Industrial Psychology: Chapter 11

What are the main objectives of a compensation system?

1. Attract good employees – use market surveys.

2. Retain employees – ensure fairness and equity.

3. Motivate performance – reward and recognize effort.

4. Comply with legal requirements – follow labour laws and documentation rules.

How do organisations attract talented employees?

• Offer competitive wages based on market rates.

• Conduct wage/salary surveys to benchmark pay.

• Ensure job descriptions are accurate for comparison.

• Consider non-monetary factors like benefits and work environment.

How can compensation help retain employees?

• Maintain internal and external pay equity.

• Avoid perceived unfairness and inequitable pay.

• Use job evaluation to determine fair pay levels.

• Communicate pay policies clearly and involve employees in the process.

How does compensation motivate employees?

• Link rewards to performance through accurate appraisal.

• Provide fair and transparent feedback.

• Use rewards like bonuses, promotions, or recognition.

• Ensure employees see a clear connection between effort and reward.

What are key legal aspects of compensation systems?

• Must comply with laws like the Basic Conditions of Employment Act.

• Ensure fairness in pay levels, working hours, and benefits.

• Maintain proper HR documentation.

What are the 10 C’s for assessing compensation effectiveness?

1. Competitive – attracts/retains talent.

2. Convergent – aligns with company values.

3. Contributor – rewards performance.

4. Customised – adaptable to individual needs.

5. Committed – motivates engagement.

6. Communicated – clearly understood.

7. Cost-effective – balances cost and value.

8. Changeable – flexible to change.

9. Controlled – well managed.

10. Compliant – fair and legally sound.

What is job evaluation?

A process of systematically analysing jobs to determine their relative worth within an organisation, ensuring fair and equitable pay

What are the four types of equity in compensation?

1. Internal equity – fairness within the organisation.

2. External equity – fairness compared to other firms.

3. Comparable worth – similar jobs get similar pay.

4. Wage rate compression – small pay gaps between experienced and new employees.

What are the four main job evaluation methods?

1. Job ranking – simplest, orders jobs by overall worth.

2. Factor comparison – compares job factors (e.g., skill, responsibility).

3. Classification – slots jobs into grades based on descriptions.

4. Point method – assigns numerical points for compensable factors.

What are key pros and cons of job evaluation methods?

• Job ranking: Quick, easy, but subjective.

• Classification: Familiar and simple but broad and imprecise.

• Factor comparison: Quantitative and specific but hard to explain.

• Point method: Accurate but time-consuming and complex.

What are examples of modern job evaluation systems used in SA?

• Patterson Method – based on decision-making.

• Hay Method – uses accountability and knowledge.

• TASK System – measures skills and knowledge.

• JAS (Job Appreciation System) – evaluates strategic value of jobs.

What is work valuation?

A system linking job value to organisational goals, assessing how each job contributes to overall performance and strategy.

What is the role of a job evaluation committee?

A team with diverse expertise that ensures fair, accurate evaluation of all jobs. Must be trained, flexible, and familiar with job descriptions.

When should an organisation use outside consultants for job evaluation?

When internal expertise is limited or when an objective external perspective is needed. Consultants like Deloitte or PwC often provide faster, expert evaluations.

What are pay systems and their main types?

Pay systems determine how employees are compensated. Two main types:

• Time-based systems – Pay for time worked (hourly, weekly, monthly).

• Person-based systems – Pay for employee’s skills, knowledge, or performance.

What are key features of time-based systems?

• Wages are based on hours, weeks, or months worked.

• Easy to administer and predictable.

• May discourage productivity since pay isn’t linked to output.

What are pay grades and steps?

• Pay grades group similar jobs with comparable value.

• Steps represent incremental pay raises within a grade (e.g., 5% per step).

• Fewer steps encourage quicker promotion; more steps maintain motivation longer.

What are red circle and green circle rates?

• Red circle: Employee paid above maximum rate for grade.

• Green circle: Employee paid below minimum rate for grade.

Why might pay grades overlap?

To allow flexibility in promotion or transfer without large salary jumps. Encourages smooth progression between grades.

What are two main types of pay increases?

• Across-the-board: Equal percentage for all employees.

• Merit increases: Based on individual performance appraisals.

What are the assumptions behind merit pay?

1. Performance can be accurately measured.

2. Pay motivates better performance.

3. Merit differences justify pay differences.
   Criticism: Links between pay and performance often weak or inconsistent.

What are person-based pay systems?

Employees are paid based on what they can do (skills or competencies) rather than just the job they hold.

What is broadbanding?

