COMPENSATION:
Introduction
© Nancy Brown Johnson
1/05
Why is compensation important?
 Society
 Firm
 Individual
What are the elements of
compensation?
 Base pay
 Incentives
 Fringe benefits
What are different forms of payment?
 Cash
 Benefits
– Payment for time not worked
– Non-pecuniary benefits (gym
memberships, child care)
 Intrinsic
Exchange Theory
 Pay is an exchange for efforts
 Implicit Social Contract
– beliefs about mutual obligations
 Implicit Psychological Contract
 Temporal Quality
– amount of time in job & career
Equity Theory
Pay, benefits,
opportunities, etc.
OUTCOME
INPUTS
the same
more or less
<=>
?
OUTCOME
INPUTS
effort, ability,
experience etc.
A person evaluates fairness by comparing their ratio with others.
IRWIN
©a Times Mirror Higher Education Group, Inc., company, 1997
Equity Theory
Workers compare their compensation with
others
If unequal workers attempt to restore
equity
Workers Restore Equity by:
 Reducing input
 Attempting to get raise
 Quitting
 Psychological Adjustment
Compensation Model
Equity
Individual
(Pay for Perf.)
Internal
(Pay Structure)
External
(Pay Level)
Procedural
Justice
(Pay
Administration)
Compensation
Tool
Seniority,
Performance
Job Evaluation
Objective
Market Surveys
Attraction
Communication,
Appeals
Organization
Citizenship,
Commitment
Motivation
Retention
Internal Equity
 Comparison of Jobs
 Jobs worth to the Employer
– Similarities and differences in
work content
– Relative contribution to
organization objectives
 Accomplished through job
evaluation
External Equity
 Value of the job to
the labor market
 Assessed through
wage surveys
Individual Equity
 Relative pay between
individuals doing the
same job
 Influences motivation
Organizational Justice
Perceived fairness of the pay
system
–Outcomes
–Process Issues
–Interactions
Influences Commitment,
Organization Citizenship
Strategic Perspectives
 The strategy balances 4 types of equity
 Best Practice
 Contingency:
– organizations will have pay systems that fit
with their business strategy
– organizations that have “fit” will outperform
those without “fit”
 Strategic Decisions include:
– pay level, pay structure, individual rewards,
team rewards, pay administration
Best Practice v. Strategy Debate
 Best practice - there are a set of
compensation practices that are good
for all firms.
 Strategy - the set of compensation
practices that are good for firms will
vary based upon the firm’s goals.
Best Practice Examples*
 High wages
 Guarantee of Employment Security
 Use incentives; share gains
 Employee Ownership
 Participation & Empowerment
 Teams
 Smaller pay differences
*Source: Pfeffer, Competitive
Advantage Through People, 1994
Summary
 There are four key elements to equity
 The strategic contingency view is that some
firms may weight those elements differently
depending on firm objectives
 The best practice view is that there are good
practices that all firms should engage in no
matter what their strategy.
Summary (continued)
 Equity forms the basis for compensation
management
 Strategy guides the organization in the
balancing of equity components
 The test is whether the compensation
system reinforces sustained competitive
advantage