Compensation, Social Justice, and Labor in Society The Pay Model

OVERVIEW Chapter one begins with the importance of compensation and provides a definition. The chapter continues with a discussion on the various forms of compensation. The major focus presents a pay model with three main components: o Compensation objectives, policy decisions, and techniques. COMPENSATION [COMPENSATION DOES NOT MEAN THE SAME THING TO EVERYONE.] What is Compensation? o All forms of financial returns and tangible services and benefits employees receive as part of an employment relationship. Society o Some people see pay as a measure of justice.  Gap between male/female earnings differentials.  Benefits may also be a reflection of equality or justice in society.  Some see benefits as a measure of success. o Job losses (or gains) in a country is partly a function of labor costs (and productivity). o What does compensation mean in a society perspective?  Social status, who is more important. The billionaire or me? o What does it say to an individual that is being paid based hourly or salary?  You work at a job that pays for all your benefits. What does that say about you in society? IT SAYS THAT YOURE VALUABLE. Because an organization just does not give that away. Stakeholders o Some stockholders say using stock to pay employees creates a sense of ownership.  Others argue it dilutes stockholder wealth. o Stockholders have a particular interest in executive pay.  Linking executive pay to company performance increases stockholders' returns.  How much is a CEO worth? o What is a stakeholder?  If CSULA disappeared, who would be affected? Los Angeles City, the state of California. Managers o Compensation influences manager’s success in two ways.  First, it is a major expense that must be managed.  Second, it is a major determinant of employee attitudes and behaviors. o Minimizing compensation costs may actually be more expensive… how?  Less productivity for employees. You cut my pay, I cut my effort. [Equity Theory] o What does this mean to managers?  Cost of labor. Cost is the first thing that comes to mind to managers when thinking about compensation.  Cut costs OR make more money. Employees [What does compensation mean to employees? o Pay is usually a major source of financial security. o Employees may see compensation as:  A return in an exchange.  An entitlement for being an employee of the company.  An incentive to take/stay in a job and invest in performing well.  As a reward for having done so. o Pay can influence employee motivation and behavior in two ways:  The incentive effect is the degree to which pay influences individual and aggregate motivation. [This is the most obvious one.] What does incentive mean? A motivation to do something.  The sorting effect is the effect that pay can have on the composition of the workforce. How an organization pays can result in sorting effects. What does this mean? o The way we structure how to pay people will attract people to our organization. At the same time it will sort of push the people out of this system. o A glass company changed from a salary-only compensation plan to an individual incentive plan.  Productivity increased by 44%  Half of this increase was due to productivity increases in individual employees  Where did the other half come from? The people that did not like this system had quit. o Reason of being there, the value of their labor. Although, is compensation is important to employees? Yes it is! o Social Desirability is what shows when someone is just wanting to know the amount of how much money they will get. This makes you look greedy. It is frowned upon society. FORMS OF PAY Forms of pay are categorized in two ways. o Total compensation:  Is pay received directly as cash and indirectly as benefits. o Relational Returns:  Are psychological.  Examples? TOTALS RETURNS FOR WORK CASH COMPENSATION Base Wage o Cash that an employer pays in return for the work performed. o A function of the skill or education an employee possesses. o Example  EX: $20/hr for a machine operator  However, some operators may receive more because of their experience and/or performance. Merit Increases/Merit Bonuses/COLA’S o A cost of living adjustment (COLA) is made to base pay on the basis of changes in:  What others are paying, living costs, or experience/skill. o Merit increases are increments to base pay based on performance.  Merit means based on some sort of performance on the past. o Merit bonuses are paid in a lump sum rather than becoming a part of base pay.  These are actually cheaper. Merit increase actually becomes their salary. o What we need to think into consideration for this is:  What are others paying?  The cost of living. Why doesn’t California pay more? Be Incentives o Incentives are a one-time payment which differs from merit adjustments.  Incentives do not increase base wage.  Incentive payment is known beforehand.  Incentive programs use objective measures of performance. o Incentives may be long-term (stock ownership, or stock options) or short-term. BENEFITS Income Protection o Medical insurance, retirement programs, life insurance, and savings plans are common. Work/Life balance. o Includes time away from work, access to services, and flexible work arrangements. o What is work/life balance?  Its when some jobs have that make your life outside of work better like gyms and what nots. They have child care. Child care on sight. Allowances often grow out of short supply. o China’s housing and transportation allowances. TOTAL EARNINGS OPPORTUNITIES Present value of a stream of earnings. o Comparison of today's initial offers to consideration of future bonuses, merit increases, and promotions.  $50K hire + 4% annual increase + benefits = $430,000(5yrs) Relational returns from work. o Nonfinancial returns that substantially impact employee behavior. A network of returns. o Created by different forms of pay; useful if bonuses, development opportunities, and promotions all work together; aligned. A PAY MODEL Three basic building blocks: 1. The compensation objectives. 2. The policies that form the foundation of the compensation system. 3. The techniques that make up the compensation system. This model serves as both a framework for examining current pay systems and a guide for most of the text. COMPENSATION OBJECTIVES Pay objectives guide the design of the pay system and are standards for judging success. o Efficiency is improving performance, increasing quality, and controlling costs. o Fairness (procedural fairness/procedural justice) is the process used to make pay decisions. o Ethics means the organization cares about how its results are achieved. o Compliance is conforming to federal and state compensation laws and regulations. FOUR POLICY CHOICES Internal Alignment  Refers to comparisons among jobs or skill levels inside a single organization.  pertains to the pay rates both for employees doing equal work and for those doing Dissimilar work.  Does one job contribute more to business goals/strategy than another? o Pay relationships affect the compensation objectives of efficiency, fairness and compliance. External Competitiveness o External competitiveness refers to pay comparisons with competitors. o Pay is ‘market driven’. o Objectives:  To ensure that pay is sufficient to attract and retain employees.  To control labor costs to ensure competitive pricing of products/ services. Four Policy Choices o Employee Contributions  Understanding the basis for judging performance, helps perceive pay as fair. o Management  Right people get the right pay for achieving the right objectives in the right way. PAY TECHNIQUES Really just means we have a lot of separate ways to design our compensation? Do we want to pay everyone in our organization the same? Techniques tie the four basic policies to the pay objectives. Many variations of pay techniques exist. o How do we evaluate which jobs are most important? o How do we ensure we are competitive in pay?  So should we pay the market rate?  Should we pay the same our competitors are paying? Although if we do this, this doesn’t not give us some type of advanced. o How do we incentivize employees?  Do we want to o How do we control costs? SUMMARY Chapter one began with the importance of compensation and provided a definition. The chapter continued with a discussion on the various forms of compensation. The major focus presented a pay model with three main components: o Compensation objectives, policy decisions, and techniques.