HRM1283 Compensation Donna Verity and Chris Carella
LESSON 9: COMPENSATION
Compensation is a major method that organizations use to attract and retain those
staff needed to help them meet their organizational objectives. At the same time,
compensation is a major expense for companies so they are always looking for
ways to manage the compensation dollar without affecting organizational outcomes.
This lesson will introduce you to compensation and how it is managed in
TOPICS FOR THIS LESSON INCLUDE:
•strategic compensation planning
owhy is compensation important in organizations?
•motivation and pay
•types of compensation
othe wage mix
ojob evaluation systems
•how much do you pay for jobs?
olegislation related to compensation
At the end of this module, you will be able to:
1. Discuss how a compensation strategy contributes to the attainment of
2. Identify the areas that need to be considered when establishing a compensation
3. Describe how internal and external factors influence the setting of wages
4. Outline 4 methods of job evaluation
5. Explain the wage curve, pay grades, and rate ranges as parts of the
6. Identify major legislation influencing compensation for jobs
7. Discuss the concept of equal pay for work of equal value
TEXT READING: Managing Compensation
Pages 399 - 428
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1. STRATEGIC COMPENSATION PLANNING
Strategic compensation planning in the organization links employee motivation and
concerns for compensation, to the objectives and goals of the organization. Through
strategic compensation planning, the organization seeks to attract and maintain
quality employees consistent with maximizing its compensation budget.
Compensation specialists recognize three important aspects to strategic
(l) linking compensation to organizational objectives
(2) the pay-for-performance standard
(3) the motivating value of compensation.
2. WHY IS COMPENSATION IMPORTANT IN ORGANIZATIONS?
The purpose of compensation is ensure that employees feel rewarded so that they
will perform effectively and help the organization meet its overall objectives.
Therefore, an organization has to be familiar with what it is that employees feel is
valuable and be prepared to meet their needs sufficiently.
The goals of compensation are
• reward employees' past performance
• remain competitive in the labour market
• maintain salary equity among employees
• link employees’ future performance with organizational goals
• control the compensation budget
• attract new employees
• reduce unnecessary turnover
One of the interesting things about a compensation policy are the decisions that the
organization takes when it is deciding how to meet its goals. For example, an
organization will choose to be above, below, or at the prevailing market rate. A
company that has an excellent reputation may choose to lag the market in pay
because they know that people will still want to work for them just to have their
company name on their résumé.
Others things to consider when establishing a policy include:
* the pay level at which employees will be recruited
* the difference in pay from this level to the top of the level for that job
* when will raises be given and how e.g. annually, cost of living and performance
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* how does compensation fit into the overall financial picture of the organization,
that is, what can the company afford to pay
Many companies today use a pay for performance standard, more commonly know
as merit pay. It also includes bonuses and other incentive payments. While this is
an important strategy to use to ensure better productivity, cost of living increases
should not be ignored as well.
3. MOTIVATING EMPLOYEES THROUGH COMPENSATION
If you will recall Maslow’s Hierarchy of Needs, compensation is at the very bottom
of the pyramid. It meets the basic needs that people have because it allows them
to buy food and clothing and pay for accommodation. As these needs are met,
compensation then takes on the form of status for an individual. The more money
they make, the more important they are in an organization. Therefore staff that
are at the level of status will tend to work harder to achieve that status, that is, to
make more money.
Pay Equity: Pay equity has both internal and external facets. First, employees
compare themselves internally to determine if they are paid equitably in relation to
other jobs in the organization. Secondly, they compare their salaries to others in
the labour market performing similar work. Staff who feel that there is internal
equity will be more motivated to perform. Those who feel that there is no external
equity may have a higher turnover rate than others. On page 403 of the text you
will see an example of the relationship between pay equity and motivation.
Expectancy Theory and Pay: Expectancy Theory, in relation to compensation,
states that an employee's level of work motivation depends on how attractive the
compensation is related to the work that they do. If they believe that the reward
will be higher for good work, you tend to see this level of achievement. So
perception in this case is very important. The relationship between pay-for-
performance and the expectancy theory of motivation is shown on page 404 of the
Pay Secrecy: A number of organizations are secret about employee salaries, even
going as far as to set rules around the level of compensation. Pay secrecy makes
staff distrust your compensation practices and therefore, it lowers motivation. The
fact is that with the amount of internet information around salaries available today,
it is difficult to keep staff in the dark about the going rate for their jobs. Companies
should avoid the practice if they wish to promote a positive pay strategy.
4. THE BASES OF COMPENSATION
•Hourly – an employee is paid for each hour or part of worked – no work, no pay
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• Salaried - employees have a number of hours that they are expected to work
(weekly, biweekly, or monthly), but even if they work more hours or less hours,
they will generally be paid the same amount
• Piecework – an employee is paid according to the number of units they produce.
In Ontario, the amount paid to employees cannot be less than minimum wage.
5. THE WAGE MIX
How internal and external factors come together to determine how much a job will
be paid is call the Wage Mix.
Internal factors include:
• the company’s compensation strategy – lag, meet or lead the market
• the worth of the job – some jobs are seen as more important to the
organizational bottom line e.g. in a research company, a scientist is often more
difficult to replace than the manager
• the worth of the employee – some employees are simply more valuable to an
organization because of their productivity, their technical expertise or their
leadership abilities – these staff will generally be the ones receiving regular
merit increases and companies will want to keep them on strength
• employer's ability to pay
External factors include:
labour market conditions – the more there are of that particular skill in the
labour market, that is the greater the supply, the less need there is to lead the
market – however if the supply is low, expect wages to be higher to attract staff
area wage rates – these are the rates for similar jobs in the geographic area –
given that most people are not willing or able to relocate, keeping wages in line
with others in the area keeps you competitive
cost of living increases
collective bargaining – if you are unionized, then you can expect that wages will
be higher than others or at the very least, be very competitive
Figure 9.3 on p. 407 of the text lists the internal and external factors affecting the
6. JOB EVALUATION SYSTEMS
Organizations use job evaluation to determine the relative worth of jobs within their
organization. This places the jobs in a hierarchy, with the most valuable jobs being
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paid more. Job evaluation is an important process in determining the value of jobs
because it establishes pay equity in the company.
The three common methods of job evaluation are:
Job Ranking System - all jobs are simply ranked, generally by a committee of
managers, employees and HR practitioners into a hierarchy of jobs
Job Classification System - used by the federal public service – a predetermined
number of pay grades are established, with each grade requiring more skill, effort,
and responsibility than the grade below it. The job is then put into the right grade
by comparing the job to the description for that particular grade.
Point System – in this system there a set of factors chosen that the organization
will compensate jobs for – skill, effort, responsibility and working conditions. Each
factor is divided into degrees, that is the degree to which that factor appears. Each
degree has points allocated to it. Add the points together to get the level of the
job. Most organizations who use this method develop their own manual on the
process. On pages 413 - 414 of the text, you will see job factors developed by the
Management Positions are often the most difficult to evaluate because of their
complexity. Many companies use the Hay profile method which bases the
evaluation on 3 factors, knowledge, mental activity, and accountability. Like the
point system, it allocates points to each level of the factor.
Work Valuation – this system is relatively new and evaluates work based on its