Chapter 3: Developing People in the Organization
Payment is a major consideration in HRM because it provides employees with a tangible reward for their
services, as well as a source of recognition and livelihood.
It is a big issue for the organizations as well, with compensation equalling to 20% of total expenditure in
manufacturing firms and up to 80% in service firms.
Total compensation (total rewards approach): Direct compensation + indirect compensation
Direct compensation: Employee wages, incentives, bonuses, and commissions
Indirect compensation: Benefits such as dental plans and life insurances supplied by employer
Though the company sets guidelines about how much each position is worth, the manager has the responsibility
to implement those guidelines, and therefore must have understanding of compensation and its link to success.
HR personnel may be responsible for gathering compensation information and developing approaches.
Reward as Part of the Company Strategy
Companies structure compensation in a way that enhances employee motivation and growth while aligning the
employees’ efforts with the objectives, philosophies, and culture of the organization.
Companies that make a reward strategy (that takes into consideration what employees see as important in the
reward equation) part of the overall motivation framework have higher organizational performance.
Employers have adopted pay strategies to attract applicants and employees with scarce skills. 95% of companies
expect to continue with their variable pay plan as part of their overall retention strategy.
High pay can allow organizations to raise selection standards, and in turn reduce training costs. Therefore,
organizations should ensure it has systematic ways of managing compensation related to performance.
Total rewards is a broad set of elements that include tangible rewards (pay, benefit) but also other factors
including career development, work culture, work-life balance, and peer recognition program.
Compensation & Organizational objectives:
o Compensations have been revolutionized by domestic and international competition, increased skill
requirements and new technology. Managers have now switched from paying for a specific position to
rewarding employees on a basis of their individual or group contribution to organizational success.
o Employees would find ways of rewarding themselves if they felt that their employers were not.
o Some corporations establish goals to align their objectives with the compensation program. Including:
To reward employees’ past performance.
To remain competitive in the labour market.
To maintain salary equity among employees.
To mesh employees’ future performance with organizational goals.
To control the compensation budget.
To retain key staff. o Pay-for-performance standard (Pg 73 chart):
Standard by which managers tie compensation to employee effort and performance
Includes merit-based pay, bonuses, salary commissions, jobs and pay bandings, team
incentives, and gain sharing of program
There must be a difference between the pay of average performers and outstanding ones.
The size of monetary increase and its value to the employees to the employees is critical, as
the program will lose its value if pay increases causes a rise in the cost of living.
o Equity: Anything of value earned through the investment of something of value.
Equity theory: Motivation theory that explains how employees respond to situations in which
they feel they have received less (or more) than they deserve.
Equitable: Pay is equitable when the compensation given is perceived to be equal to the value
of the work performed.--
Pay has a direct bearing on the standard of living, status and recognition they may be able to
achieve on and off the job, and so pay must be equitable in relation to employee contributions.
If the ratio of the inputs to the outcome is equal, employees perceive the situation as equitable.
If it is inequitable relative to others, there is motivation to reduce the inequity
o Basis for compensation:
Hourly work: Work paid on an hourly basis
Piecework: Work paid according to the number of units produced
Hourly work is much more prevalent than piecework as a basis for compensating employees.
o Compensation strategy
Organizations state objectives regarding compensation for their employees.
One company may wish to pay (fairly and) at the market average, while another may want to
attract and retain high-calibre staff
Policy setting reflects:
Internal wage relationship among jobs and skill levels
External competition or an employer’s pay position relative to competitors’
Policy of rewarding employee performance
Administrative decisions concerning elements of the pay system.
o Worth of job
Organizations without formal compensation program generally base the worth of jobs on the
subjective opinion of people familiar with the job.
Organizations with formal compensation programs rely on a program of job evaluation to aid
the determination of rates. Job evaluation: Systematic process of determining the relative worth of jobs to establish
which jobs should be paid more than others within an organization (then in the industry)
Measured in level of skill, effort, responsibility, and working condition
o Employee’s relative worth
Superior performance can be merited with promotion, incentive systems, or merits.
Managers sometimes compare performance of one employee to others.
A visible and credible relationship and raises must be created, but too many merit systems
provide for raises to be granted automatically.
o Employer’s ability to pay
In the public sector, compensation is limited by funds budgeted for this purpose and by
willingness of taxpayers to provide this.
In the private sector, profits, other financial resources, economic condition, and competition
available limit pay levels.
o Conditions of the labour market
Due to the recession, many companies have:
Differentiated between average and high performers when making compensation
Created unpaid vacations
Managed workforce costs through a combination of hiring freezes and terminations.
o Cost of living
Consumer price index (CPI): Measure of the average change in price over time in a fixed
market basket of goods and services. Based on food, clothing, shelter, fuel, transportation
fares, medical services, and price of other goods necessary for survival.
Using the CPI to determine changes in pay also compress pay rates within a structure,