occurs when individuals of substantially different levels of

experience or seniority are paid similar wages or salaries.