© 2008 by Prentice Hall9-1 Human Resource Management Chapter 9 DIRECT FINANCIAL COMPENSATION

© 2008 by Prentice Hall9-2 HRM in Action: Are Top Executives Paid Too Much? Peter Drucker recommends 20-to-1 salary ratio between senior executives and rank- and-file white-collar workers Ratio of chief executives’ compensation to the pay of average production worker jumped to 431-to-1 90 percent of investors think that executives are overpaid

© 2008 by Prentice Hall9-3 Compensation: An Overview Compensation - Total of all rewards provided employees in return for services Direct financial compensation - Pay received in form of wages, salaries, bonuses, and commissions Indirect financial compensation (benefits) - All financial rewards not included in direct compensation Nonfinancial compensation - Satisfaction person receives from job itself or from psychological and/or physical environment in which person works

© 2008 by Prentice Hall9-4 Components of Total Compensation Program External Environment Internal Environment Compensation 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 Disability Protection Employee Stock Option Plans Supplemental Unemployment Benefits (SUB) Employee Services Premium Pay Customized Benefit Plans The Job Skill Variety Task Identify Task Significance Autonomy Feedback Job Environment Sound Policies Capable Managers Competent Employees Congenial Coworkers Suitable Status Symbols Working Conditions Workplace Flexibility Flextime Compressed Workweek Job Sharing Customized Benefit Plans Telecommuting Part-time Work More Work, Fewer Hours FinancialNonfinancial

© 2008 by Prentice Hall9-5 Equity Theory Motivation theory that people assess their performance and attitudes by comparing both their contribution to work and benefits they derive from it to contributions and benefits of comparison others whom they select—and who in reality may or may not be like them

© 2008 by Prentice Hall9-6 Equity in Financial Compensation Financial equity - Perception of fair pay treatment for employees External equity - Employees are paid comparably to workers who perform similar jobs in other firms Internal equity - Employees are paid according to relative value of jobs within same organization

© 2008 by Prentice Hall9-7 Equity in Financial Compensation (Cont.) 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

© 2008 by Prentice Hall9-8 Primary Determinants of Direct Financial Compensation Organization Compensation Policies Organizational Level Ability to Pay Labor Market Compensation Surveys Expediency Cost of Living Labor Unions Economy Legislation Employee Job Performance Skills Competencies Seniority Experience Organization Membership Potential Political Influence Luck Job Pricing Direct Financial Compensation Job Job Analysis Job Descriptions Job Evaluation

© 2008 by Prentice Hall9-9 Organization as a Determinant of Direct Financial Compensation Compensation Policies Organizational Level Ability to Pay

© 2008 by Prentice Hall9-10 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 do not require highly capable employees

© 2008 by Prentice Hall9-11 Organizational Level Upper management often makes decisions to ensure consistency Extreme pressure to retain top performers may override desire to maintain consistency in pay structure

© 2008 by Prentice Hall9-12 Ability to Pay Organization’s assessment of ability to pay is important factor in determining pay levels

© 2008 by Prentice Hall9-13 Labor Market as Determinant of Direct Financial Compensation Potential employees located within geographic area from which employees are recruited Pay for same jobs in different labor markets may vary considerably

© 2008 by Prentice Hall9-14 Compensation Surveys What are other firms paying? Geographic area of survey Specific firms to contact Jobs to include

© 2008 by Prentice Hall9-15 Expediency Managers in highly technical and specialized areas occasionally need to utilize nontraditional means to determine what constitutes competitive compensation for scarce talent and niche positions Need real-time information