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The PayModel

Chapter

1

Screen graphics created by:

Jana F. Kuzmicki, PhD

Troy State University-Florida and Western Region

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1. Explain how perceptions of compensation differ amongsociety, stockholders, managers and employees.

2. Discuss the difference between cash compensation (directcompensation) and benefits (indirect compensation) anddefine each of the direct and indirect forms of compensation.

3. Explain how the employment relationship combines bothtransactional and relational returns to form an implicitcontract between employers and employees.

4. Explain the three main components of a pay model.

5. Understand how the pay model integrates objectives,

policies, and techniques into a compensation system.6. Be able to distinguish empirical research from surveys

and opinions.

Learning ObjectivesAfter discussing Chapter 1, students

should be able to:

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Chapter Topics

Compensation: Definition, Please?Forms of Pay

The Employment Relationship

Combines Transactional andRelational Returns

A Pay Model

Book Plan

Caveat Emptor - Be an Informed

Consumer

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Key Questions and Issues

How do differing perspectives affect ourviews of compensation?

What can a pay system do for an

organization? For an employee?

How does the pay model help organizeone’s thinking about compensation?

Under what circumstances would one of the four basic pay policies beemphasized relative to the others?

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Society’s Views

Stockholders’Views

Employees’Views

Managers’Views

Contrasting Perspectives of Compensation

t

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1-7x t . : our yCompensation

Costs for Production Workers

E t 1 L t

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1-8Ex t 1. : La or osts as aPercentage of Revenues, Airline

Industry

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Compensation refers toall forms of financial

returns and tangible

services and benefits

employees receive as

part of an employment

relationship.

What Is Compensation?

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Exhibit 1.3: Total Returnsfor Work

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Direct Pay Forms

Cash Compensation:

Base

Cash Compensation:

Merit Pay / Cost-of-

Living Adjustments

Cash Compensation:

Incentives

Long-Term Incentives

Indirect Pay Forms

Benefits: Income

Protection

Benefits: Work/Life

Focus

Benefits: Allowances

Forms of Pay

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Relational Returns fromWork

Recognition& Status

EmploymentSecurity

Challenging

Work

Learning

Opportunities

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E t 1 4 F

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1-14Ex t 1.4: Framewor orAnalyzing Employment

Relationships

HIGH PAY – LOW COMMITMENT

Hired Guns(Stockbrokers)

HIGH PAY – HIGH COMMITMENT

Cult - like(Microsoft)

LOW PAY – LOW COMMITMENT

Workers as Commodity

(Employers of MigrantFarm Workers)

LOW PAY – HIGH COMMITMENT

Family

(Starbucks)

H i g h

H i g h

L o w

L o w

T

R A N

S A C T I O

N A

L

T

R A N

S A C T I O

N A

L

LowLow HighHigh

RELATIONALRELATIONAL

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POLICIES TECHNIQUES OBJECTIVES

EFFICIENCY

• Performanc

e• Quality

• Customers

• Stockholders

• Costs

FAIRNESS

COMPETITIVENESS Market Surveys Policy PAYdefinitions lines STRUCTURE

CONTRIBUTORSSeniority Performance Merit INCENTIVE

based based guidelines PROGRAMS

MANAGEMENT Costs Communication Change EVALUATION

Exhibit 1.5: THE PAY MODEL

ALIGNMENTWork Descriptions Evaluation/

analysis certificationINTERNAL

STRUCTURE

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Compensation Objectives

Efficiency

Fairness

Compliance

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Medtronic Support objectives and increasedcomplexity of business

Minimize increases in fixed costs Emphasize performance through

variable pay and stock Competitiveness aligned with

financial performance: 50th percentile performance paid at 50th percentile of market. 75th percentile performance paid at 75th of market.

AESOur guiding principles are to act withintegrity, treat people fairly, have fun,

and be involved in projects that providesocial benefits. This means we will

Help AES attract self-motivated,

dependable people who want to keeplearning new things

Hire people who really like the placeand believe in the AES system

Pay what others are paid both inside

and outside AES, but hire people whoare willing to take less to join AES

Use teams of employees and managersto manage the compensation system

Make all employees stockholders

Exhibit 1.6: Pay Objectivesat Medtronic and AES

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Internal alignmentFocus - Comparisons among jobs or skill levels

inside a single organization

External competitiveness

Focus - Compensation relationships external tothe organization: comparison with competitors

Employee contributionsFocus - Relation emphasis placed on employee

performance

ManagementFocus - Policies related to managing the pay

system

Pay System Policies

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Include methods used to operationalizepolicy decisions and link decisions to overallcompensation objectivesExamples of techniques

Internal consistency Job analysis Job evaluation

External competitivenessPay surveys

Employee contributionsIncentive plans

Performance-based pay increases

Pay System Techniques

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