Chapter 1: Discussion Questions
1.Explain the different types of compensation:
1. Wage - amount of money paid to an employee on an hourly basis (ie. Roger was paid $13/hour)
2. Salary – pre-determined set of money paid to an employee on monthly/yearly basis
3. Merit Increase/Merit Bonus – higher wage rate paid to employees on basis of an agreed upon
4. Cost of Living Adjustment-when cost of living (inflationgoes up some contracts have pre-
determined clause where wage increases to keep same purchasing power (prior to price increase)
5. Incentives/Variable Pay–compensations for an employee doing exceptional work (bonus
awards, benefits). Variable pay/Piece Wage occurs when employee is paid for the task to be
completed regardless of how long it takes (ie. Paying someone $50 to mow lawn – get same amount
whether it takes them 2 or 5 hours)
6. Benefits -advantages, privileges, rights, or financial reimbursements made to an employee for
(medical coverage, dental, pension plan, insurance etc.)
2. How would you decide what types of pay to offer? What would it depend on?
Different companies have different values, different cultures, different methods for evaluating
employee performance and also different compensation measures. When trying to determine what kind
of pay incentives to give to your employees you must first determine which type of work is to be
completed, the timeliness that it needs to be completed as well as other factors such as what type of
position does the individual hold, how long they’ve been working and how valuable they are to the firm.
At the end of the day however you end up compensating your employee you must be clear and concise
when figuring out how to provide compensation.
3. What is it meant by the present value of the future stream of earnings?
The present value of the future stream of earnings means that the value of cash earnings now will be
worth more than it will be in the future. Future cash flows are discounted at the discount rate, and the
higher the discount rate, the lower the present value of the future cash flows.
4. Relational returns are non-financial returns from work. Give some examples of relational returns
and explain why/how they would be motivating
Some examples of relational returns are: Recognition and Status, Employment Security, Challenging
Work, Learning Opportunities
There are lots of people that would much rather prefer a job they enjoy and find stimulating
than how much money they make. Money is not only motivator in the workplace. There are many
relational returns that employees would actually prefer than just strictly financial returns.
5. How should an organization decide how much to pay an employee (explain briefly as we will be
exploring this in much greater detail in future class)? Explain how procedural justice is important in
designing and implementing a pay system.
An employer must take many things into account when deciding how much to pay an
employee. Some of these factors include: Merit, Level of authority, How much responsibility, How much
work is involved, Related jobs (How much other people in similar jobs make; to be competitive)
*Procedural justice is important when deciding how much to pay an employee because when
you do not follow certain procedures and guidelines than there may be discrepancies between who
makes what. Employees may see it as unfair when people in similar positions have drastically different
wages. Procedural justice helps to keep things consistent. 6. What OB theories will we likely be using in this class to explain how different types of
compensation would be motivating and/or lead to high performance?
There are a number of OB theories that can be applied to explain how different types of
compensation can motivate and/or lead to high performance. Some examples are:
1. Theory of Commitment: affective commitment (which is when employees are committed to a
firm because they want to be)normative commitment (employees feel that they should be
committed to a firm)and affective commitment (feel they have to be committed to the
-firms should strive for affective commitment and can use compensation to achieve this
by tying pay to performance.
-normative commitment can be achieved through offering certain bonuses such as
vacation leave time
-continuous commitment can be achieved through compensation systems which offer
benefits such as a pension plan, where employees feel as they have to be committed and
continue with the company to get their pension pay
2. The equity theory -concept that employees get job satisfaction and motivation by
comparing their efforts and income with those of the other people in the same of firms.
- with this theory, it can be explained how compensation strategies can be used to
motivate and increase job satisfaction.
3. Expectancy theory which is about employees performing in a manner based on their
-can look at how compensation can be used to increase employee’s motivation. It will
be important to consider what type of compensation will appeal to the individual employee.
4. Procedural justice –process used to make decisions based about pay is viewed as fair
-important employees feel the process to determine compensation is allocated fairly.
5. Distributive justice-process to distribute pay is viewed as fair
-important employees feel that what they are receiving is what they feel they deserve.
-employees feel they receive fair compensation compared to what others receive
7. The implicit contract is an “unwritten understanding between employees and employers about
their reciprocal obligations and returns”. How does compensation play a role in the implicit contract?
Compensation plays a role in the implicit contract by providing a return to employees for assisting them
in achieving an organization's goals. This is understood by both parties in an unwritten understanding or
implicit contract. The work is a trade-off for some sort of compensation, whichever mix of transactional
and relational compensation that may be. Both employees and employers must hold up their part of the
deal or exchange, by providing compensation relative to work performed and value to worker. It also
plays a role in severance packages when employees are laid off and compensated for the termination of
their position within a company. Compensation is one side of the agreement awaiting an exchange.
8. Is pay an important factor in attracting people to a job? Why or why not?
Pay’s a very important factor when it comes to attracting people to a job as it’s a primary objective of
getting a job. Although there are people who work for other reasons (social reasons)Pay is not the only
important factor in attracting people. Relational returns are also very important. Many people consider
benefits such as vacation pay, sick leave, maternity leave, working overtime and working on holidays or
things such as recognition, status, or growth opportunities. If companies want to ensure they have the
best individuals being recruited they must focus on having a