I
Dr. Kin Fai Ellick WONG

 Have you ever asked the following questions?
 Why the salary for some jobs are higher than the salary for other jobs?
 Why are there bonuses for some jobs but not for other jobs?
 If I were a manager, how do I know the salary for a newly created job?
 You may find the answers in the following two classes

 Some basic concepts of compensation
 Designing a compensation system
 Internal vs. external equity
 Fixed vs. variable pay
 Performance vs. membership
 Job vs. individual pay
 To be continued in next lesson

 Some basic concepts of compensation
 Designing a compensation system
 Internal vs. external equity
 Fixed vs. variable pay
 Performance vs. membership
 Job vs. individual pay
 To be continued in next lesson

 Total compensation
 The package of quantified rewards an employee receives for his/her labors
 Base compensation
 Pay incentives
 Indirect compensation / benefits

 The fixed pay an employee receives on a regular basis
 Salary or hourly wages
 The most standard part about pay
 Will be extensively discussed in this and next lessons

 A program designed to reward employees for good performance
 Bonuses, profit sharing
 Will be further discussed in the lesson “Pay for Performance”

 Benefits
 Health insurance, housing scheme, annual leave
 Perquisites, perks
 Car, parking, club member, etc.

 Compensation constitutes the single most important cost in the firm
 60% or even higher of the total cost
 The pay strategy should be consistent with overall business strategy
 Hi-tech industry: Research &
Development
 Thus, the following questions should be asked frequently, and answered accurately:

 What types of activities should be rewarded with higher salaries?
 Hi-tech firms: R & D activities
 Which employee groups should receive special treatments when limited pay resources are allocated?
 Hi-tech firms: researchers in R & D

 Some basic concepts of compensation
 Designing a compensation system
 Internal vs. external equity
 Fixed vs. variable pay
 Performance vs. membership
 Job vs. individual pay
 To be continued in next lesson

Nine criteria for developing a compensation system
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Internal vs. external equity
Fixed vs. variable pay
Performance vs. membership
Job vs. individual pay
Egalitarianism vs. elitism
Below-market vs. above-market compensation
Monetary vs. non-monetary rewards
Open vs. secret pay
Centralized vs. decentralized of pay decisions

Nine criteria for developing a compensation system









Internal vs. external equity
Fixed vs. variable pay
Performance vs. membership
Job vs. individual pay
Egalitarianism vs. elitism
Below-market vs. above-market compensation
Monetary vs. non-monetary rewards
Open vs. secret pay
Centralized vs. decentralized of pay decisions

 Fairness or justice in pay is an important issue
 Perception of unfairness could minimize the impact of a compensation system (e.g., it could decrease the morale of workers and de-motivate them)
 Fair pay is one that employees generally view as equitable

 Internal equity
 The perceived fairness of the pay structure within a firm
 External equity
 The perceived fairness in pay relative to what other employers are paying for the same type of labor

 Internal Equity
 Employees compare what they bring to the firm to what they receive in return (i.e., outcome/input ratio)
 Employees compare this ratio with that of other employees within the firm
 Internal equity is met when one’s outcome/input ratio is equivalent to that of others

 External Equity
 The salary is perceived as fair when it fits with the demand-supply labor market
 The more the demand, or the lower the supply, then the higher the salary
 External equity is met when the salary is set at a point where the supply of labor equals the demand for labor

Nine criteria for developing a compensation system









Internal vs. external equity
Fixed vs. variable pay
Performance vs. membership
Job vs. individual pay
Egalitarianism vs. elitism
Below-market vs. above-market compensation
Monetary vs. non-monetary rewards
Open vs. secret pay
Centralized vs. decentralized of pay decisions

 Some organizations choose to pay a high proportion of total compensation in the form of base pay (i.e., relatively fixed pay):
HK government, education units (HKUST)
 Some choose to pay a high proportion of total compensation in the form of variable pay: investment bank

 In general, the percent of salary in the form of bonus increases as the base salary increases
 Those in higher level positions earn more, but their compensations are more subject to risk
 The more the proportion of variable pay, the more risk sharing there is between the employee and the firm

Nine criteria for developing a compensation system









Internal vs. external equity
Fixed vs. variable pay
Performance vs. membership
Job vs. individual pay
Egalitarianism vs. elitism
Below-market vs. above-market compensation
Monetary vs. non-monetary rewards
Open vs. secret pay
Centralized vs. decentralized of pay decisions

 Performance-contingent compensation
 Outcome oriented, Piece-rate plans
 Pay based on units produced: 膠降落傘
 Commission
 Membership-contingent compensation
 All received the same or similar wage in a given job (with minimum satisfactory performance)

Nine criteria for developing a compensation system









Internal vs. external equity
Fixed vs. variable pay
Performance vs. membership
Job vs. individual pay
Egalitarianism vs. elitism
Below-market vs. above-market compensation
Monetary vs. non-monetary rewards
Open vs. secret pay
Centralized vs. decentralized of pay decisions

 Job pay
 Regardless of ability and performance, the pay is based on jobs. Highly qualified individuals will not be paid more on the same job
 Individual pay
 Knowledge-based, or skill-based pay system
 Paid on the basis of the jobs they can do or talents they have that can be successfully applied to a variety of tasks and situations

 Research findings have the following suggestions
 Job-based tends to work best in situations where
 Technology is stable, jobs do not change often
 Employees do not need to cover for one another frequently
 Turnover is relatively low
 Employees are expected to move up through the ranks over time

 Individual-based compensation programs are more suitable when:
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
The firm has a relatively educated workforce with both the ability and the willingness to learn different jobs
The company’s technology and organizational structure change frequently
 Employee participation and teamwork are encouraged throughout the organization
 Opportunities for upward mobility are limited

Nine criteria for developing a compensation system









Internal vs. external equity
Fixed vs. variable pay
Performance vs. membership
Job vs. individual pay
Egalitarianism vs. elitism
Below-market vs. above-market compensation
Monetary vs. non-monetary rewards
Open vs. secret pay
Centralized vs. decentralized of pay decisions