Compensation Ted Mock
Intro to Compensation
• What is compensation? Pay mix is the unique blend of base pay, incentives
and indirect compensation/benefits
• Compensation is significant cost to firm 60% to 80% of total operating
• Design of compensation system is crucial strategic decision for firm – must
support company objectives/strategies, ability to pay, organization's culture
and environment - must enhance employee motivation and retention
• Can enhance firm's ability to attract candidates (internal fit with recruitment
• Can enhance firm[s ability to keep key employees (internal fit with retention
Linking compensation to organizational objectives
• value-added compensation - "how does the compensation package benefit
the organization?" If it does not add value, change it.
• the term “pay mix” or wage mix refers to the combination of base wage, pay
for performance and benefits that applies to a particular job family (family of
similar jobs). The pay mix is often unique to certain job families as the pay
mix can be designed to encourage specific behaviors and attitudes. This is
tied closely to the concept of “strategic compensation”.
Motivating value of compensation
Fredrick Herzberg (Two factor theory) maintains that wages are not a
motivator but rather a 'hygiene factor' or 'maintenance factor'. He suggests that
while wages do not motivate, inadequate wages will de-motivate. He suggested
that motivators are the work itself, achievement and recognition are motivators.
If pay can be structured as a form of recognition, then it would fit Herzberg's
criteria for a motivator.
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Equity Theory (Adams, 1965)
Equity Theory is the notion that employees examine their relationship between
their inputs to their job (skills, efforts, attitudes) and their outcomes from their
job (pay, benefits, working conditions, perks and favours) and compare this ratio
of inputs and outputs to other people both inside and outside the firm. These
people are referred to as "referent others".
If employees feel that the perceived input/output ratios relative to referent others
are fair, they will be motivated to continue their current level of inputs.
If employees feel that their inputs are greater than their outputs in comparison to
referent others, they will be motivated to correct the perceived imbalance. One
way to correct the imbalance is to ask for more pay. Another way is to reduce
output (not work as hard) or to be absent more often. Another way to correct
the imbalance is to leave the firm.
Expectancy Theory (Victor Vroom, 1964)
This is a powerful theory of motivation that can be very useful in examining the
motivational potential of certain wage and bonus plans. It tends to be more
appropriate for analyzing variable wages as opposed to fixed wages - such as
we will consider in Chapter 11.
The theory has 3 main components:
1. Effort - performance expectancy - "what is the likelihood that I can achieve
2. Performance- outcome expectancy - "what is the likelihood that, if I achieve
the target, it will lead to the desired outcome?"
3. Value (valence) of the outcome - how attractive is the outcome to me? Is the
value of the outcome worth the effort?
The Expectancy Theory Equation is stated as : E X P X V = M whereby E, P
and V are each probability values with a minimum value of zero and a maximum
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value of one. If the value of any of the components of this equation is zero (or
near zero) the resulting level of motivation will be zero (or near zero).
hourly; piecework; salaried; exempt; non-exempt
Factors affecting wages -
Internal factors - compensation policy of firm; worth of job; employee's relative
worth; employer's ability to pay
External factors - conditions of labour market; area wage rates; cost of living;
collective bargaining; legal requirements
Labour market model (economics) – wage rate for any given occupation is
set at point where the supply of labour equals demand for labour in the
marketplace – firm cannot stray too far from the going the ‘going rate’ for the
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Labour Market Model
• For specific job in specific market
• Where supply equals demand, the market "clears"
Going Rate - the
market clears at this
rate of pay for this job
Low $ Demand curve
Low # workers Quantity of Workers High # workers
Consumer Price Index (CPI) - you hear this term frequently - it is a
measurement that is done by Statistics Canada to determine whether the cost
of living in Canada is going up or down. The CPI is made up of a 'fixed basket
of consumer goods and services' and StatsCan samples the cost of this fixed
basket of goods and services every month. The CPI is often used to determine
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a COLA – cost of living adjustment often found in union collective agreements
where wages are automatically increased depending upon increases in the CPI.
COLA’s are necessary in union collective agreements as the collective
agreements (or contracts) are usually negotiated for several years at a time and
not re-opened during the life of the contract.
Job evaluation – the process of evaluating the relative value, worth or
contribution of different jobs to an organization using compensable factors
which are work-related criteria that an organization considers most important
such as skill, effort, responsibility and working conditions
The simplest qualitative methods are job ranking and paired comparison
Most firms that have any kind of sophistication in their HR techniques use some
form of a Point System.
The following describes the Steps in Creating a Job-Based Compensation
Plan using a point system of job evaluation:
Establish Internal Equity
1. Job analysis –gathering and organizing information concerning the tasks and
duties of specific jobs
2. Job description - create a job description for each job based on the job
3. Determine job specifications – prerequisites that an employee must meet to
perform a job successfully- work experience, education, certificates, etc.
4. Rate worth of all jobs using a job evaluation system – by far the most
common is some form of point factor system – uses compensable factors
which are work related criteria that an organization considers most important
in assessing the relative worth of different jobs
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5. Create a job hierarchy –list jobs in order of their importance (evaluation
6. Classify jobs by grade levels – for sake of administrative simplicity
– broad-banding creates even wider job grades – often associated with skill
based pay but can be more expensive.
Note: job evaluation focuses only on the job and not the person performing the
Establish External Equity
7. Establish the rate of pay for each job grade – market salary surveys –
company may perform own survey or may purchase survey conducted by
consulting firms – depends upon uniqueness of jobs of likelihood of finding a
good ‘match’ in a survey
• What jobs should be surveyed? Benchmark jobs