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Compensation
Compensation is the reward that individuals receive in exchange
for performing tasks
 A major cost of doing business
 The chief reason people seek employment
 U.S.
employers pay an average of $23.65
per hour worked
 $17.02 = straight-time wages and salaries
 $6.63 = benefits
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Compensation
Direct
Indirect
Non-financial
Wages
Salary
Bonuses
Commissions
Insurance
Vacation
Childcare
Praise
Self-esteem
Recognition
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Objective of Compensation
Adequate
Acceptable to
employees
Equitable
Effective
compensation
Provides
incentive
Balanced
Cost effective
Secure
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External Influences on Compensation
Labor Market
The Economy
External Influences
Unions
Government
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Government Influences
The government requires employers to deduct funds
from employees’ wages for…
Federal income
taxes
Social security
taxes
State and local
income taxes
Other ways government influences compensation
If the government is the employer, it can legislate pay
levels by setting statutory rates
The government may create jobs for certain categories of workers,
thus reducing the supply of workers and affecting pay rates
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Union Influences
Unions exert influence on compensation programs
Unionized workers work longer hours and earn
more than non-unionized workers
Unions are pacesetters in demands for pay,
benefits, and improved working conditions
There is supportive interaction between
unions and the government
The Davis-Bacon Act requires employers with
government contracts to pay prevailing wages
The Wagner Act makes it illegal to change wage
rates during a union organizing campaign
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The Labor Market and Compensation
Styles of managing and rewarding are
changing in response to diversity
Diversity is more than demographics;
it means differing value, lifestyles,
even body types
Changing demographics require employers
to offer more, and more varied,
benefits to motivate, satisfy, retain employees
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Legal Considerations
 Discrimination:
 Must
apply same decision rules to all employees eligible
for the reward or incentive.
 Employees protected by Title VII and Equal Pay Act.
 Taxes and accounting rules:
 For example, those governing capital gains, deferred
compensation and stock plans.
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Pay and Pay Decisions
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Pay is a powerful tool for meeting the organization’s goals.
Pay has a large impact on employee attitudes and
behaviors.
Pay influences the kinds of people who are attracted to (or
remain with) the organization.
Employees attach great importance to pay decisions when
they evaluate their relationship with their employer.
Pay Decisions
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Factors Influencing Pay Decisions
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Legal Requirement for Pay
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Legal Requirement for Pay

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Employers must not base differences in pay on an
employee’s age, sex, race, or other protected status.
Any differences in pay must be tied to job
responsibilities or performance.
The goal is equal pay for equal work.

Minimum wage is the lowest amount that employers
may pay under federal or state law, stated as an $/hour.

The overtime rate is 1½ times the employee’s usual
hourly rate; exempt employees (not covered by FSLA)
do not get overtime…they are not hourly

Prevailing wage rules require federal contractors to pay
their employees at rates at least equal to the typical
wages in the area.
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Child Labor Laws
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Children aged 16 and 17 may not be employed in
hazardous occupations defined by the U.S. Department
of Labor.
Children aged 14 and 15 may work only outside school
hours, in jobs defined as nonhazardous, and for limited
time periods.
A child under age 14 may not be employed in any work
associated with interstate commerce.
Exemptions include baby-sitting, acting, and delivering
newspapers.
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Economic Influences on Pay
Product Markets
 The organization’s
product market includes
organizations that offer
competing goods and
services.
 Organizations compete
on quality, service, and
price.
 The cost of labor is a
significant part of an
organization’s costs.
Labor Markets
 Organizations must
compete to obtain human
resources in labor
markets.
 Competing for labor
establishes the minimum
an organization must pay
to hire an employee for a
particular job.
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Pay Level: Deciding What to Pay
Pay at the rate set by the market
Pay at a rate above the market
Pay at a rate below the market
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Comparing Market Pay
Benchmarking – a procedure where an organization
compares its own practices against those of others
 Pay surveys
 Trade and industry groups
 Professional groups
Employees compare their pay and contributions by:
1. What they think employees in other organizations
earn for doing the same job.
2. What they think other employees holding different
jobs within the organization earn for doing work at
the same or different levels.
3. What they think other employees in the organization
earn for doing the same job as theirs.
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Pay Equity
If employees conclude that they are under-rewarded, they are
likely to make up the difference in one of three ways:
1. They might put forth less effort (reducing their inputs).
2. They might find a way to increase their outcomes
(e.g., stealing).
3. They might withdraw (by leaving the organization or
refusing to cooperate).
Employees’ beliefs about fairness also influence their
willingness to accept transfers or promotions.
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The Pay-Level Decision
Pay-level Strategies
High
Low
Comparable
Attracts and
holds the best
employees
Minimum level
needed to hire
enough
workers
The going rate
plus or minus
5 percent
Pacesetter
All the company
can pay
Most frequently
used
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Pay Structure Steps
Job
Evaluation
Job
Structure
Define
Key Jobs
Pay Rates
Pay Policy
Line
Pay
Survey
Pay
Grades
Pay
Ranges
Pay
Structure
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Pay and Employees’ Satisfaction
Relative deprivation theory suggests that pay
dissatisfaction is a function of six judgments…
Discrepancy between what workers want and receive
Discrepancy between comparison outcome and what they get
Past expectations of receiving more rewards
Low expectations for the future
A feeling of deserving or being entitled to more
Not feeling personally responsible for poor results
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Pay and Employees’ Productivity
Ability
Safety
Performance
requires
motivation
plus…
Health
Good
leadership
& managers
Adequate
equipment
Good working
conditions
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Pay and Employees’ Productivity
Some argue that
 Tying pay to performance destroys the intrinsic
reward of doing a job well
 The importance of money varies from person
to person
If an organization has an incentive pay system but pays
for seniority, the motivation of pay is lost
 Be sure that compensation systems are directly
connected to expected behaviors