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MGTO 231 Human Resources Management. Compensation I Dr. Kin Fai Ellick WONG. Prologue. Have you ever asked the following questions? Why the salary for some jobs are higher than the salary for other jobs? Why are there bonuses for some jobs but not for other jobs?

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Mgto 231 human resources management

MGTO 231Human Resources Management

Compensation I

Dr. Kin Fai Ellick WONG


Prologue
Prologue

  • Have you ever asked the following questions?

    • Why the salary for some jobs are higher than the salary for other jobs?

    • Why are there bonuses for some jobs but not for other jobs?

    • If I were a manager, how do I know the salary for a newly created job?

  • You may find the answers in the following two classes


Outline
Outline

  • Some basic concepts of compensation

  • Designing a compensation system

    • Internal vs. external equity

    • Fixed vs. variable pay

    • Performance vs. membership

    • Job vs. individual pay

    • To be continued in next lesson


Outline1
Outline

  • Some basic concepts of compensation

  • Designing a compensation system

    • Internal vs. external equity

    • Fixed vs. variable pay

    • Performance vs. membership

    • Job vs. individual pay

    • To be continued in next lesson



Elements of compensation
Elements of compensation

  • Total compensation

    • The package of quantified rewards an employee receives for his/her labors

      • Base compensation

      • Pay incentives

      • Indirect compensation / benefits


Base compensation
Base compensation

  • The fixed pay an employee receives on a regular basis

    • Salary or hourly wages

    • The most standard part about pay

    • Will be extensively discussed in this and next lessons


Pay incentives
Pay incentives

  • A program designed to reward employees for good performance

    • Bonuses, profit sharing

    • Will be further discussed in the lesson “Pay for Performance”


Indirect benefits
Indirect benefits

  • Benefits

    • Health insurance, housing scheme, annual leave

  • Perquisites, perks

    • Car, parking, club member, etc.


Strategic aspects
Strategic aspects

  • Compensation constitutes the single most important cost in the firm

    • 60% or even higher of the total cost

  • The pay strategy should be consistent with overall business strategy

    • Hi-tech industry: Research & Development

    • Thus, the following questions should be asked frequently, and answered accurately:



Outline2
Outline salaries?

  • Some basic concepts of compensation

  • Designing a compensation system

    • Internal vs. external equity

    • Fixed vs. variable pay

    • Performance vs. membership

    • Job vs. individual pay

    • To be continued in next lesson


Nine criteria for developing a compensation system
Nine criteria for developing a compensation system salaries?

  • Internal vs. external equity

  • Fixed vs. variable pay

  • Performance vs. membership

  • Job vs. individual pay

  • Egalitarianism vs. elitism

  • Below-market vs. above-market compensation

  • Monetary vs. non-monetary rewards

  • Open vs. secret pay

  • Centralized vs. decentralized of pay decisions


Nine criteria for developing a compensation system1
Nine criteria for developing a compensation system salaries?

  • Internal vs. external equity

  • Fixed vs. variable pay

  • Performance vs. membership

  • Job vs. individual pay

  • Egalitarianism vs. elitism

  • Below-market vs. above-market compensation

  • Monetary vs. non-monetary rewards

  • Open vs. secret pay

  • Centralized vs. decentralized of pay decisions


Internal vs external equity
Internal vs. external equity salaries?

  • Fairness or justice in pay is an important issue

  • Perception of unfairness could minimize the impact of a compensation system (e.g., it could decrease the morale of workers and de-motivate them)

  • Fair pay is one that employees generally view as equitable


  • Internal equity salaries?

    • The perceived fairness of the pay structure within a firm

  • External equity

    • The perceived fairness in pay relative to what other employers are paying for the same type of labor


What is perceived to be fair
What is perceived to be fair? salaries?

  • Internal Equity

    • Employees compare what they bring to the firm to what they receive in return (i.e., outcome/input ratio)

    • Employees compare this ratio with that of other employees within the firm

    • Internal equity is met when one’s outcome/input ratio is equivalent to that of others


  • External Equity salaries?

    • The salary is perceived as fair when it fits with the demand-supply labor market

    • The more the demand, or the lower the supply, then the higher the salary

    • External equity is met when the salary is set at a point where the supply of labor equals the demand for labor


Nine criteria for developing a compensation system2
Nine criteria for developing a compensation system salaries?

  • Internal vs. external equity

  • Fixed vs. variable pay

  • Performance vs. membership

  • Job vs. individual pay

  • Egalitarianism vs. elitism

  • Below-market vs. above-market compensation

  • Monetary vs. non-monetary rewards

  • Open vs. secret pay

  • Centralized vs. decentralized of pay decisions


Fixed vs variable pay
Fixed vs. variable pay salaries?

  • Some organizations choose to pay a high proportion of total compensation in the form of base pay (i.e., relatively fixed pay): HK government, education units (HKUST)

  • Some choose to pay a high proportion of total compensation in the form of variable pay: investment bank


  • In general, the percent of salary in the form of bonus increases as the base salary increases

  • Those in higher level positions earn more, but their compensations are more subject to risk

  • The more the proportion of variable pay, the more risk sharing there is between the employee and the firm


Nine criteria for developing a compensation system3
Nine criteria for developing a compensation system increases as the base salary increases

  • Internal vs. external equity

  • Fixed vs. variable pay

  • Performance vs. membership

  • Job vs. individual pay

  • Egalitarianism vs. elitism

  • Below-market vs. above-market compensation

  • Monetary vs. non-monetary rewards

  • Open vs. secret pay

  • Centralized vs. decentralized of pay decisions


Performance vs membership
Performance vs. membership increases as the base salary increases

  • Performance-contingent compensation

    • Outcome oriented, Piece-rate plans

    • Pay based on units produced: 膠降落傘

    • Commission

  • Membership-contingent compensation

    • All received the same or similar wage in a given job (with minimum satisfactory performance)


Nine criteria for developing a compensation system4
Nine criteria for developing a compensation system increases as the base salary increases

  • Internal vs. external equity

  • Fixed vs. variable pay

  • Performance vs. membership

  • Job vs. individual pay

  • Egalitarianism vs. elitism

  • Below-market vs. above-market compensation

  • Monetary vs. non-monetary rewards

  • Open vs. secret pay

  • Centralized vs. decentralized of pay decisions


Job vs individual pay
Job vs. individual pay increases as the base salary increases

  • Job pay

    • Regardless of ability and performance, the pay is based on jobs. Highly qualified individuals will not be paid more on the same job

  • Individual pay

    • Knowledge-based, or skill-based pay system

    • Paid on the basis of the jobs they can do or talents they have that can be successfully applied to a variety of tasks and situations


Which is better
Which is better? increases as the base salary increases

  • Research findings have the following suggestions

  • Job-based tends to work best in situations where

    • Technology is stable, jobs do not change often

    • Employees do not need to cover for one another frequently

    • Turnover is relatively low

    • Employees are expected to move up through the ranks over time


  • Individual-based compensation programs are more suitable when:

    • The firm has a relatively educated workforce with both the ability and the willingness to learn different jobs

    • The company’s technology and organizational structure change frequently

    • Employee participation and teamwork are encouraged throughout the organization

    • Opportunities for upward mobility are limited


Nine criteria for developing a compensation system5
Nine criteria for developing a compensation system when:

  • Internal vs. external equity

  • Fixed vs. variable pay

  • Performance vs. membership

  • Job vs. individual pay

  • Egalitarianism vs. elitism

  • Below-market vs. above-market compensation

  • Monetary vs. non-monetary rewards

  • Open vs. secret pay

  • Centralized vs. decentralized of pay decisions


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