Strategic Compensation

Strategic Salary Planning

 Human Resource
Governmental
Societal Decisions

Strategies
Corporate Organizational
Affecting
Management
Compensation
Decisions
Decision Business
Making
Function Level
Functional Decisions

Strategies
 Total Compensation

Direct Indirect

Wages / Salaries Time Not Worked

Vacations
Breaks
Holidays
Commissions
Insurance Plans
Bonuses Medical
Dental
Life
Gainsharing
Security Plans
Pensions

Employee Services
Educational assistance
Recreational programs
 The Relationship between Business Unit
Strategy to Compensation Goals

Strategy A fundamental pattern of present

and past deployments and environmental
interactions that indicates how an
organization will achieve its objectives.

Compensation Goals Attract, HR Strategy Acquiring the Quantity

Retain, Motivate and Develop and Quality of human resources the possess
the Human Resources necessary the necessary knowledge, skills and abilities
to accomplish the Organization's within relevant time constraints, to achieve
goals organization goals

Compensation Strategy Decisions

to Environmental Threats and
Opportunities and linked or at least
support the overall direction of the
organization
Compensation Management and
Other HRM Functions

Supply of applicants
Aid or impair recruitment Recruitment affects wage rates

Selection standards affect

Pay rates affect selectivity Selection level of pay required

Training and Increased knowledge leads

Pay can motivate training
Development to higher pay

Training and development may Compensation A basis for determining

lead to higher pay Management employees rate of pay

Low pay encourages Pay rates determined

unionization
Labor Relations through negotiation
Common Strategic Compensation Goals

1. To reward employees past performance

2. To remain competitive in the labor market
3. To maintain salary equity among employees
4. To mesh employees future performance with organizational goals
5. To control the compensation budget
6. To attract new employees
7. To reduce unnecessary turnover & motivate employees
Compensation System
Key Strategic Issues in Compensation

Determining compensation relative to market

Balance between fixed and variable compensation
Deciding whether or not to utilize team-based versus individual pay
Creating appropriate mix of financial and non-financial
compensation
Developing a cost-effective compensation program resulting in high
performance
Compensation Policy Issues

Pay for performance

Pay for seniority
Salary increases and promotions
Overtime and shift pay
Probationary pay
Paid and unpaid leaves
Paid holidays
Salary compression
Geographic costs of living differences
Forms of Equity

External equity
- How a jobs pay rate in one company compares to the jobs pay rate in other
companies.
Internal equity
- How fair the jobs pay rate is, when compared to other jobs within the same company
Individual equity
- How fair an individuals pay as compared with what his or her co-workers are earning
for the same or very similar jobs within the company.
Procedural equity
- The perceived fairness of the process and procedures to make decisions regarding
the allocation of pay.
Equity Theory
Equity and Its Impact on Pay Rates

The equity theory of motivation

- States that if a person
perceives an inequity, the
person will be motivated to
reduce or eliminate the
tension and perceived
inequity.
Expectancy Theory and Pay

Expectancy Theory
- A theory of motivation that holds that
employees should exert greater work
effort if they have reason to expect that
it will result in a reward that they value.
- Employees also must believe that good
performance is valued by their
employer and will result in their
receiving the expected reward.
Perceived Equity of a Pay Structure

MY PAY OTHERS PAY

My qualifications Their qualifications
My work performed Their work performed
My product value Their product value
Relationship between Pay Equity and Motivation

50
45
40
35 My Input/Output
Ratio
30
Comparison Person's
25 Input/Output Ratio
20
15
10
5
0
Inequity Equity Inequity

(Feeling of Being (Feeling of Being (Feeling of Being

Underpaid) Paid Fairly) Overpaid)
 Relationship between Pay Equity and Motivation

Doing More and Receiving Less Doing the Same and Receiving the Same Doing Less and Receiving More

The greater the perceived disparity between my input/output ratio and

the comparison persons input/output ratio, the greater the motivation
to reduce the inequity.
Individual Equity

