Chapter 1
The Pay
Model
HRM 370
By
Nabila Kamal
Key Topics in the Chapter
• How different perspectives affect our views of compensation
• Definition of compensation
• The most appropriate meaning of compensation comes from an employee's
view: return, reward or entitlement
• Four policy issues in the pay model
• Objectives of the pay model
• Forms of pay received from work
Contrasting Perspectives of Compensation
• Society’s Views
• Stockholders’ Views
• Employee’s Views
• Manager’s Views
Compensation: Definition
• Society
• 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 (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 (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
• 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
Total Returns for Work
Transactional and Relational Expectations
Forms of Pay
• Relational returns
• Psychological in nature (Non financial)
• Total compensation
• Cash Compensation/ transactional
• Base wages
- Cash compensation paid for the work done
• 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
• Cash Compensation/ transactional (cont.)
• Incentives/ Variable pay – tie pay increases directly to performance
• Does not increase base wage; must be re-earned each pay period
• Potential size generally known beforehand
• Long-term (stock options), and short-term
• Benefits
• Income protection
• Work/life balance
• Allowances
A Pay Model
1.
Compensation
• Three basic building blocks: objectives
2.
Policies
3.
Technique
s
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
• Conformance to Federal and State compensation laws and regulations
• Ethics
• 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
Four Policy Choices
1. 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
2. External competitiveness
• Focus - Compensation relationships external to the organization: comparison
with competitors
• Pay is ‘market driven’
• 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
Four Policy Choices (cont.)
3. Management
• Focus - Policies ensuring the right people get the right pay for achieving the
right objectives in the right way
4. Employee Contributions
• Pay for performance