Combines many narrow pay grades into fewer, wider bands to improve flexibility and encourage employee mobility.

What is skill-based or competency-based pay?

Pay increases with the number or level of skills employees gain.
Types:

1. Vertical skill plans – advanced skills in same job.

2. Horizontal skill plans – cross-training in different tasks.

3. Depth skill plans – deeper expertise in one area.

4. Basic skills plans – literacy or computing.

5. Combination plans – mix of all above.

What are gainsharing and profit-sharing plans, and how do they differ?

• Gainsharing:

  • Employees and organisation share financial gains from improved productivity or efficiency.

  • Based on measurable performance improvements.

  • Encourages teamwork and shared goals.

  • Examples: Scanlon, Rucker, and Improshare plans.

• Profit-Sharing:

  • Employees receive a share of company profits (usually annual or quarterly).

  • Encourages employee commitment to organisational success.

  • Types:

    1. Distribution plans – Cash bonuses paid regularly.

    2. Deferred plans – Profits placed in retirement or savings funds.

    3. Combination plans – Mix of cash and deferred bonuses.

What are the main guidelines for designing effective incentive plans?

• Bold incentives – Offer meaningful financial rewards to all employees.

• Emphasis on team performance – Focus on group output and teamwork.

• Quick feedback – Provide regular, separate bonuses for good performance.

• Above-average rewards – Incentives must exceed normal pay levels.

• Simple formulas – Make calculations clear and easy to understand.

What are common problems with incentive or performance-based plans?

• Limited use in jobs where individual output can’t be measured.

• Can encourage rivalry, short-term thinking, or over-competition.

• Poorly designed plans may reduce motivation or teamwork.

• The “peanut-butter effect” (same raise for all) can lower morale.

• May conflict with company culture or values.

What is Economic Value Added (EVA) and how is it used?

• Definition: A measure of company performance based on residual wealth after deducting cost of capital.

• Formula:
  EVA = Net Operating Profit After Tax (NOPAT) – (Capital × Cost of Capital).

• Purpose: Ties rewards directly to shareholder value; used in performance-based incentive systems.

• Example: Managers may earn a % of EVA each year.

What are the main components of executive compensation?

1. Base salary – Fixed annual pay.

2. Annual bonuses – Cash or stock, tied to company performance.

3. Long-term incentives – Encourage commitment to long-term goals.

4. Benefits & perks (perquisites) – Extra privileges like cars, memberships, counselling.

What are golden parachutes?

Contracts guaranteeing executives compensation if employment ends due to mergers, acquisitions, or takeovers.

• Protects executives during company changes.

• Example: Continued salary or lump-sum payout after termination.

What are stock/share options and their purpose?

An incentive plan giving executives the right to buy company shares at a fixed price in the future.

• Rewards improved company performance.

• Encourages executives to focus on shareholder value.

• Risk: Overemphasis on short-term stock prices or excessive compensation.

What are the 5 main types of employee benefits?

1. Legally required benefits

2. Retirement benefits

3. Paid time off

4. Insurance

5. Employee services/creative benefits

What benefits are legally required in South Africa?

• Unemployment Insurance (UIF) – covers job loss or maternity leave.

• Compensation for Occupational Injuries and Diseases Act – covers work-related injury, illness, or death.

What are common voluntary employee benefits?

• Retirement plans: Pension, provident fund, annuities.

• Health insurance: Medical aid, hospital plans.

• Life/disability insurance: Life cover, accident/disability protection.

• Paid time off: Public holidays, vacations, sick/maternity/family leave.

• Other benefits: Company cars, loans, housing aid, tuition, relocation, club memberships.

What is the difference between contributory and non-contributory pension plans?

• Contributory: Employee and employer share costs.

• Non-contributory: Employer pays all costs.

What types of paid leave are typically offered?

Public holidays, sick leave, vacation, maternity/paternity, study leave, family responsibility, moving leave, voting leave, and tea/lunch breaks.

What insurance options do employers usually offer?

Group life, accident, health, disability, and hospitalisation insurance—often under a shared group plan with lower costs.

What are employee service benefits and their purpose?

Non-traditional perks (e.g., wellness programs, childcare, tuition aid) aimed at boosting loyalty, reducing turnover, and attracting talent.

Advantages of flexible plans

•Meet diverse needs of employees

•Control benefit costs

•Improve benefits offered

•Attract and retain employees

•Avoid unions

Avoid duplicate coverage

Employee Compensation Audits

The evaluation of employee salary, benefits and incentives to determine their effectiveness, competitiveness and legal compliance.