Strategic Human resource
Management
compensation
Compensation
• Key strategic area
• Impact an employer’s ability to
– Attract applicants
– Retain employees
In meeting organization objectives
– It’s a key economic issue which attracts, motivates
and retains employees; at the same time
compensation should allow the organization to
maintain a cost structure that enables it to
compete effectively and efficiently in it s markets
Compensation
Compensation system
Direct
Base pay
Indirect
Incentive pay
•Bonus
•Commission
•Profit sharing
•Stock options
Legally required
•Social security
•Unemployment
compensation
insurance
•Worker’s
compensation
•Stock options
Optimal
•Paid time off
(holidays,
vacations, sick
days)
•Health insurance
•Retirement
•Disability
insurance
•Life insurance
•Dependent care
•Flexible working
hours
Compensation
• Equity: equity and work related outcomes
Internal Equity
External Equity
Individual Equity
Motivation
Perceptions of
Fairness
Commitment
Performance
Compensation
• Equity theory:
• Perceived equity or fairness of the system for
employees
• All employees should feel that they are
compensated fairly relative to others
• Equity theory holds that;
– Workers assess their perceived inputs to their
work and their outcomes to those of others
If they are being treated inequitably relative to
others; it may have several negative impact
Compensation
• Internet can provide a wealth of information
to employees about comparable salary data.
• A recent Google search turned up more than
28,000 hits for the search “salary comparison”
sites
• Salary.com
• Careerjournal.com
Most visited sites
Compensation
• Types of equity:
– Internal equity
– External equity
– Individual equity
These perceptions of equity directly impact
– Motivation
– Commitment
– Performance
Compensation
• Internal equity:
– Perceived fairness of pay differentials among different
jobs within an organization
– It should be fair according to the difference in job
responsibilities
– In attempting to establish internal equity, employers
can evaluate jobs by using four techniques:
– Job ranking
– Job classification
– Point systems
– Factor comparison
• Job ranking:
Compensation
– Relatively simple
– Most challenging job receive higher compensation
– Random and non scientific; concerned with the
hierarchical position of jobs
– It is used in infrequent and usually only in small,
informal organization
• Job classification;
– Group jobs requirement similar effort, ability, training,
and responsibility into predetermined grades or
classes and compensates each job within a grade
similarly.
– Organization must force each job into specific
category,
Compensation
• Point system:
– Easy to understand
– Difficult to design
– Easy to implement once they are operational
– Create the list of compensable factors
• Things that the organization is willing to pay its
employees for such as education, experience, specific
skills, working conditions, and responsibility.
Compensation
• Hay plan;
– A special type of point system is often used for
administrative and managerial positions
– It utilizes three factors called universal factors which
are common to all managerial and administrative jobs:
– Know-how
• Technical knowledge required to do a job
– Problem solving
• Assess the amount of independent thinking and decision
making required in the job
– Accountability
• Direct responsibility for people, resources and results.
compensation
• External Equity:
– External equity involves employee perception of the
fairness of their compensation relative to those
outside the organization
– Employees look at the salary structure of other
organizations
– Determine market wage rate
– When making assessment of external equity, it is
important to consider not only salaries but also other
forms of compensation, such as bonus and incentive
plans
– Competitors level???
compensation
• External Equity:
– Organization has determine has its own pay
strategy relative to market
– A lead policy
– A lag policy
– A Market policy
Compensation
• Individual Equity:
– Consider employee receptions of pay differentials
among individuals who hold identical jobs in the
same organization.
– Basic pay on seniority
– Seniority based systems
– Merit pay system
– Performance based pay system
– Skilled based pay system
– Team based pay system
Compensation
Legal issues in compensation:
– Discrimination (Men n women)
– Different jobs
– Same jobs
– Equal pay act
– Worth of the work (loading or office work)
Compensation
• Executive compensation:
– Important and controversial area of compensation
– No standard for executive compensation
– Different industries
– Recent corporate accounting scandals in which
executives reaped millions of dollars in
compensation while organizations were going
bankrupt has drawn even more attention to
executive compensation
– Stock option
Compensation
• Conclusion;
– Number of strategic issues:
•
•
•
•
Compensation relative to the market
Balance between fixed and variable compensation
Utilization of individual versus team based pay
Appropriate mix of financial and non financial
compensation
• Over all cost effective program that results in high
performance