Lecture One: The Pay Model

Course Name: Compensation Management

Course Instructor:
Nusrat Jahan Arefin
Assistant Professor
Department of Public Administration
Jahangirnagar University
Date: 15 January, 2021
Why should we care about Compensation?
• How people are paid affects their behavior at work which affects an
organizations chance of success.

• For most employers, compensation major part of total cost, often

largest part of operating cost.

• Well-designed compensation system can help an organization achieve

and sustain competitive advantage.

• Poorly designed compensation systems can play a major role in

undermining organization success.
 What is Compensation?
• View differs
depending on
perspectives

• How compensation is
viewed differently by
society, stockholders,
managers and
employees around the
world.
 Society’s Views
• A measure of justice
• Gender pay gap in U.S., after adjusting for differences in education,
experience, occupation, has narrowed from 36 percent in 1980 to 13 percent
in 2006
• Reduces Gender wages gap

• Differences in compensation between countries

• Compensation as the cause of price increase

 Stockholders’ Views

• Using stock to pay employees creates a sense of ownership

• Granting too much ownership dilutes stockholder wealth and may not
incentivize the behavior as intended

• Linking executive pay to company performance supposedly increases

stockholders' returns
 Managers’ Views
• Major Expense
• Competitive pressure force managers to consider the affordability of their compensation
decisions

• Pay has to be minimized or optimized.

• Managers use pay to influence employee behavior and to improve organization

performance
• The quality of employees work attitude

• Learning new skills

• Suggesting innovations interest

 Employees’ Views
• Major source of financial security

• Pay plays a vital role in a person’s economic and social well-being

• Compensation as the return in an exchange entitlement for being an

employee of the company reward for performing well in the job

• “return” may mislead employees and managers

 Incentive and Sorting Effects of Pay on
Employers’ Behaviors
• Incentive Effect:
• Pay can affect the motivational intensity, direction, and persistence of current
employees
• Motivation determines employee behaviors such as performance
• Incentive effect of pay influences individual and aggregate motivation among
the employees
• Sorting Effect:
• Different types of pay strategies may cause different types of people to apply
to and stay with an organization
• Higher pay levels help organizations to attract more high-quality applicants
• Higher pay levels may improve employee retention
 Global Views of Compensation
Chinese View Japanese View

Traditionally, compensation provides the necessities in “Compensation” in Japanese is kyuyo, meaning “giving
life something”

In the recent past compensation was treated as an Traditionally, compensation is thought of as something
entitlement given by one’s superior

In today’s China, compensation refers to how you are Today, compensation means “reward” and has no
being treated associations with notions of superiors

In broader sense compensation considers returns as The many part of Japanese compensation systems
well as entitlement translate as teate, which means “taking care of
something”
Forms of pay
 Cash Compensation: Base Pay

• Base wage is the cash compensation that an employer pays for the
work performed

• Base wage tends to reflect the value of the work or skills and
generally ignores differences attributable to individual employees

• Distinction usually made between wage and salary

 Cash Compensation: Merit Pay/Cost-of-
Living Adjustments
• Periodic adjustments to base wages may be made on the basis of
changes in what other employers are paying for the same work

• Merit increases are given as increments to base pay and are based on
performance

• Cost-of-living adjustments give the same increases to everyone,

regardless of performance
 Cash Compensation: Incentives
• Incentives or Variable Pay increases directly to performance
• Incentives may be short- or long-term.
• Long-term incentives are intended to focus employee efforts on
multiyear results
• Typically, they are in the form of stock ownership or options to buy
stock at a fixed price
• However, incentives differ from merit adjustments
• Incentives do not increase the base wage
• The potential size of the incentive payment will generally be known
beforehand
 Benefits: Income Protection
• Some insurance programs are required by law

• Different countries have different mandatory benefits

• Medical Insurance, retirement programs, life insurance and savings plan

are common benefits

• Help protect employees from the financial risk of daily life

• Often companies can provide these more cheaply than employees can
obtain for themselves
• Benefits: Work/Life Balance

• Programs that help employees better integrate their work and life responsibilities include
time away from work, access to services to meet specific needs and flexible work
arrangements

• Health and wellness, security, individual and family wellbeing, fulfilling work environment
– total well being

• Benefits: Allowances
• Allowances often grow out of whatever is in short supply

• Almost all foreign companies in China discover that housing, transportation, and other
allowances are expected

• Rice allowance (after world war II – Japanese firms)

• In many European countries – car will be provided for manager – who decide the model
 Relational Returns from Work

• Relational returns from work includes recognition and status,

employment security, challenging work, and opportunities to learn

• Other forms of relational return might include personal satisfaction

from successfully facing new challenges, teaming with great co-
workers, receiving new uniforms, and the like

• Such factors are part of the total return, which is a broader umbrella
than total compensation
A Pay Model
 Strategic Compensation Objectives
Efficiency Fairness Compliance Ethics

Improving Fundamental objective of Compliance as a pay Means organization cares about

performances: pay systems objective means how its results are achieved
increasing quality conforming to federal and
delighting customers state compensation laws
and stockholders and regulations

Controlling labor costs The fairness objective calls If laws change, pay Highly diversified firms may have
for fair treatment for all systems may need to different pay objectives
employees by recognizing change, too, to ensure
both employee continued compliance
contributions and
employee needs

Procedural fairness As law change, pay system Objectives serve many purposes:
concerned the process used need to comply with laws • Guide design of pay system
to make decisions about of all countries which • Serve as standards for judging
pay them operate the success of the pay system
 Four Policy Choices
• Every employer must address the policy decisions shown on the left
side of the pay model:
• internal alignment,
• external competitiveness,
• employee contributions, and
• management of the pay system.
• These policies are the foundation on which pay systems are built
• They also serve as guidelines for managing pay in ways that
accomplish the system’s objectives
 Internal Alignment

• Comparison of jobs or skill levels inside a single organization.

• Jobs and people skills are compared in terms of their relative

contributions to the organization's business objectives.

• This is both for employees doing equal work and dissimilar work.

• Internal Alignment affects all the three compensation objectives.

 External Competitiveness

• Comparison with competitors includes pay mix (base, incentives, stock,

benefits etc.).

• “Market Driven Pay” – both how much and what form.

• Have 2 fold effect on objective (to attract and retain and to control labor

cost)
 Employee Contribution

• Performance based / Seniority based

• Eaton and Motorola – Team based pay and corporate profit sharing plans

• Performance based pay – employee needs to understand the basis for

judging the performance.

 Management

• Ensuring that the “right people get the right pay for achieving the

right objective in the right way”

 Pay Techniques

• Techniques tie the four basic policies to the pay objectives

• Uncounted variations in pay techniques exist