The document discusses key aspects of developing compensation plans, including identifying appropriate compensation policies, establishing internal pay equity, and understanding different approaches such as job-based versus skill-based compensation. It also outlines the components of compensation systems, types of compensation, total compensation packages, criteria for developing plans, and tools for setting compensation.

1. Challenges
 Identify the compensation policies and practices that are most
appropriate for a particular firm.
 Weigh the strategic advantages and disadvantages of the different
compensation options.
 Establish a job-based compensation scheme that is internally
consistent and linked to the labor market.
 Understand the difference between a compensation system in
which employees are paid for the skills they use and one in which
they are paid of the job they hold.
 Make compensation decisions that comply with the legal
framework.
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2. Compensation
 Financial rewards that employees receive
can come in a wide array of forms
 Most visible forms are cash compensation
and fringe benefits
 Total rewards an individual receives, when
compared to with what he feels he should
receive , determine satisfaction
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3. Compensation
Compensation is a systematic
approach to providing monetary value
to employees in exchange for work
performed. Compensation may
achieve several purposes assisting in
recruitment, job performance, and job
satisfaction
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4. Compensation
The methods and practices of maintaining
balance between interests of operating the
company within the fiscal budget and
attracting, developing, retaining, and
rewarding high quality staff through wages
and salaries which are competitive with the
prevailing rates for similar employment in the
labor markets.
4

5. Compensation
Compensation is a tool used by management
for a variety of purposes to further the
existence of the company. Compensation
may be adjusted according the business
needs, goals, and available resources.
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6. Compensation
 Recruit and retain qualified employees
 Increase or maintain morale/satisfaction
 Reward and encourage peak performance
 Achieve internal and external equity
 Reduce turnover and encourage company
loyalty
 Modify (through negotiations) practices of
unions
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7. Components of Compensation
System
 Compensation will be perceived by
employees as fair if based on systematic
components
 Various compensation systems have
developed to determine the value of positions
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8. Components of Compensation
System
 Job descriptions
A critical component of both compensation and
selection systems, job descriptions define in
writing the responsibilities, requirements,
functions, duties, location, environment,
conditions, and other aspects of jobs.
Descriptions may be developed for jobs
individually or for entire job families.
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9. Components of Compensation
System
 Job analysis
The process of analyzing jobs from which job
descriptions are developed. Job analysis
techniques include the use of interviews,
questionnaires, and observation.
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10. Components of Compensation
System
 Job evaluation
A system for comparing jobs for the purpose of
determining appropriate compensation levels for
individual jobs or job elements. There are four
main techniques: Ranking, Classification,
Factor Comparison, and Point Method.
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11. Components of Compensation
System
 Salary ranges/structures
Useful for standardizing compensation practices.
Most pay structures include several grades with
each grade containing a minimum salary/wage
and either step increments or grade range.
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12. Components of Compensation
System
 Salary surveys
• Collections of salary and market data. May
include average salaries, inflation indicators, cost
of living indicators, salary budget averages. When
purchasing the results of salary surveys
conducted by other vendors, note that surveys
may be conducted within a specific industry or
across industries as well as within one
geographical region or across different
geographical regions.
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13. Components of Compensation
System
Written procedures
Policies and regulations
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14. Types of Compensation
 Base Pay
 Commissions
 Overtime Pay
 Bonuses, Profit Sharing, Merit Pay
 Stock Options
 Travel/Meal/Housing Allowance
 Benefits including: dental, insurance,
medical, vacation, leaves, retirement, taxes...
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15. Total Compensation
The package of quantifiable
rewards an employee receives for
his or her labors. Includes three
components: base compensation,
pay incentives, and indirect
compensation/benefits
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16. The Elements of Total
Compensation
Total
Compensation
Base Pay Indirect
Compensation Incentives Compensation/
Benefits
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17. The Nine Criteria for Developing a
Compensation Plan
1. Internal versus External Equity Will the compensation plan
be perceived as fair within the company, or will it be
perceived as fair relative to what other employers are paying
for the same type of labor?
2. Fixed versus Variable Pay Will compensation be paid
monthly on a fixed basis —through base salaries —or will it
fluctuate depending on such preestablished criteria as
performance and company profits?
3. Performance versus Membership Will compensation
emphasize performance and tie pay to individual or group
contributions, or will it emphasize membership in the
organization —logging in a prescribed number of hours
each week and progressing up the organizational ladder? 17

