HRM303 Chapter Notes - Chapter 4: Job Evaluation, Fixed Cost, Nepotism

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Chapter 4: components of compensation strategy
Fundamental components of the compensation mix
Base pay pg 110
Portion of an individual’s compensation that is based on a unit of time
worked
Guaranteed by the employer; if a person works for a certain amount of time,
he or she is paid a prespecified amount of money
Wage: pay based on an hourly time period
Salary: pay based on a weekly, monthly, or annual time period
Why use base pay?
Substitution of output related pay for time based pay is only feasible for jobs in
which output it:
Easy to measure
Easy to price in terms of its value to the employer
Easy to attribute to individual employees
Controllable by individual employee
Relatively stable
Positive reasons:
Flexibility
Based pay allows employer to recognize and encourage important job
behaviours that don’t directly produce output
Base pay can signal relative importance of jobs within organizations
Base pay demonstrates commitment on part of the employer to the
employee, creating greater likelihood of employee commitment to employer
Base pay can support a particular managerial strategy
Usually much simpler to implement/administer than output related system
Disadvantages
Represents more of fixed employer commitment than performance pay and
is not linked to variability in employer’s ability to pay in way that
performance can
Does not directly motivate task behaviour nor does it signal key task
behaviours
Since it does not relate organizational success directly to individual success,
it does not directly contribute to citizenship behaviour
Not self-correcting
Performance pay
Any type of financial reward provided only when certain results occur. These
results may be based on the performance of indivudla employees, a group or
team of employees, or entire organization
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Why use performance pay?
Properly designed, can signal key employee behaviours and motivate
employees to achieve them
Reduce need for other types of mechanisms for controlling employee
behaviour
Can raise employee interest in performance and provide employees with info
about their current performance levels
Different types of performance pay can be used to support specific
managerial strategies
Make pay more variable and can help link compensation levels to firm’s
ability to pay
Disadvantage of performance pay
Employees generally prefer predictable and certain rewards to unpredictable
and uncertain rewards
May cause employees to focus on aspects of behaviour that are being
measured ignoring other unmeasured but still important behaviours
Indirect pay pg 119
Any type of employer-provided reward that serves an employee need but is
not part of base of performance pay
Why use indirect pay?
Competitive pressure
To satisfy the security needs of their members (unions usually bargain for
comprehensive employee benefits)
Certain types of indirect pay receive more favourable income tax treatment
than direct pay
Benefit items (medical/dental coverage) can be purchased more cheaply by
employer than by employee due to group discounts  this provides higher
level of reward to employees for same amount of company money
Benefits can protect financial security and peace of mind of employees which
helps maintain good employee performance
Employers feel a genuine sense of responsibility for the welfare of their
employees and want to help protect them from adversity
Benefits can reinforce particular managerial strategy since benefits increase
as tenure increases, benefits can encourage membership behaviour
Used to promote consequences that benefit the organization
Disadvantages
Costly
Rigidity: indirect pay is generally a fixed cost and is liable for costs of
maintaining these benefits
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