Lecture Notes_Intro to Compensation.doc

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Woodsworth College Courses
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Rafael Gomez

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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 expenses • 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 strategy) • Can enhance firm[s ability to keep key employees (internal fit with retention strategy) 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. 1 Compensation Ted Mock 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 this target?" 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 2 Compensation Ted Mock 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). Terms : 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 job 3 Compensation Ted Mock Labour Market Model • For specific job in specific market • Where supply equals demand, the market "clears" Wages High $ Supply curve 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 4 Compensation Ted Mock 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 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 analysis 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 5 Compensation Ted Mock 5. Create a job hierarchy –list jobs in order of their importance (evaluation points) 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 job 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
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