Chapter Chapter 11

The Pay Model

Mr. Lorenzo E. Mr. Lorenzo E. Garin Jr.Garin Jr.InstructorInstructor

Chapter TopicsChapter Topics

Compensation: DefinitionForms of PayA Pay ModelBook Plan

Key Questions and IssuesKey Questions and Issues

How differing perspectives affect our views of compensation

Definition of compensation◦The meaning of compensation most appropriate from an employee's view: return, reward, or entitlement

Examining “network of returns” a college offers an instructor

Key Questions and Issues Key Questions and Issues (cont.)(cont.)Four policy issues in the pay model◦Objectives of the pay model

Forms of pay received from work

Contrasting Perspectives Contrasting Perspectives of Compensationof Compensation

Society’s Views

Stockholders’ Views

Employees’ Views

Managers’ Views

Compensation: Compensation: DefinitionDefinitionSociety

◦Pay as a measure of justice◦Benefits as a reflection of justice in society

◦Job losses (or gains) attributed to differences in compensation

◦Belief that pay increases lead to price increases

Compensation: Definition Compensation: Definition (cont.)(cont.)Stockholders

◦Using stock to pay employees creates a sense of ownership

◦Linking executive pay to company performance supposedly increases stockholders' returns

Managers◦A major expense◦Used to influence employee behaviors

and to improve the organization's performance

Compensation: Definition Compensation: Definition (cont.)(cont.)Employees

◦Major source of financial security◦Return in an exchange between

employer and themselves◦Entitlement for being an employee of

the company◦Reward for a job well done

Global Views – Vive la difference◦China: Traditional meaning of

compensation providing necessities of life replaced with dai yu

◦Japan: Traditional word kyuyo replaced with hou-syu; very recently the phrase used is teate

Compensation refers to all forms of financial returns and tangible services and benefits employees receive as

part of an employment relationship

What Is What Is Compensation?Compensation?

Exhibit 1.4: Total Returns for Exhibit 1.4: Total Returns for WorkWork

Forms Of Forms Of PayPayCash Compensation: BaseCash Compensation : Merit Pay/ Cost-of-living adjustment

Cash Compensation : Incentives

Long- Term IncentivesBenefits : Income ProtectionBenefits : Work/Life-Balance

Forms Of PayForms Of PayRelational returns

◦Psychological in natureTotal compensation

◦Cash Compensation/ transactional Base wages

Difference between wage and salary Merit pay/cost-of-living adjustments

Merit increases – given in recognition of past work behavior

Cost-of-living adjustments –same increases to everyone, regardless of performance

Forms Of Pay (cont.)Forms Of Pay (cont.)◦Cash Compensation/ transactional (cont.) Incentives/ Variable pay – tie pay

increases directly to performance Does not increase base wage; must be reearned each pay period

Potential size generally known beforehand Long-term (stock options), and short-term

◦Benefits Income protection Work/life balance Allowances

Forms Of Pay (cont.)Forms Of Pay (cont.)Total earnings opportunities:

Present value of a stream of earnings◦Shifts comparison of today's initial

offers to consideration of future bonuses, merit increases, and promotions

Relational returns from work◦Nonfinancial returns

Organization as a network of returns◦Created by different forms of pay,

including total compensation and relational returns

A Pay ModelA Pay Model

Three basic building blocks:◦Compensation objectives◦Policies that form the foundation of the compensation system

◦Techniques that make up the compensation system

Exhibit 1.5: The Pay Exhibit 1.5: The Pay ModelModel

Compensation Objectives Compensation Objectives (cont.)(cont.)

Efficiency◦Improving performance, increasing quality, delighting customers and stockholders

◦Controlling labor costsFairness

◦Fundamental objective of pay systems

◦Fair treatment by recognizing both employee contributions, and employee needs

Procedural fairness

Compensation Objectives Compensation Objectives (cont.)(cont.)

Compliance◦ Conformance to Federal and State

compensation laws and regulationsEthics

◦ Organizations care about how its results are achieved

Objectives◦ Guide the design of the pay system◦ Serve as the standards for judging success

of the pay system◦ Policies and techniques are means to reach

objectives

Internal alignment◦Focus - Comparisons among jobs or skill levels inside a single organization

◦Pay relationships within an organization affect employee decisions to: Stay with the organization Become more flexible by investing in additional

training Seek greater responsibility

External competitiveness◦Focus - Compensation relationships external to the organization: comparison with competitors

◦Pay is ‘market driven’

Four Policy ChoicesFour Policy Choices

Four Policy Choices (cont.)Four Policy Choices (cont.)External competitiveness (cont.)

◦ Effects of decisions regarding how much and what forms: To ensure that pay is sufficient to attract and retain

employees To control labor costs to ensure competitive pricing of

products/ servicesEmployee contributions

◦ Focus - Relation emphasis placed on employee performance Performance based pay affects fairness

Management◦ Focus - Policies ensuring the right people get

the right pay for achieving the right objectives in the right way

Techniques tie the four basic policies to the pay objectives

Many variations existSome techniques will be discussed through the book

Pay System TechniquesPay System Techniques

Caveat Emptor -Caveat Emptor -Be An Informed ConsumerBe An Informed Consumer

Is the Research Useful?Does the Study Separate

Correlation from Causation?Are there Alternative

Explanations?

Summary Summary

The MODEL presented in this chapter provides a structure for understanding compensation system. The three main components of the modelCompensation objectivesPolicy decisionTechniques

Four Policy Decision of pay model

Internal alignmentExternal competitivenessEmployee performance Management

Summary (cont.) Summary (cont.)

Terms:Terms:Base Pay

is compensation based on time worked, such as annual salary or an hourly wage and it does not include pay benefits, overtime or incentive pay.

Compensationmay be in the form of financial returns, tangible services, and benefits received by employees as part of their employment. It does not include other forms of rewards such as recognition and interpersonal relationships etc.

Indirect Payis part of an employee’s total compensation package, non-cash items or services provided to employees in return for their contribution to the organization (i.e., health benefits, paid time off). Sometimes the costs for the items are shared by the employees.

Merit Payis a monetary reward given in recognition of outstanding performance which increases base pay. It may be paid in a lump-sum or added incrementally to base pay.

Performance Payis a monetary onetime payment made to an employee, team or the whole organization for achieving results established at the beginning of a performance cycle.

Salaryis direct compensation/pay calculated at an annual or monthly rate rather than by hour.

Wagesare direct compensation/pay calculated by the hour