Mana Compensation Administration Fall Semester, 2002 Dr. Ray Gullett

Types of Returns to Employees in Exchange for Work Financial Compensation Relational Forms of Return

Compensation As Exchange Is a Part of What the Employee Receives for His or Her Services to the Organization

Total Returns in Exchange for Work TOTAL COMPENSATION FORMS Direct: Cash Indirect: Benefits & Services RELATIONAL FORMS Recognition & StatusEmployment Security Learning OpportunitiesChallenging Work

Compensation refers to all forms of financial returns and tangible services and benefits employees receive as part of an employment relationship.

Compensation - What Do We Include? Base pay - should reflect the “worth” of the job itself or the skill levels of workers Base pay - should reflect the “worth” of the job itself or the skill levels of workers May include “cost of living” adjustments May include “cost of living” adjustments Merit pay - rewards the individual for past performance - as increments to base pay Merit pay - rewards the individual for past performance - as increments to base pay

Compensation - What Do We Include? Incentive pay - pay tied to current performance; Formula specified in advance Incentive pay - pay tied to current performance; Formula specified in advance Services & benefits - sometimes called “fringes” (today averages 42% of total payroll costs) Services & benefits - sometimes called “fringes” (today averages 42% of total payroll costs)

Total Compensation Forms DIRECT Base pay Base pay Merit pay Merit pay Incentives Incentives Cost of living adjustments Cost of living adjustmentsDIRECT Base pay Base pay Merit pay Merit pay Incentives Incentives Cost of living adjustments Cost of living adjustmentsINDIRECT Protection programs Protection programs Paid time away from work Paid time away from work Employee services and allowances Employee services and allowancesINDIRECT Protection programs Protection programs Paid time away from work Paid time away from work Employee services and allowances Employee services and allowances

Compensation Model - 3 Parts Objectives Objectives Strategic issues (policy areas) Strategic issues (policy areas) Techniques Techniques

Objectives Efficiency Efficiency - control of costs, high quality, customer driven Equity Equity - fairness of pay, both procedural & outcome Compliance Compliance - obeying governmental regulations regarding compensation

Strategic Issues (Policies) -Guidance for Achieving the Objectives Internal consistency - does pay reflect relative job worth? Internal consistency - does pay reflect relative job worth? External competitiveness - how does our pay compare to that of other organizations? External competitiveness - how does our pay compare to that of other organizations?

Strategic Issues (Policies) -Guidance for Achieving the Objectives Employee contributions - are individuals recognized through pay for differences in performance? Employee contributions - are individuals recognized through pay for differences in performance? Administration - how well is the pay system managed? Administration - how well is the pay system managed?

Compensation Techniques - Implementation for Policies Job (or work) analysis, descriptions, & specifications Job (or work) analysis, descriptions, & specifications Job evaluation Job evaluation Pay surveys Pay surveys Pay structure design Pay structure design Merit pay systems Merit pay systems Incentive plans Incentive plans Design of supplementary compensation Design of supplementary compensation

Pay Systems and Strategies: The “Best Fit” or Contingency View Warning! Techniques should not be used in a vacuum! Warning! Techniques should not be used in a vacuum!  The human resources &/or compensation department should tailor the compensation plan to the organization’s strategic direction

Compensation Message – “Best Fit” or Contingency View No single best approach No single best approach No best application of techniques No best application of techniques Different compensation approaches fit: Different compensation approaches fit: Different organization strategies Different organization strategies Different external opportunities & threats Different external opportunities & threats Different workforce characteristics Different workforce characteristics Different organization cultures Different organization cultures

Other Closely Related Issues in Compensation Design Organizational culture & values Organizational culture & values Other HR programs Other HR programs External environmental forces External environmental forces Economic factors Economic factors Political pressures Political pressures Societal expectations Societal expectations Employee preferences/union expectations Employee preferences/union expectations

Key Steps to Formulate a Compensation Strategy 1. Assess Total Compensation Implications Culture and Values Social, Economic, and Political Context Global Competitive Pressure Employee / Union Needs Other HR Systems 2. Fit Policy Decisions to Strategy Objectives Contributions Consistency Administration Competitiveness 3. Implement Strategy Design System to Translate Strategy into Action Choose Techniques to Fit Strategy 4. Reassess the Fit Realign as Conditions Change Realign as Strategy Changes

Alternative Perspective - Best Practices A “one best way” view of compensation A “one best way” view of compensation Two commonly cited best practice options Two commonly cited best practice options “The New Pay” “The New Pay” “High Commitment” “High Commitment”

Any Evidence That Pay Systems Are Developing This Way? In many industries, new employees with scarce skills are entering with pay levels above more senior people In many industries, new employees with scarce skills are entering with pay levels above more senior people Signing bonuses & other perks have been common Signing bonuses & other perks have been common Less marketable employees have been given small pay adjustments to keep the average down Less marketable employees have been given small pay adjustments to keep the average down

Growth in Real Hourly Compensation Declining since mid – 1998 Declining since mid – 1998 Less than 2% today Less than 2% today

Incentive Pay About 4% of all workers in 1991 About 4% of all workers in 1991 Approximately 10% of all workers today Approximately 10% of all workers today Stock options & bonuses available to some workers in 70% of firms surveyed Stock options & bonuses available to some workers in 70% of firms surveyed