Financial Rewards and Compensation Anil Verma, Professor Rotman School of Management University of Toronto

1. Financial Rewards and Compensation Anil Verma, Professor Rotman School of Management University of Toronto

2. I. Compensation: An Overview A. Direct Financial Compensation Wages, salaries, bonuses, commissions B. Indirect Financial Compensation All financial rewards not included in direct compensation (benefits) C. Nonfinancial Compensation Satisfaction received from the job or from the psychological and/or physical environment of the job

3. II. Compensation Equity A. Equity Perception that one is being treated fairly B. External Equity Employees are paid comparably to those who perform similar jobs in other firms C. Internal Equity Employees are paid according to relative value of their jobs within an organization D. Employee Equity Individuals performing similar jobs for the same firm are rewarded according to factors unique to the employee, such as performance level or seniority E. Team Equity More productive teams receive greater rewards than less productive groups

5. The Organization as a Determinant of Financial Compensation A. Pay Leaders Organizations that pay higher wages and salaries than competing firms B. Going Rate Average pay that most employers provide for the same job in a particular area or industry C. Pay Followers Managers who choose to pay below the going rate because of poor finances or because they believe that they do not require highly capable employees

6. The Labour Market as a Determinant of Financial Compensation (1 of 3) A. Compensation Surveys Organizations conduct surveys to determine prevailing pay rates and benefits within labour markets B. Cost of Living A pay increase must be roughly equivalent to cost of living increase to maintain the level of real wages C. Labour Unions When a union uses comparable pay as a standard in making compensation demands, the employer must obtain accurate labour market data

7. The Labour Market as a Determinant of Financial Compensation (2 of 3) D. Society Compensation paid to employees affects a firm�s prices for its goods or services�consumers may be interested in compensation decisions E. The Economy A depressed economy generally increases the labour supply, serving to lower the average wage rate In most cases, the cost of living will rise in an expanding economy, exerting upward pressure on pay levels

9. The Job as a Determinant of Financial Compensation Employees are paid for the values attached to duties, responsibilities, and other job-related factors like working conditions Techniques for determining a job�s relative worth include job analysis, job descriptions, and job evaluation A. Job Analysis and Job Descriptions Job analysis is a systematic method of determining the skills and knowledge required for performing jobs The job description is the primary product of job analysis, consisting of a written document that describes job duties and responsibilities Job descriptions are an essential part of all job evaluation systems

10. Job Evaluation (1 of 2) Job evaluation is a technique or process used to determine the relative value of one job in relation to every other job. The Ranking Method Raters examine each job description and arrange jobs in order according to their perceived value to the company Classification Method Classes or grades are defined to describe a group of jobs The raters compare the job description with the class description The class description that most closely agrees with the job description determines the job�s classification

11. Job Evaluation (2 of 2) Factor Comparison Method Raters make decisions on separate aspects of the job; assuming there are 5 universal job factors Point Method Numerical values are assigned to specific job components; the sum of these values provides quantitative assessment of a job�s relative worth The Hay Guide Chart-Profile Method is a highly refined version of the point method, which uses only a few factors: know-how, problem solving, accountability, and, where appropriate, working conditions

12. The Employee as a Determinant of Financial Compensation (1 of 4) A. Pay for Performance Theory: Rewarded behaviour tends to be repeated. Types of P-f-P: Individual Incentives Compensation programs that relate pay to individual performance Line-of sight is very clear

14. The Employee as a Determinant of Financial Compensation (3 of 4) E. Seniority Length of time employee has been associated with the company, division, department, or job F. Skill-based pay Employees are compensated on the basis of job-related skills and knowledge G. Experience On-the-job experience may greatly enhance a person�s ability to perform