18. The Nine Criteria for Developing a
Compensation Plan (cont.)
4. Job versus Individual Pay Will compensation be based on
how the company values a particular job, or will it be based
on how much skill and knowledge an employee brings to
that job?
5. Egalitarianism versus Elitism Will the compensation plan
place most employees under the same compensation
system (egalitarianism), or will it establish different plans by
organizational level and/or employee group (elitism)?
6. Below-Market versus Above-Market Compensation Will
employees be compensated at below-market levels, at
market levels, or at above-market levels?
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19. The Nine Criteria for Developing a
Compensation Plan (cont.)
7. Monetary versus Nonmonetary Awards Will the
compensation plan emphasize motivating employees
through monetary rewards like pay and stock options, or will
it stress nonmonetary rewards such as interesting work and
job security?
8. Open versus Secret Pay Will employees have access to
information about other workers’ compensation levels and
how compensation decisions are made (open pay) or will
this knowledge be withheld from employees (secret pay)?
9. Centralization versus Decentralization of Pay Decisions Will
compensation decisions be made in a tightly controlled
central location, or will they be delegated to managers of the
firm’s units? 19

20. The Labor Market Model
Supply of
Qualified
Employees
Wage
W1
Demand for
Employees
0 N1
Number of Qualified Workers 20

21. Compensation Tools
 The goal of all these tools is to produce pay
systems that:
 Equitable
 Allow the firm to:
 Attract
 Retain
 Motivate workers
 While
 Keeping labour costs under control
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22. Compensation Tools
 Can be grouped into two broad categories
 Job-based Approaches
 Skill-based Approaches
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23. Compensation Tools
 Job-based Approaches
 Includes traditional and widely used type of
compensation programs
 These plans assume that work gets done by
people who are paid to perform well-defined jobs
 All jobs not equally important
 Important jobs attract better compensation
 Employees paid according to Grade
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24. Compensation Tools
 Skill-based Approaches
 Far less common
 Assumes that workers should be paid according
to how flexible or capable they are at performing
multiple tasks
 Greater the variety of job-related skills workers
possess, the more they are paid
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25. When to Use a Job-based
Pay Policy
 A job-based pay policy tends to work best in
situations where:
 Technology is stable
 Jobs do not change often
 Employees do not need to cover for one another frequently
 Much training is required to learn a given job
 Turnover is relatively low
 Employees are expected to move up through the ranks
over time
 Jobs are fairly standardized within the industry
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26. Individual-based
Compensation
 Individual-based compensation programs are more
suitable when:
 The firm has a relatively educated workforce with both the
ability and the willingness to learn different jobs
 The company’s technology and organizational structure
change frequently
 Employee participation and teamwork are encouraged
throughout the organization
 Opportunities for upward mobility are limited
 Opportunities to learn new skills are present
 The costs of employee turnover and absenteeism in terms
of lost production are high
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27. The Key Steps in Creating Job-Based
Compensation Plans
Job Evaluation for
Internal Equity 1. Job Analysis
2. Job Descriptions 3. Job Specifications
Identify 4. Rate Worth of All Jobs
Compensable Factors Using a Predetermined
System
5. Job Hierarchy
6. Classify Jobs by 1. Check Market Value
Market Surveys for Grade Levels Using Benchmark or Key
External Equity Jobs
7. Establish Final Pay Criteria for Pay
Policy Positioning Within
Within-Pay-Range Range for Each Job
Positioning Criteria • Experience
for Individual Equity Individual Pay • Seniority 27
Assignment • Performance
© 1998 by Prentice Hall