MODULE 3: ESTABLISHING STRATEGIC COMPENSATION & REWARDS

COMPENSATION

→ A set of rewards that organizations provide to individuals in return for their willingness to perform various jobs and tasks within the organization

→ Financial forms and tangible services and benefits

• Base salary

• Incentives

• Bonuses

• Benefits and other rewards

• Base salary

• Incentives

• Bonuses

• Benefits and other rewards

Financial forms and tangible services and benefits

WAGES

Generally, refer to hourly compensation paid to skilled and unskilled workers or those performing BLUE COLLAR JOBS with TIME AS BASIS in computation

BLUE COLLAR JOB

Typically classified as involving manual labor and compensation by an hourly wage.

SALARY

Income paid to an individual on the basis of performance

SALARY

Usually given to professional and managerial employees who are performing WHITE COLLAR JOBS

WHITE COLLAR worker

is a person who performs professional, managerial, or administrative work. _______ work is performed in an office, cubicle, or other administrative setting

PINK COLLAR JOBS

are careers that have historically absorbed the expanding female labor force. __________ are typically service-oriented roles that require interpersonal skills and involve caring for others, such as nursing, teaching, secretarial work, social work, and childcare.

PINK COLLAR JOBS

While these positions may have male workers, females have traditionally occupied these roles, and the tendency continues to date, although to a lesser extent.

EQUITY

→ The equity theory of motivation holds that workers assess their perceived inputs to their work and their outcomes to those of others.

→ In designing the overall compensation system, an organization needs to be concerned with the perceived equity or fairness of the system for employees. All employees should feel that they are being compensated relative to their coworkers and to individuals who hold comparable jobs in other organizations (Mello, 2015).

INTERNAL EQUITY

involves the perceived fairness of pay differentials among different jobs within an organization. Employees should feel that the pay differentials between jobs are fair, given the corresponding differences in job responsibilities.

JOB RANKING

JOB CLASSIFICATION

2 WAYS OF DETERMINING EQUITY IN COMPENSATION:

JOB RANKING

This method, which is somewhat random and nonscientific, is more concerned with the hierarchical position of jobs rather than with the differential amounts of compensation.

Senior management

makes judgments as to which jobs are most challenging and ensures that the more challenging jobs receive higher compensation.

Job ranking

is used infrequently and usually only in small, informal organizations

Entry Level

Individual Contributors

Operations Manager

Director of Operations

Vice President of Operations

Chief Operating Officer (COO)

JOB RANKING FROM BOTTOM TO TOP MANAGEMENT

JOB CLASSIFICATION

systems group jobs requiring similar effort, ability, training, and responsibility into predetermined grades or classes and compensate each job within a grade similarly.

Organizations must force each job into a specific category, and subjectivity is involved in classifying jobs, given the nonquantitative nature of the process

flexibility

Job classification is more scientific than job ranking, but it has been criticized for a lack of __________.

EXTERNAL EQUITY

involves employee perception of the fairness of their compensation relative to those outside the organization.

→ Employers need to be aware of salary structures of competitors and understand that this can impact motivation, commitment, and productivity.

→ Organizations should first collect wage and salary information to determine market wage rates. This information, which can be collected in-house or through sources external to the organization, is usually readily available relative to the industry and geographic area through professional associations, human resource (HR) consulting firms, or through the organization's own primary

It can be collected in-house or through sources external to the organization, is usually readily available relative to the industry and geographic area through professional associations, human resource (HR) consulting firms, or through the organization's own primary

How do organizations collect wage and salary information to determine market wage rates?

BASIC DETERMINANTS OF PAY

EXTERNAL FACTORS

• Market Factors

• Supply & demand

• Economic conditions

• Unemployment

• Existing pay level within community

• Government laws

1. Seniority-based systems

2. Merit pay systems

3. Incentive plans

4. Performance-based pay

5. Pay-for-performance

INDIVIDUAL EQUITY: BASIS FOR SALARY

Seniority-based systems

determine compensation according to the length of time on the job or the length of time with the employer. Although this rewards a stable and experienced workforce, it has no direct relationship to performance on the job.

Merit pay systems

compensate individuals for their proven performance on the job. Ideally, they provide an incentive for employees to work harder and accomplish more. _______ is generally permanently added to an employee's base pay

Incentive plans

allow the employee to receive a portion of his or her compensation in direct relation to the financial performance of the individual, unit, or entire organization.

Incentive pay

is provided for a given time period and is not added to the base salary.

Examples: Commission sales plans, profit-sharing plans, gain sharing plans (in which cost savings are partially distributed to those responsible for them), and stock ownership, distribution, or option plans.

Performance-based pay

that is variably tied to an employee's, work unit's, or organization's results is popular with both employers and employees.

Pay-for-performance

plans have been identified as a means of aligning the interests of employers and owners. Employers need to monitor such programs to ensure that employees do not focus excessively on incentive producing tasks and behaviors that result in individual financial rewards at the expense of other important tasks or goals.

Fixed Performance Pay

Variable Performance Pay

While these two terms pay for performance and performance-based pay are identical, HR professionals usually categorize this overall model into two distinct financial mechanisms:

Fixed Performance Pay

Mechanism: Permanent additions to base salary driven by past performance.

Examples: Merit increases, performance-based promotions.

Variable Performance Pay

Mechanism: Re-earnable, non-permanent bonuses or incentives given for specific outputs.

Examples: Sales commissions, quarterly target bonuses, profit-sharing, spot bonuses.

Statutory

Mandated by Law

Management Prerogative

company’s discretion:

1. Hiring

2. Time, place, manner of work

3. Transfer of employees

4. To promote/demote

5. To Discipline

6. To dismiss/terminate

BASIC DETERMINANTS OF PAY

ORGANIZATIONAL FACTORS

JOB FACTORS

INDIVIDUAL FACTORS

ORGANIZATIONAL FACTORS

• Industry type

• Company's capacity to pay

• Presence of unions

• Size of company

• Capital (requires a large amount of capital, equipments, etc.) to produce their goods and services or labor intensive (requires a large amount of labor in the company’s operation—eg. Construction)

• Value of the Job

JOB FACTORS

• Skill

• Responsibility (Amount of responsibility)

• Effort (Amount of work they exert)

• Working conditions

INDIVIDUAL FACTORS

Performance

Productivity

Experience

Seniority

Length of service

Potential Promotability

Price benchmark jobs (Salary surveys)

→ Majority of the positions found in the company are usually priced directly in the marketplace

→ Collection of data on benefits to provide basis on which to make decision regarding employee benefits

PAY FOR PERFORMANCE

MARKET COMPETITIVENESS

2 Dimensions of Compensation Philosophy

PAY FOR PERFORMANCE

→ “rewarding outstanding performance with outstanding pay”

→ Appreciation for an employee’s loyalty & commitment, length of service

MARKET COMPETITIVENESS

→ Market rates are expressed in terms of total compensation whenever possible

→ Achieved by pay and benefits surveys focusing on competitors for customers and associates

A. Guaranteed Cash

• Regular salary

• Fixed or guaranteed allowance

• Fixed or guaranteed bonuses ( 13th month pay)

B. Variable or Discretionary Compensation

• Examples: Commission, profit sharing, performance bonus, incentives)

C.

D. Total Cash (A+B)

E. Benefits F. Total remuneration (total amount of pay based on the amount of

Example of Total Compensation