Fairness about pay differentials among individuals in same job

Established by using
- Seniority-based pay systems: Reward longevity
- Merit-based pay systems: Reward employee performance
- Incentive plans: Employees receive part of compensation based on
performance
- Skills-based pay systems: Compensation based on employees
possessing skills that firm values
- Team-based pay plans: Encourage cooperation and flexibility
Internal Equity

Fairness of pay
differentials between
different jobs in
organization
Established by job
ranking, job
classification, point
systems or factor
comparisons (job
evaluation)
Internal alignment, often called internal
equity, refers to the pay relationships
between the jobs / skills / competencies
within a single organization. The
relationships form a pay structure that can
support the workflow, is fair to
employees, and directs their behavior
toward organization objectives.
External Equity

Fairness of organizational
compensation levels relative
to external compensation
Assessed by collecting
wage and salary survey
information to guide in
setting organizations pay
strategy to lead, meet, or lag
labor market wages
External Equity

Lag policy Market policy

- Lower wages than competitors, - Wages equal to competitors
compensates employees through - Neutralizes pay as factor
other means
Lead policy
- Opportunity for advancement
- Higher wages than competitors to
- Incentive plans
ensure organization becomes
- Good location employer of choice
- Good working conditions
- Employment security
What Is Competency-based Pay?

Competency-based pay
- Where the company pays for the
employees range, depth, and types
of skills and knowledge, rather than
for the job title he or she holds.
Competencies
- Demonstrable characteristics of a
person, including knowledge, skills,
and behaviors, that enable
performance.
Methods to Address Equity Issues

Salary surveys
- To monitor and maintain external equity.
Job analysis and job evaluation
- To maintain internal equity,
Performance appraisal and incentive pay
- To maintain individual equity.
Communications, grievance mechanisms, and employees participation
- To help ensure that employees view the pay process as transparent and fair.
Strategic Compensation Policy Concerns

1. The rate of pay within the organization and whether it is to be above, below, or at
the prevailing community rate.
2. The ability of the pay program to gain employee acceptance while motivating
employees to perform to the best of their abilities.
3. The pay level at which employees may be recruited and the pay differential between
new and more senior employees.
4. The intervals at which pay raises are to be granted and the extent to which merit
and/or seniority will influence the raises.
5. The pay levels needed to facilitate the achievement of a sound financial position in
relation to the products or services offered.
Compensating Teams

Management often overlooks

powerful intrinsic rewards that
come from
- Team participation
- Being part of corporate decision-
making process
Let team decide who gets what
from awards basket
The Pay-for-Performance Standard

Pay-for-Performance Standard
- The standard by which managers tie
compensation to employee effort and
performance.
- Refers to a wide range of
compensation options, including merit-
based pay, bonuses, salary
commissions, job and pay banding,
team/ group incentives, and various
gainsharing programs.
The Bases for Compensation

Hourly Work
- Work paid on an hourly basis.
Piecework
- Work paid according to the number of units produced.
Salary Workers
- Employees whose compensation is computed on the basis of weekly,
biweekly, or monthly pay periods.
The Wage MixInternal Factors

Employers Compensation Strategy

- Setting organization compensation policy to lead, lag, or match
competitors pay.
Worth of a Job
- Establishing the internal wage relationship among jobs and skill levels.
Employees Relative Worth
- Rewarding individual employee performance
Employers Ability-to-Pay
- Having the resources and profits to pay employees.
The Wage MixExternal Factors

Labor Market Conditions

- Availability and quality of potential
employees is affected by economic
conditions, government regulations and
policies, and the presence of unions.
Area Wage Rates
- A firms formal wage structure of rates
is influenced by those being paid by
other area employers for comparable
jobs.
The Wage MixExternal Factors

Cost of Living
- Local housing and environmental
conditions can cause wide variations in
the cost of living for employees.
- Inflation can require that compensation
rates be adjusted upward periodically
to help employees maintain their
purchasing power.
The Wage MixExternal Factors

