MGTO 231 Human Resources Management Compensation II Dr. Kin Fai Ellick WONG

Outline Designing a compensation system  Egalitarianism vs. elitism  Below market vs. above market compensation  Monetary vs. non-monetary rewards  Open vs. secret pay  Centralized vs. decentralized of pay decision Compensation tools  Job-based compensation plans  Skill-based compensation plans

Outline Designing a compensation system  Egalitarianism vs. elitism  Below market vs. above market compensation  Monetary vs. non-monetary rewards  Open vs. secret pay  Centralized vs. decentralized of pay decision Compensation tools  Job-based compensation plans  Skill-based compensation plans

Nine criteria for developing a compensation system Internal vs. external equity Fixed vs. variable pay Performance vs. membership Job vs. individual pay Egalitarianism vs. elitism Below-market vs. above-market compensation Monetary vs. non-monetary rewards Open vs. secret pay Centralized vs. decentralized of pay decisions

Nine criteria for developing a compensation system Internal vs. external equity Fixed vs. variable pay Performance vs. membership Job vs. individual pay Egalitarianism vs. elitism Below-market vs. above-market compensation Monetary vs. non-monetary rewards Open vs. secret pay Centralized vs. decentralized of pay decisions

Egalitarianism vs. Elitism Egalitarian pay system  A pay plan in which most employees are part of the same compensation system  Reduces barriers between people as the hierarchy is relatively fuzzy

Elitist pay system  A pay plan in which different compensations are established for employees or groups at different organizational levels  Different pay systems may create a sense of hierarchy  Encourage employees to move upward

Nine criteria for developing a compensation system Internal vs. external equity Fixed vs. variable pay Performance vs. membership Job vs. individual pay Egalitarianism vs. elitism Below-market vs. above-market compensation Monetary vs. non-monetary rewards Open vs. secret pay Centralized vs. decentralized of pay decisions

Below-market vs. above-market compensation Below market  Less expensive  Low job satisfaction and high turnover  Employees with high ability will not stay long, or even will not apply Above market  More expensive  Employees are relatively stable  Can attract competent candidates

Trade-off between attractiveness and costs A possible solution  Above-market compensation for important posts  Below-market compensation for less important posts  拉下補上 (make an average)

Nine criteria for developing a compensation system Internal vs. external equity Fixed vs. variable pay Performance vs. membership Job vs. individual pay Egalitarianism vs. elitism Below-market vs. above-market compensation Monetary vs. non-monetary rewards Open vs. secret pay Centralized vs. decentralized of pay decisions

Monetary vs. non-monetary rewards Monetary rewards  Money, cash, or payment that can be converted into cash in the future (stocks, retirement plan) Non-monetary rewards  Interesting work, challenging assignments, public recognition, degree of freedom

Extrinsic vs. intrinsic motivation Extrinsic motivation  Behaviors are motivated in order to get external rewards, e.g., cash  Low in job satisfaction Intrinsic motivation  Behaviors are motivated in order to get self-fulfillment  High in job satisfaction A story about a professor vs. a band

Nine criteria for developing a compensation system Internal vs. external equity Fixed vs. variable pay Performance vs. membership Job vs. individual pay Egalitarianism vs. elitism Below-market vs. above-market compensation Monetary vs. non-monetary rewards Open vs. secret pay Centralized vs. decentralized of pay decisions

Open vs. secret pay Open pay  Salary can be accessed by public (or most of the employees in the same firm)  Civil servants, professors, etc. Secret pay  Salary of each employee should not be disclosed  Those who break this rule may be fired

Advantages of open pay Increase employees’ satisfaction as they tend to overestimate others’ salaries Open pay is perceived to be more fair as it is perceived that no hidden decision occurs

Disadvantages of open pay It forces the managers or supervisors to expend more resources (time, writing report) to justify their decisions The cost of mistake in decision increases This system tends to minimize salary differences across employees  increases turnover rate and decreases job satisfaction for those who have best performances

Nine criteria for developing a compensation system Internal vs. external equity Fixed vs. variable pay Performance vs. membership Job vs. individual pay Egalitarianism vs. elitism Below-market vs. above-market compensation Monetary vs. non-monetary rewards Open vs. secret pay Centralized vs. decentralized of pay decisions

Centralized vs. decentralized Centralized system  Pay decisions are tightly controlled in a central location, normally the HR department Decentralized system  Pay decisions are delegated deep down into the firm, normally to managers of each unit

Centralized system is more appropriate when It is cost effective and efficient to hire compensation specialists, who are responsible for salary surveys, benefits administration, and recordkeeping. There are frequent legal challenges The company wants to have more control on expenses

Disadvantages of centralized The issue of external equity (that’s why a specialist is so important) It lacks flexibility, department cannot offer a more attractive package for an excellent candidate

Outline Designing a compensation system  Egalitarianism vs. elitism  Below market vs. above market compensation  Monetary vs. non-monetary rewards  Open vs. secret pay  Centralized vs. decentralized of pay decision Compensation tools  Job-based compensation plans  Skill-based compensation plans

Job-based compensation plans Achieving internal equity Achieving external equity Achieving individual equity

Achieving internal equity Job evaluation by job analysis  Job description and job specifications Rate worth of all jobs  Using a predetermined system  Compensable factors: work-related criteria that an organization considers most important in assessing the relative value of different jobs Knowledge, effort, responsibility, job conditions

Create a job hierarchy Classify jobs by grade levels

Achieving external equity Do market survey  薪酬調查趨勢報告 (salary trend index) Identifying benchmark or key jobs  Jobs that are similar or comparable in content across firms Establishing a pay policy  A firm’s decision to pay above, below, or the market rate for its jobs

Achieving individual equity Individual equity  The perceived fairness of individual pay decisions Simply assign each employee a pay rate within the range established for his or her job Assuming that this job’s salary has achieved both internal and external equity, then individual equity will also be achieved

Skill-based compensation plans It is more costly and more limited in use Three dimensions are paid  淵 Depth of skills (learning more about a specialized area)  博 horizontal or breadth of skills (learning more about more areas)  自身 vertical skills (self-management)

Depth of skills  Typist 100 wpm vs. 120 wpm  Basketball player Field goal percentage  45% vs. 20%  Programmer Knowledge in C++

Breadth of skills  Typist Typing + accounting + photocopy machine maintenance  Basketball player Free-throw + 3-point + assistant …  Programmer C++ + Java + Visual Basic + Pascal…