Chapter One
Compensation: A Component of
Human Resource Systems
What Influences Pay?
Chris Smith and Pat
Jones are both
computer programmers.
 Chris earns $45,000,
while Pat earns
$35,000.
 What could cause this
difference?

Equity Policies
Internal
Consistency
External
Competitiveness
Employee
Contributions
Administration
Compensation Department’s
Main Goals

Internal equity --Internal consistency
» Relative value of each job among all jobs within a company
» Value of the job, regardless of the person in the job
» Jobs that require greater qualifications, more responsibilities, and
more-complex job duties should receive higher pay than other jobs.
» Done through job analysis and job evaluation

External equity—Market-competitiveness
» Jobs within a company are paid similarly to same jobs outside
» Companies’ pay policies fit with business objectives
» Done through strategic analysis and salary surveys

Individual equity--Recognizing individual
contributions
» Pay people differently within jobs according to job performance.
» Done through pay grades and ranges
Compensation Techniques

INTERNAL:
Job Analysis, Job Descriptions, Job Evaluation,
Internal Work Structure

EXTERNAL:
Market definitions, Market surveys,
Policy lines, Pay structures

INDIVIDUAL:
Seniority based, Performance based,
Incentive guidelines, Incentive programs

ADMINISTRATION:
 Planning,Budgeting,Communicating, Evaluating
What is Compensation?

Intrinsic compensation
» Reflects employees’ psychological mind sets that
result from performing their jobs.
» Through effective job design

Extrinsic compensation
» Rewards given you by others
» Includes both monetary and non-monetary (e.g.,
benefits) rewards.
» Through compensation systems
Exhibit 1-1
The Influence of Core Job Characteristics on Intrinsic
Compensation and Subsequent Benefits to Employers
Core Job
Characteristics
Skill variety
Task identity
Task significance
Autonomy
Feedback
Critical Psychological
State
Experienced
meaningfulness of
the work
Experienced
responsibility for
work outcomes
Gained knowledge
of results from
work activities
Benefit to
Employers
Lower turnover
Lower
absenteeism
Enhanced job
performance
Greater job
satisfaction
Exhibit 1-3
Elements of Core Compensation


Base Pay (recurring)
» Hourly pay/wage
» Annual salary
How Base Pay is Adjusted Over Time
» Cost-of-living adjustments (COLAs)
» Seniority pay
» Merit pay
» Incentive pay or variable pay
» Pay-for-knowledge and skill-based pay
Exhibit 1-4
Elements of Fringe Compensation (1 of 3)

Social Security Act of 1935
»
»
»
»
»

Unemployment insurance
Retirement insurance
Benefits for dependents
Disability benefits
Medicare
State compulsory disability laws
» Workers’ Compensation

Family and Medical Leave Act of 1993 (12
weeks of annual unpaid leave)
Exhibit 1-4
Elements of Fringe Compensation (2 of 3)

Discretionary Benefits
» Protection Programs
– Income protection programs
– Health protection programs
» Pay for time-not-worked
–
–
–
–
–
–
–
–
Holidays
Vacation
Sick leave
Personal leave
Jury duty
Funeral leave
Military leave
Cleanup, preparation, travel time
Exhibit 1-4
Elements of Fringe Compensation (3 of 3)

Discretionary Benefits (cont.)
» Services
–
–
–
–
–
–
Employee assistance programs (EAPs)
Family assistance programs
Tuition reimbursement
Transportation services
Outplacement assistance
Wellness programs
Strategic vs. Tactical Decisions


Strategic decisions guide activities in the market
Tactical decisions support the fulfillment of strategic decision
Strategic
Decisions
Competitive
strategy
HR strategy
Compensation
strategy
General Tactical Specific Tactical
HR Decisions
HR Decisions
(Compensation)
Recruitment and Seniority pay
Selection
Merit pay
Performance
Incentive pay
appraisal
Benefit options
Compensation
Etc.
Training
Competitive Strategy


Planned use of resources to promote & sustain competitive
advantage
Lowest-cost strategy
» Efficient-scale, cost minimization
» Southwest Airlines, Wal-Mart
» Employee roles: repetitive, predictable behaviors, short-term focus,
individual activity, concern for quantity, primary concern for results.

Differentiation Strategy
»
»
»
»
Unique products: design image, technology, etc
Build brand loyalty, price premium, invest in R&D
Iams company, Saks Fifth Avenue
Employee roles: creative behavior, long-term focus, cooperative and
interdependent behavior, risk taking, openness to novel work.
Compensation and…

Recruitment, Selection

» $ to get top candidates,
signing bonus, benefits



Career Development
» Promotions, lateral
moves
Employee Termination
» Severance pay, pension,
early retirement
Training
» Pay for knowledge

» Collective bargaining
agreements, pay, COLAs,
incentives
Performance Appraisal
» Basis for merit pay and
incentives
Labor-Management
Relations

Legislation
» Income and continuity,
safety, work hours, pay
discrimination, disabilities
and family needs
Stakeholders of the Compensation
System
Employees
 Line managers
 Executives
 Unions
 U.S. government
