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The Pay Model. Chapter 1. Chapter Topics. Compensation: Definition Forms of Pay A Pay Model Book Plan Caveat Emptor - Be an Informed Consumer Your Turn: Glamorous Internships, or House Elves?. Key Questions and Issues. How differing perspectives affect our views of compensation

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The pay model

The Pay Model

Chapter 1


Chapter topics
Chapter Topics

Compensation: Definition

Forms of Pay

A Pay Model

Book Plan

Caveat Emptor - Be an Informed Consumer

Your Turn: Glamorous Internships, or House Elves?


Key questions and issues
Key Questions and Issues

How differing perspectives affect our views of compensation

Definition of compensation

The meaning of compensation most appropriate from an employee's view: return, reward, or entitlement

Examining “network of returns” a college offers an instructor


Key questions and issues cont
Key Questions and Issues (cont.)

  • Four policy issues in the pay model

    • Objectives of the pay model

  • Forms of pay received from work


Contrasting perspectives of compensation

Society’s Views

Stockholders’ Views

Managers’ Views

Employees’ Views

Contrasting Perspectives of Compensation


Compensation definition
Compensation: Definition

  • Society

    • Pay as a measure of justice

    • Benefits as a reflection of justice in society

    • Job losses (or gains) attributed to differences in compensation

    • Belief that pay increases lead to price increases



Compensation definition cont
Compensation: Definition (cont.) Workers (in U.S. Dollars)

  • Stockholders

    • Using stock to pay employees creates a sense of ownership

    • Linking executive pay to company performance supposedly increases stockholders' returns

  • Managers

    • A major expense

    • Used to influence employee behaviors and to improve the organization's performance



Compensation definition cont1
Compensation: Definition (cont.) Change in CEO Pay

  • Employees

    • Major source of financial security

    • Return in an exchangebetween employer and themselves

    • Entitlementfor being an employee of the company

    • Rewardfor a job well done

  • Global Views – Vive la différence

    • China: Traditional meaning of compensation providing necessities of life replaced with dai yu

    • Japan: Traditional word kyuyo replaced with hou-syu; very recently the phrase used is teate


What is compensation
What Is Compensation? Change in CEO Pay

Compensation refers to all forms of financial returns and tangible services and benefits employees receive as part of an employment relationship



Forms of pay
Forms Of Pay Change in CEO Pay

  • Relational returns

    • Psychological in nature

  • Total compensation

    • Cash Compensation/ transactional

      • Base wages

        • Difference between wage and salary

      • Merit pay/cost-of-living adjustments

        • Merit increases – given in recognition of past work behavior

        • Cost-of-living adjustments –same increases to everyone, regardless of performance


Forms of pay cont
Forms Of Pay (cont.) Change in CEO Pay

  • Cash Compensation/ transactional (cont.)

    • Incentives/ Variable pay – tie pay increases directly to performance

      • Does not increase base wage; must be reearned each pay period

      • Potential size generally known beforehand

      • Long-term (stock options), and short-term

  • Benefits

    • Income protection

    • Work/life balance

    • Allowances


Forms of pay cont1
Forms Of Pay (cont.) Change in CEO Pay

  • Total earnings opportunities: Present value of a stream of earnings

    • Shifts comparison of today's initial offers to consideration of future bonuses, merit increases, and promotions

  • Relational returns from work

    • Nonfinancial returns

  • Organization as a network of returns

    • Created by different forms of pay, including total compensation and relational returns


A pay model
A Pay Model Change in CEO Pay

  • Three basic building blocks:

    • Compensation objectives

    • Policies that form the foundation of the compensation system

    • Techniques that make up the compensation system


Exhibit 1 5 the pay model
Exhibit 1.5: The Pay Model Change in CEO Pay


Compensation objectives cont
Compensation Objectives (cont.) Change in CEO Pay

  • Efficiency

    • Improving performance, increasing quality, delighting customers and stockholders

    • Controlling labor costs

  • Fairness

    • Fundamental objective of pay systems

    • Fair treatment by recognizing both employee contributions, and employee needs

  • Procedural fairness


Compensation objectives cont1
Compensation Objectives (cont.) Change in CEO Pay

  • Compliance

    • Conformance to Federal and State compensation laws and regulations

  • Ethics

    • Organizations care about how its results are achieved

  • Objectives

    • Guide the design of the pay system

    • Serve as the standards for judging success of the pay system

    • Policies and techniques are means to reach objectives



Four policy choices

Internal alignment Change in CEO Pay

Focus - Comparisons among jobs or skill levels inside a single organization

Pay relationships within an organization affect employee decisions to:

Stay with the organization

Become more flexible by investing in additional training

Seek greater responsibility

External competitiveness

Focus - Compensation relationships external to the organization: comparison with competitors

Pay is ‘market driven’

Four Policy Choices


Four policy choices cont
Four Policy Choices (cont.) Change in CEO Pay

  • External competitiveness (cont.)

    • Effects of decisions regarding how much and what forms:

      • To ensure that pay is sufficient to attract and retain employees

      • To control labor costs to ensure competitive pricing of products/ services

  • Employee contributions

    • Focus - Relation emphasis placed on employee performance

      • Performance based pay affects fairness

  • Management

    • Focus - Policies ensuring the right people get the right pay for achieving the right objectives in the right way


Pay system techniques

Techniques tie the four basic policies to the pay objectives Change in CEO Pay

Many variations exist

Some techniques will be discussed through the book

Pay System Techniques


Caveat emptor be an informed consumer
Caveat Emptor - Change in CEO PayBe An Informed Consumer

  • Is the Research Useful?

  • Does the Study Separate Correlation from Causation?

  • Are there Alternative Explanations?


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