direct financial compensation

Human Resource Management 12th Edition

Chapter 9Direct Financial Compensation

Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall 9-1

Are Top Executives Paid Too Much?

• Peter Drucker advised that a 20-to-1 salary ratio between senior executives and rank-and-file white-collar workers is the limit beyond which they cannot go if they don't want resentment and falling morale to hit their companies.

• CEO pay has ballooned to about 344 times average worker's pay in 2009.


Compensation: An Overview

• Compensation: Total rewards provided to employees in return for services

• Direct financial compensation: Wages, salaries, bonuses, and commissions

• Indirect financial compensation (benefits): All other financial rewards

• Nonfinancial compensation: Satisfaction from job itself or from psychological and/or physical environment in which employee works


Components of Total Compensation Program External EnvironmentInternal Environment


Compensation

Direct

Wages Salaries Commissions Bonuses

Indirect (Benefits) Legally Required Benefits SSSPag-ibig Philhealth

Discretionary Benefits Health Care Life Insurance Retirement Plans Disability Protection Employee Stock Option Plans

Voluntary Benefits

The JobMeaningful and Satisfying Job

Recognition for Accomplishment

Feeling of Achievement

Possibility of Increased Responsibility

Opportunity for Growth and Advancement

Enjoy Doing the Job

Job EnvironmentSound Policies Capable Managers Competent Employees Congenial Coworkers Working Conditions

Workplace Flexibility Flexitime Compressed Workweek

Financial Nonfinancial

Equity Theory

• A person’s motivation is in proportion to the perceived fairness of the rewards received for the amount of effort exerted.

• This is then compared to what others around the person receive for their efforts, making equity and fairness important in compensation.


Equity in Financial Compensation

• Financial equity: Perception of fair pay • External equity: Employees paid comparably to

workers who perform similar jobs in other firms• Internal equity: Employees paid according to

relative value of jobs within a single organization• Employee equity: Individuals performing similar

jobs for same firm paid according to factors such as performance level or seniority

• Team equity: More productive teams are rewarded more than less productive groups


Primary Determinants of Direct Financial Compensation


Organization Compensation Policies Organizational Level Ability to Pay

Labor Market Compensation Surveys Expediency Cost of Living Labor Unions Economy Legislation

Employee Job Performance Skills Competencies Seniority Experience Organization Membership Potential Political Influence Luck

Job

Pricing

Direct Financial Compensation

Job Job Analysis Job Descriptions Job Evaluation

Organization as a Determinant of Direct Financial Compensation

• Compensation policies

• Organizational level

• Ability to pay


Compensation Policies

• Pay leaders: Pay higher wages and salaries to attract high-quality, productive employees and thus achieve lower per-unit labor costs

• Market rate, or going rate: Pay what most employers pay for same job

• Pay followers: Pay below market rate because of firm’s poor financial condition or belief that it does not require highly capable employees


Organizational Level

• Upper management often makes decisions to ensure consistency.

• Extreme pressure to retain top performers may override desire to maintain consistency in pay structure.


Ability to Pay

Organization’s assessment of its ability to pay is an important factor in determining pay levels.


Labor Market as Determinant of Direct Financial Compensation

• Labor market: Potential employees located within geographic area from which employees are recruited

• Pay for same jobs in different labor markets may vary considerably


Compensation Surveys

• A means of obtaining data regarding what other firms are paying for specific jobs or job classes within a given labor market.

• Market rates remain the most important standard for determining pay.


Expediency

• Managers in highly technical and specialized areas occasionally need to use nontraditional means to determine what constitutes competitive compensation for scarce talent and niche positions.

• They need real-time information.


Cost of Living

• When prices rise over a period of time and pay does not, real pay is actually lowered.

• A pay increase must be roughly equivalent to the increased cost of living.


The Economy

• Affects financial compensation decisions

• Depressed economy generally increases labor supply

• Cost of living often rises as economy expands


Job as Determinant of Direct Financial Compensation

• Job itself is a factor, especially in firms that have internal pay equity as primary consideration.

• Organizations pay for value they attach to certain: – Duties– Responsibilities– Other job-related factors, such

as working conditions


Job Analysis and Job Descriptions

• Before organization can determine relative difficulty or value of jobs, they must first define content.

• This is done by job analysis and job descriptions.


Employee as Determinant of Direct Financial Compensation

• Performance (performance-based pay)• Seniority• Experience• Potential• Political influence• Luck


Performance-Based Pay

• Merit pay• Variable pay• Bonuses• Spot bonuses• Piecework


Merit Pay

• Pay increase given based on level of performance, as indicated in appraisal

• Historically a cost-of-living increase in disguise

• Increases the employee’s base pay

• Some companies are freezing or cutting pay for some so as to be able to reward others


Variable Pay (Bonuses)

• Bonuses are the most common type of variable pay for performance.

• One-time financial award based on productivity.

• Based on productivity that is not added to base pay.

• Use of bonuses is a win–win situation.


Spot Bonuses

• Relatively small gifts to employees for outstanding work or effort

• For work done in a relatively short period of time


Piecework

• Employees paid for each unit they produce

• Especially prevalent in the production/operations area

• Need plan for developing output standards

• Not feasible for many jobs


Other Determinants of Pay

• Seniority: Length of time employee has been with the company

• Experience: Has a significant impact on performance

• Potential: Used to attract prospective talent• Political influence: May sway pay and

promotion decisions (It’s not what you know, but who you know.)

• Luck: Being in the right place at the right time


Salary Compression: Why Is the New Guy Making What I Am Making?

• Occurs when less experienced employees are paid as much as or more than employees who have been with organization a long time

• Caused by a gradual increase in starting salaries and limited salary adjustment for long-term employees

• Occurs when there is only a minimum pay differential with various skills and responsibility levels


Team-Based Pay

• If a team is to function effectively, firms should also provide rewards based on the overall team performance.

• Firms find it easier to develop performance standards for groups than for individuals.

• Potential disadvantage for exemplary performers.


Company-Wide Pay

• Profit sharing


Profit Sharing

• Distribution of predetermined percentage of firm’s profits (cash or stock) to employees

• Kinds of plans: – Current profit sharing– Deferred profit sharing – trust fund

(retirement, termination, death)– Combination plans


Contingent Worker Compensation

• In most cases, contingent workers earn less pay than permanent counterparts

• Far less likely to receive health or retirement benefits


Executive Compensation

• Enormous pay gap between the most affluent executives and the average worker.


Types of Executive Compensation

• Base salary

• Bonuses and performance-based pay

• Stock option plans


Base Salary

• Factor in determining executive’s standard of living.

• Salary provides basis for other forms of compensation; may determine amount of bonuses and certain benefits.


Bonuses and Performance-Based Pay

• Trend toward more performance-based compensation packages for executives

• Payment of bonuses reflects a managerial belief in their incentive value


Stock Option Plans

• Options for managers to buy specified amount of stock in the future at or below current market price.



All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Printed in the United States of America.

direct financial compensation

Documents

pearson education

rise of executive compensation

major types of compensation

prentice hall9

total rewards

ceo pay

annual pay of typical

health care insurance