Chapter 8, 9, 10—Compensation
• There are three main goals when it comes to compensation:
o 1. Attract employees
o 2. Retain your current employees
o 3. Motivate your employees
• Compensation costs are the largest cost category in most firms (usually about 50-80% of
o These costs vary by industry—the highest costs are in service organizations
(colleges, universities, hospitals)
• Pay shows what the organization values:
o 1. Value of a job
This relates to pay structure which is the relative pay of different jobs
and how much they are paid (you determine pay based on what the job
o 2. Value of an employee
o 3. Value of particular behaviours/performance
The last two relate to individual pay which is when you vary pay based
on individual performance and other factors
• There are many different ways to determine which strategy for determining compensation
is the most optimal, but ultimately the most optimal one is the one that adds the most
value to the firm (it should be aligned with the strategy of the organization, and it isn’t
always the cheapest)
• “What gets paid is what gets done” is not always true as this can encourage
counterproductive behaviour if people feel they are not getting paid enough
• There are three major considerations you should make:
o 1. What criteria should be used to determine pay?
The job, individual KSAOs, performance, profits, etc.?
o 2. What ‘pay mix’ should be used?
Base pay, benefits, stock options, and performance rewards? o 3. If pay-for-performance is used, on what basis should it be used?
Individual, team, organization performances?
• Base pay: salaries/wages
• Incentives/Performance Pay: commissions, bonuses, pay for performance
• There are also indirect compensation costs, like time not worked (vacations, holidays,
leaves), insurance plans (medical, dental, life), security plans (pensions), and employee
services (educational assistance and recreational programs)
o The indirect costs can account for up to 50% of pay costs!
Does Money Motivate?
• The “Yes” View:
o People will be more willing to do certain things if doing them results in (more)
o Locke said, “Money is the crucial incentive...no other incentive or motivational
technique even comes close to money with respect to its instrumental value”
• The “No” View:
o Pfeffer sais that the idea that money motivates is a myth—it is said that large
external rewards actually undermine intrinsic motivation
• Research says that people who earn a higher income report being more satisfied with
their lives, however, people who are singularly focuses on money and financial success
are less happy and satisfied, even if they attain it!
• Equity Theory: we evaluate the fairness of our pay by comparing it to others
o It is a comparison of one’s ration of outcomes to inputs with the outcome/input
ratio of others
If there is a positive inequity there might be some guilt, but is there is a
negative inequality then there might be some resentment
Internal vs. External Equity
• There are two types of social comparisons for equity:
o External Equity is when you compare pay to those with a similar job in other
organizations o Internal Equity is when you compare pay to others within the same organization
(above, below, or on the same level as you)
Methods for Establish Pay Structure
• When it comes to external equity, it is popular to use market pricing which is where you
look at the average pay in the market
o What pay is necessary to attract qualified individuals from the labour market?
o Often done by salary surveys which is related to benchmarking pay which is
where you compare an organization’s practices against the competitions
Must determine: (1) which employers to include in the survey, (2) which
jobs to include in the survey, (3) how to combine/weight the collection of
different surveys conducted
• There is a strategic question you should ask yourself here: should you offer above market
wage, at market, or below market?
• Job evaluation refers to the process of determining the relative worth of jobs within an
organization (this is showcased by the difference in pay levels)
• Purpose is to foster internal equity (pay equity)
o The “point system” is the most popular method (you assign points to certain
factors of the job known as compensable factors and then offer pay based on
• Job evaluation levels refers to the responsibility for financial resources (these levels
refer to the degree of accountability for money, financial data, and financial decisions
o Level 1: infrequently involved in financial matters