Collective Bargaining
- Escalator clauses in labor agreements
provide for quarterly upward cost-of-
living wage adjustments for inflation to
protect employees purchasing power.
- Unions bargain for real wage increases
that raise the standard of living for their
members.
- Real wages are increases larger than
rises in the consumer price index; that
is, the real earning power of wages.
 The Wage Curve

Wage Curve
- A curve in a scattergram representing the relationship between relative worth of
jobs and wage rates.
Pay Grades
- Groups of jobs within a particular class that are paid the same rate.
Rate Ranges
- A range of rates for each pay grade that may be the same for each grade or
proportionately greater for each successive grade.
Red Circle Rates
- Payment rates above the maximum of the pay range.
Wage Structure with Increasing Rate Ranges
The Wage Curve (contd)

Competence-based Pay, (also skill-based pay or knowledge-based pay)

- Compensation for the different skills or increased knowledge employees
possess rather than for the job they hold in a designated job category.
- Greater productivity, increased employee learning and commitment to
work, improved staffing flexibility to meet production or service demands,
and the reduced effects of absenteeism and turnover,
Broadbanding
- Collapses many traditional salary grades into a few wide salary bands.
 Motivating Employees through Compensation

Pay Secrecy
- An organizational policy prohibiting employees from revealing their
compensation information to anyone.
- Creates misperceptions and distrust of compensation fairness and pay-
for-performance standards.
- Arguments against secrecy:
- Knowledge of base pay is the strongest predictor of pay
satisfaction, which is highly associated with work engagement
- Knowledge of base pay more strongly predicts pay satisfaction
than does the actual amount of pay received by employees.
Virtuous and Vicious Circles

Organization
Performance Increased Performance-
INCREASES Based Pay

Virtuous Circle

Risk/Return Increased Employee

BALANCE Performance

Organization
Performance Decreased Performance-
DECREASES Based Pay
Vicious Circle

Risk/Return Decreased Employee

IMBALANCE Performance
 Framework for Analyzing
Different Deals

HIGH PAY LOW COMMITMENT HIGH PAY HIGH COMMITMENT

Hired Guns Cult - like

(Stockbrokers) (Microsoft)
TRANSACTIONAL

LOW PAY LOW COMMITMENT LOW PAY HIGH COMMITMENT

Workers as Commodity Family

Low

(Employers of Migrant (Starbucks)

Farm Workers)

Low High
RELATIONAL
Pay structure, refers to the array of pay
rates for different work or skills within a
single organization. The number of levels,
differentials in pay between the levels, and
the criteria used to determine those
differences create the structure.
Consequences of an Internally Aligned Structure

Undertake training
Increase experience
Reduce turnover
Pay structure Facilitate career progression
Facilitate performance
Reduce pay-related
grievances
Reduce pay-related work
stoppages
Internal Consistency:
Engineering Job Structure

Entry Level Engineer: Limited use of basic principles. Close supervision.

Senior Engineer: Full use of standard principles and concepts. Under
general supervision.
Systems Engineer: Wide applications of principles and concepts, plus
working knowledge of other related disciplines. Under very general
direction.
Lead Engineer: Applies extensive knowledge as a generalist or specialist.
Exercises wide latitude.
Advisor Engineer: Applies advanced principles, theories, and concepts.
Assignments often self-initiated.
Consultant Engineer: Exhibits an exceptional degree of ingenuity,
Recognized creativity, and resourcefulness. Acts independently to uncover and resolve
Authority operational problems.
Which Structure has the Greatest Impact on Performance? On
Fairness?

Structure A Structure B
Layered De-layered
Chief Engineer Chief Engineer
Engineering Manager
Consulting Engineer
Senior Lead Engineer
Lead Engineer Consulting Engineer
Senior Engineer
Engineer
Engineer Trainee Associate Engineer
Pay Mix Policy Alternatives

Performance - Driven Market Match

Benefits Benefits
17% 20%
Options 4%
Options Base 50% Base 70%
16% Bonus 6%

Bonus
17%
Work - Life Balance Security (Commitment)

Benefits
20%
Benefits
30%
Base 50%
Base 80%
Options
10%
Bonus
10%
QUESTIONS