CHAPTER 1
THE PAY MODEL
PRESENTED BY:
CH. ABDUL RAUF
COMPENSATION: NOW AND
100 YEARS BACK
Early 1900 - 1925
1925-50
Compensation
Individual
Internal labor
Policies
contracts
markets
1950-75
1990s
Internal equity
Strategic
Performance
Market based
Performance
Piece rates
Profit sharing
Contract rates
Merit Increases
Performance-
COLAs
Based
Competitiveness
Market based
Internal equity/
Internal equity/
Market based/
Market
Market
Flexible
adjustments
adjustments
structures
Total
Cash
Cash based
Equity
compensation
Incentives
Benefits
Flexible benefits
Welfare services
Government
regulations
Contracting
Stability and
Predictability
Commitment
Commitment
Security
Total Returns
Focus
Cash,
Variable Choice
Employability /
Agility
CHAPTER TOPICS
Compensation: Definition
Forms of Pay
A Pay Model
Caveat Emptor - Be an Informed Consumer
Your Turn: Glamorous Internships, or House
Elves?
CONTRASTING PERSPECTIVES
OF COMPENSATION
Societys Views
Stockholders Views
Employees Views
Managers Views
COMPENSATION:
DEFINITION
Society
Pay as a measure of justice
Belief that pay increases lead to price increases
Benefits as a reflection of justice in society
Job losses (or gains) attributed to differences in
compensation
EXHIBIT 1.1: HOURLY
COMPENSATION COSTS FOR
MANUFACTURING WORKERS (IN U.S.
DOLLARS)
COMPENSATION:
DEFINITION (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
EXHIBIT 1.2: THE RELATIONSHIP
BETWEEN SHAREHOLDER
RETURN AND CHANGE IN CEO
PAY
COMPENSATION:
DEFINITION (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 diffrence
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
WHAT IS COMPENSATION?
Compensation refers to all forms of
financial returns and tangible services
and benefits employees receive as part
of an employment relationship
EXHIBIT 1.4: TOTAL RETURNS
FOR WORK
FORMS OF PAY
Relational returns
Psychological in nature
Total compensation
Cash Compensation/ transactional
Base wages
Merit pay/cost-of-living adjustments
Difference between wage and salary
Merit increases given in recognition of past work behavior
Cost-of-living adjustments same increases to everyone,
regardless of performance
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.)
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 MODEL
Three basic building blocks:
Compensation objectives
Techniques that make up the compensation system
Policies that form the foundation of the compensation
system
EXHIBIT 1.5: THE PAY MODEL
COMPENSATION OBJECTIVES
(CONT.)
Efficiency
Improving performance, increasing quality, delighting
customers and stockholders
Controlling labor costs
Fairness
Fundamental objective of pay systems
Fair treatment by recognizing both employee
contributions, and employee needs
Procedural fairness
COMPENSATION
OBJECTIVES (CONT.)
Compliance
Ethics
Conformance to Federal and State compensation laws and
regulations
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
EXHIBIT 1.6: PAY OBJECTIVES AT
MEDTRONIC AND WHOLE FOODS
FOUR POLICY CHOICES
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 CHOICES
(CONT.)
External competitiveness (cont.)
Employee contributions
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/ services
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
PAY SYSTEM TECHNIQUES
Techniques tie the four basic policies to the pay objectives
Many variations exist
CAVEAT EMPTOR BE AN INFORMED CONSUMER
Is the Research Useful?
Does the Study Separate Correlation from
Causation?
Are there Alternative Explanations?
THANK YOU
