Strategic Human resource Management

compensation

Compensation

• Key strategic area• Impact an employer’s ability to– Attract applicants– Retain employeesIn meeting organization objectives– It’s a key economic issue which attracts, motivates

and retains employees; at the same time compensation should allow the organization to maintain a cost structure that enables it to compete effectively and efficiently in it s markets

Compensation

Compensation system

Indirect

Incentive pay• Bonus

• Commission• Profit sharing• Stock options

Base pay

Direct

Legally required• Social security• Unemployment

compensation insurance• Worker’s

compensation• Stock options

Optimal• Paid time off

(holidays, vacations, sick

days)•Health insurance• Retirement• Disability

insurance• Life insurance• Dependent care• Flexible working

hours

Compensation• Equity: equity and work related outcomes

Internal Equity

External Equity

Individual Equity

Perceptions of Fairness

Performance

Motivation

Commitment

Compensation• Equity theory:• Perceived equity or fairness of the system for

employees• All employees should feel that they are

compensated fairly relative to others• Equity theory holds that;– Workers assess their perceived inputs to their work

and their outcomes to those of othersIf they are being treated inequitably relative to others;

it may have several negative impact

Compensation• Internet can provide a wealth of information

to employees about comparable salary data.• A recent Google search turned up more than

28,000 hits for the search “salary comparison” sites

• Salary.com• Careerjournal.comMost visited sites

Compensation

• Types of equity:– Internal equity– External equity– Individual equity

These perceptions of equity directly impact – Motivation– Commitment– Performance

Compensation • Internal equity:– Perceived fairness of pay differentials among

different jobs within an organization– It should be fair according to the difference in job

responsibilities– In attempting to establish internal equity, employers

can evaluate jobs by using four techniques:– Job ranking– Job classification– Point systems– Factor comparison

Compensation

• Job ranking:– Relatively simple– Most challenging job receive higher compensation– Random and non scientific; concerned with the

hierarchical position of jobs– It is used in infrequent and usually only in small,

informal organization• Job classification;– Group jobs requirement similar effort, ability, training,

and responsibility into predetermined grades or classes and compensates each job within a grade similarly.

– Organization must force each job into specific category,

Compensation• Point system:– Easy to understand– Difficult to design– Easy to implement once they are operational– Create the list of compensable factors• Things that the organization is willing to pay its

employees for such as education, experience, specific skills, working conditions, and responsibility.

Compensation• Hay plan;– A special type of point system is often used for

administrative and managerial positions– It utilizes three factors called universal factors which

are common to all managerial and administrative jobs:– Know-how

• Technical knowledge required to do a job

– Problem solving• Assess the amount of independent thinking and decision

making required in the job

– Accountability• Direct responsibility for people, resources and results.

compensation

• External Equity:– External equity involves employee perception of the

fairness of their compensation relative to those outside the organization

– Employees look at the salary structure of other organizations

– Determine market wage rate– When making assessment of external equity, it is

important to consider not only salaries but also other forms of compensation, such as bonus and incentive plans

– Competitors level???

compensation

• External Equity:– Organization has determine has its own pay

strategy relative to market– A lead policy– A lag policy– A Market policy

Compensation

• Individual Equity:– Consider employee receptions of pay differentials

among individuals who hold identical jobs in the same organization.

– Basic pay on seniority– Seniority based systems– Merit pay system– Performance based pay system– Skilled based pay system– Team based pay system

Compensation

Legal issues in compensation:– Discrimination (Men n women)– Different jobs– Same jobs– Equal pay act– Worth of the work (loading or office work)

Compensation

• Executive compensation:– Important and controversial area of compensation– No standard for executive compensation– Different industries– Recent corporate accounting scandals in which

executives reaped millions of dollars in compensation while organizations were going bankrupt has drawn even more attention to executive compensation

– Stock option

Compensation

• Conclusion;– Number of strategic issues:• Compensation relative to the market• Balance between fixed and variable compensation• Utilization of individual versus team based pay• Appropriate mix of financial and non financial

compensation• Over all cost effective program that results in high

performance