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Chapter One. Compensation: A Component of Human Resource Systems. What Influences Pay?. Chris Smith and Pat Jones are both computer programmers. Chris earns $45,000, while Pat earns $35,000. What could cause this difference?. Equity Policies. Internal Consistency. External

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Chapter One

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chapter one

Chapter One

Compensation: A Component of Human Resource Systems

what influences pay
What Influences Pay?
  • Chris Smith and Pat Jones are both computer programmers.
  • Chris earns $45,000, while Pat earns $35,000.
  • What could cause this difference?
equity policies
Equity Policies








compensation department s main goals
Compensation Department’s Main Goals
  • Internal equity --Internal consistency
    • Relative value of each job among all jobs within a company
    • Value of the job, regardless of the person in the job
    • Jobs that require greater qualifications, more responsibilities, and more-complex job duties should receive higher pay than other jobs.
    • Done through job analysis and job evaluation
  • External equity—Market-competitiveness
    • Jobs within a company are paid similarly to same jobs outside
    • Companies’ pay policies fit with business objectives
    • Done through strategic analysis and salary surveys
  • Individual equity--Recognizing individual contributions
    • Pay people differently within jobs according to job performance.
    • Done through pay grades and ranges
compensation techniques
Compensation Techniques
    • Job Analysis, Job Descriptions, Job Evaluation, Internal Work Structure
    • Market definitions, Market surveys, Policy lines, Pay structures
    • Seniority based, Performance based, Incentive guidelines, Incentive programs
    • Planning,Budgeting,Communicating, Evaluating
what is compensation
What is Compensation?
  • Intrinsic compensation
    • Reflects employees’ psychological mind sets that result from performing their jobs.
    • Through effective job design
  • Extrinsic compensation
    • Rewards given you by others
    • Includes both monetary and non-monetary (e.g., benefits) rewards.
    • Through compensation systems
Exhibit 1-1The Influence of Core Job Characteristics on Intrinsic Compensation and Subsequent Benefits to Employers

Core Job


Critical Psychological


Benefit to


Skill variety

Task identity

Task significance

Experienced meaningfulness of the work

Lower turnover

Lower absenteeism

Enhanced job performance

Greater job satisfaction

Experienced responsibility for work outcomes



Gained knowledge of results from work activities

exhibit 1 3 elements of core compensation
Exhibit 1-3Elements of Core Compensation
  • Base Pay (recurring)
    • Hourly pay/wage
    • Annual salary
  • How Base Pay is Adjusted Over Time
    • Cost-of-living adjustments (COLAs)
    • Seniority pay
    • Merit pay
    • Incentive pay or variable pay
    • Pay-for-knowledge and skill-based pay
exhibit 1 4 elements of fringe compensation 1 of 3
Exhibit 1-4Elements of Fringe Compensation (1 of 3)
  • Social Security Act of 1935
    • Unemployment insurance
    • Retirement insurance
    • Benefits for dependents
    • Disability benefits
    • Medicare
  • State compulsory disability laws
    • Workers’ Compensation
  • Family and Medical Leave Act of 1993 (12 weeks of annual unpaid leave)
exhibit 1 4 elements of fringe compensation 2 of 3
Exhibit 1-4Elements of Fringe Compensation (2 of 3)
  • Discretionary Benefits
    • Protection Programs
      • Income protection programs
      • Health protection programs
    • Pay for time-not-worked
      • Holidays
      • Vacation
      • Sick leave
      • Personal leave
      • Jury duty
      • Funeral leave
      • Military leave
      • Cleanup, preparation, travel time
exhibit 1 4 elements of fringe compensation 3 of 3
Exhibit 1-4Elements of Fringe Compensation (3 of 3)
  • Discretionary Benefits (cont.)
    • Services
      • Employee assistance programs (EAPs)
      • Family assistance programs
      • Tuition reimbursement
      • Transportation services
      • Outplacement assistance
      • Wellness programs
strategic vs tactical decisions
Strategic vs. Tactical Decisions
  • Strategic decisions guide activities in the market
  • Tactical decisions support the fulfillment of strategic decision
competitive strategy
Competitive Strategy
  • Planned use of resources to promote & sustain competitive advantage
  • Lowest-cost strategy
    • Efficient-scale, cost minimization
    • Southwest Airlines, Wal-Mart
    • Employee roles: repetitive, predictable behaviors, short-term focus, individual activity, concern for quantity, primary concern for results.
  • Differentiation Strategy
    • Unique products: design image, technology, etc
    • Build brand loyalty, price premium, invest in R&D
    • Iams company, Saks Fifth Avenue
    • Employee roles: creative behavior, long-term focus, cooperative and interdependent behavior, risk taking, openness to novel work.
compensation and
Recruitment, Selection

$ to get top candidates, signing bonus, benefits

Performance Appraisal

Basis for merit pay and incentives


Pay for knowledge

Career Development

Promotions, lateral moves

Labor-Management Relations

Collective bargaining agreements, pay, COLAs, incentives

Employee Termination

Severance pay, pension, early retirement


Income and continuity, safety, work hours, pay discrimination, disabilities and family needs

Compensation and…
stakeholders of the compensation system
Stakeholders of the Compensation System
  • Employees
  • Line managers
  • Executives
  • Unions
  • U.S. government