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PAY SYSTEMS
Job-based Pay
Skill-based Pay
Performance-based Pay
Fixed/guaranteed bonus
Merit increase or bonuses based on
› days of sick leave,
› department expenditure,
› Number of employee strikes,
› customer complaints,
› etc.
Strategic implications of pay for
performance
─ Clear link: tying pay to some measure of individual, group, or
organizational performance.
─ Clear target: Establish a performance “threshold” to qualify for
incentive payments (variable pay).
─ Fair Evaluation: Establish performance evaluation tools
─ Impact on organization: Emphasize a shared focus on
organizational objectives. Create shared commitment in that
every individual contributes to organizational performance and
success.
─ Impact on individuals: Address growth needs, advancement
potential, increased responsibility, appropriate recognition
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Performance measurement
(objective/subjective; reliable & consistency)
Performance variation (what good looks like?)
Pay range allows for flexibility
Ability, expectancy, instrumentality
VALENCE - Link between rewards and satisfaction (Not
all rewards are equally important to everyone)
Equity of rewards, not just absolute amount is important
Expectancy Instrumentality Valence
Ability to Motivational Equity and
perform rewards justice
Motivation Effort Performance Rewards Satisfaction
Expectancy X Instrumentality X Valence = Motivation
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Merit pay
Bonus
Piece rate
Commission
INDIVIDUAL
Profit sharing
Gainsharing
Team GROUP
incentive/ ORGANISATION Employee stock
ownership plans
bonus
(ESOPs)
Merit pay links an increase in base pay to how successfully an
employee performs his or her job. Once merit increases are
given they become part of base pay, regardless of future
performance.
Bonus is an incentive payment given to employees beyond
their normal base wage. It is frequently given at the end of
the year and does not become part of base pay.
Piece rate is additional pay to additional piece of work over
the amount expected on base rate. (quantity vs. quality)
Commission is an incentive pay based on a percentage of
sales
Fixed vs. Employee Supervisor’ Base Pay
variable Timing Risk s vs. Level
Variable Pay Objective
cost
measure
Merit pay
Bonus
Piece rate V Weekly / Low Objective At Market
Monthly measure
or as
agreed
Commission
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Production standards are set unfairly.
Incentive plans are really “work speedup”.
Incentive plans create competition among workers.
Increased earnings result in tougher standards.
Payout formulas are complex and difficult to
understand.
Incentive plans cause friction between employees
and management.
PAY MIX COMPOSITION
Base salary_____________________ xx%
Variable/Incentive pay ___________ xx%
Benefits________________________ xx%
Total compensation______________100%
Pay Mix and the Organization Life Cycle
Same total compensation, different mixes
(Milkovich & Newman, 2008)
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Comparing the Pay Mix for
Different Categories of Employees
EXHIBIT 9.3
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Executive Pay Mix for Performance (2011)
S&P 500 (U.S. Public Companies)
Others Total Equity Total Cash Pay packages are trending
100% away from cash (salary &
90% bonus) and towards equity
80% (long term incentives e.g. stock
70% options, restricted stocks and
63 61 61 61 54 57 58
60% 69 73 performance awards).
50%
Most companies are using pay
40%
for performance approach to
30%
executive compensation. A
20% 36 36 37 42 39 39
34 29 positive link of CEO pay and
10% 25
their companies’ financial
0% results is reported (Hay
Group).
Source: Surveys Find Modest Increases in Executive Compensation in 2011, Report on Salary Surveys, 19(7), pp.1-5
Compensation for the Top 10 Highest Paid CEOs.
Source: Surveys Find Modest Increases in Executive Compensation in 2011, Report on Salary Surveys, 19(7), pp.1-5
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Structure of Executive Compensation Packages in Asia
Sun, Zhao & Yang (2010) Asia Pacific Journal of Management Vol.27: 775-802
References
Armstrong, M. and H. Murlis (1991) Reward Management, 2nd ed., Kogan Page/IPM,
London.
Bohlander, G.W. and Snell, S.A. (2013) Principles of Human Resource Management, 16th ed.,
South-Western, Cengage Learning.
Milkovich, G.T. , Newman, J.M., and Gerhart, B. (2011) Compensation. (10th ed.) McGraw-
Hill, New York.
Noe et al. (2014) Fundamentals of Human Resource Management (5th ed.) McGraw Hill.
(Chapter 11)
Sun, S. L., Zhao, X. and Yang, H. (2010) “Executive Compensation in Asia: A Critical Review
and Outlook”, Asia Pacific Journal of Management, 27: 775-802.
‘‘Surveys Find Modest Increases in Executive Compensation’ Report on Salary Surveys, July
2011, pp.1-5
Werner, Schuler & Jackson (2012) Human Resource Management (11th ed.) South-Western
Cengage Learning (Chapter 9)
