Compensation: A Component of Human Resource Systems Chapter One Compensation: A Component of Human Resource Systems

What Influences Pay? Chris Smith and Pat Jones are both computer programmers. Chris earns $45,000, while Pat earns $35,000. What could cause this difference?

Equity Policies Internal Consistency External Competitiveness Employee Contributions Administration

Compensation Department’s Main Goals Internal equity --Internal consistency Relative value of each job among all jobs within a company Value of the job, regardless of the person in the job Jobs that require greater qualifications, more responsibilities, and more-complex job duties should receive higher pay than other jobs. Done through job analysis and job evaluation External equity—Market-competitiveness Jobs within a company are paid similarly to same jobs outside Companies’ pay policies fit with business objectives Done through strategic analysis and salary surveys Individual equity--Recognizing individual contributions Pay people differently within jobs according to job performance. Done through pay grades and ranges

Compensation Techniques INTERNAL: Job Analysis, Job Descriptions, Job Evaluation, Internal Work Structure EXTERNAL: Market definitions, Market surveys, Policy lines, Pay structures INDIVIDUAL: Seniority based, Performance based, Incentive guidelines, Incentive programs ADMINISTRATION: Planning,Budgeting,Communicating, Evaluating

What is Compensation? Intrinsic compensation Extrinsic compensation Reflects employees’ psychological mind sets that result from performing their jobs. Through effective job design Extrinsic compensation Rewards given you by others Includes both monetary and non-monetary (e.g., benefits) rewards. Through compensation systems

Critical Psychological Exhibit 1-1 The Influence of Core Job Characteristics on Intrinsic Compensation and Subsequent Benefits to Employers Core Job Characteristics Critical Psychological State Benefit to Employers Skill variety Task identity Task significance Experienced meaningfulness of the work Lower turnover Lower absenteeism Enhanced job performance Greater job satisfaction Experienced responsibility for work outcomes Autonomy Feedback Gained knowledge of results from work activities

Exhibit 1-3 Elements of Core Compensation Base Pay (recurring) Hourly pay/wage Annual salary How Base Pay is Adjusted Over Time Cost-of-living adjustments (COLAs) Seniority pay Merit pay Incentive pay or variable pay Pay-for-knowledge and skill-based pay

Exhibit 1-4 Elements of Fringe Compensation (1 of 3) Social Security Act of 1935 Unemployment insurance Retirement insurance Benefits for dependents Disability benefits Medicare State compulsory disability laws Workers’ Compensation Family and Medical Leave Act of 1993 (12 weeks of annual unpaid leave)

Exhibit 1-4 Elements of Fringe Compensation (2 of 3) Discretionary Benefits Protection Programs Income protection programs Health protection programs Pay for time-not-worked Holidays Vacation Sick leave Personal leave Jury duty Funeral leave Military leave Cleanup, preparation, travel time

Exhibit 1-4 Elements of Fringe Compensation (3 of 3) Discretionary Benefits (cont.) Services Employee assistance programs (EAPs) Family assistance programs Tuition reimbursement Transportation services Outplacement assistance Wellness programs

Strategic vs. Tactical Decisions Strategic decisions guide activities in the market Tactical decisions support the fulfillment of strategic decision Strategic Decisions General Tactical HR Decisions Specific Tactical HR Decisions (Compensation) Competitive strategy HR strategy Compensation strategy Recruitment and Selection Performance appraisal Compensation Training Seniority pay Merit pay Incentive pay Benefit options Etc.

Competitive Strategy Planned use of resources to promote & sustain competitive advantage Lowest-cost strategy Efficient-scale, cost minimization Southwest Airlines, Wal-Mart Employee roles: repetitive, predictable behaviors, short-term focus, individual activity, concern for quantity, primary concern for results. Differentiation Strategy Unique products: design image, technology, etc Build brand loyalty, price premium, invest in R&D Iams company, Saks Fifth Avenue Employee roles: creative behavior, long-term focus, cooperative and interdependent behavior, risk taking, openness to novel work.

Compensation and… Labor-Management Relations Recruitment, Selection Collective bargaining agreements, pay, COLAs, incentives Employee Termination Severance pay, pension, early retirement Legislation Income and continuity, safety, work hours, pay discrimination, disabilities and family needs Recruitment, Selection $ to get top candidates, signing bonus, benefits Performance Appraisal Basis for merit pay and incentives Training Pay for knowledge Career Development Promotions, lateral moves

Stakeholders of the Compensation System Employees Line managers Executives Unions U.S. government