...an organization is only be as good as the people it is able to attract and keep...

...the firm must pay employees what they are worth or else they may choose to work for another firm...

Compensation is the outcomes (rewards) employees receive in exchange for their work...

...an exchange between the individual or group and the employer

A... compensation scheme... communicates...  about the firm's values and cultures...

Employees are more likely to look at what a company pays rather than what it says.

compensation policy...

• systematically administered
• equitable salaries,
• reconciling employees' career aspirations
• aligning employees' objectives with those of the organization,
• keeping costs under control

The desire for more pay has the potential to lead to

• reduced productivity,
• increased levels of grievances,
• increased levels of strikes,
• increased job accidents,
• increased levels of absenteeism
• search for higher paying job
• psychological withdrawal

Relative pay levels... comparisons employees make of pay within the organization... employees' feelings of fairness or equity.

Employees will act to restore equity if they perceive an imbalance...

It is axiomatic to suggest that an organization is only be as good as the people it is able to attract and keep. Therefore, as we have indicated in sections dedicated to recruitment and selection, it is important that firms take the time necessary to find the right people to fill job openings. Choosing people to work for an organization generally means choosing people for a long time; these people should be thought of as investments.  As these people are likely to be essential ingredients in the firm's success, it is incumbent upon the firm to protect this asset/investment. As such, the firm must pay employees what they are worth or else they may choose to work for another firm. The firm's compensation policy must be managed appropriately.

COMPENSATION MANAGEMENT

Let's begin our discussion of Compensation Management with a simple question: "What is compensation?" While there may be as many answers to this question as there are employees, we'll start with the following definition:

Compensation is the outcomes (rewards) employees receive in exchange for their work, or

Pay is an exchange between the individual or group and the employer.

From a manager's perspective, the compensation package offered a firm's employees is important not only because it costs money, but because it's likely to be the primary reason the employees work for the firm. Compensation packages with good pay and benefits can help attract and retain the best employees. A quick survey of employees about compensation is likely to reveal an expectation that wages cover basic living expenses, keep up with inflation, leave some money for savings (perhaps for retirement) and leisure, increase over time, and are fair.

A firm's compensation scheme also communicates a great deal about the firm's values and cultures. Employees are more likely to look at what a company pays rather than what it says. In many respects, people behave as they are rewarded. Insofar as this is true, a compensation scheme communicates to the employees what the firm's expectations are of them. Therefore, for example, if quality is an important value, it should be reinforced through some element of the total compensation system.

An Overview of Reward Systems

The objectives of a compensation policy are manifold:

• attract suitable staff
• retain qualified personnel
• develop reward structures that are equitable with consistent and fair pay relationships between differently valued jobs
• adjust pay structures to reflect inflationary effects
• ensure that rewards and salary costs adjust to changes in market rates or organizational change
• reward performance, responsibility, and loyalty, and provide for progression and increases
• comply with legal requirements
• keep compensation levels and differentials under review and control salary/wage costs

CONSEQUENCES OF PAY DISSATISFACTION

There are also clear consequences to neglecting a firm's compensation policy. The desire for more pay has the potential to lead to reduced productivity, increased levels of grievances, strikes, and the search for higher paying job. Further, organizational symptoms of pay dissatisfaction may include increased levels of absenteeism and job accidents, and psychological withdrawal.

EQUITY

One consideration in the establishment of a compensation policy has to do with absolute versus relative levels of pay. Quite simply, absolute levels of pay provide for satisfaction of an employee's physiological and safety needs (see Maslow on the topic of motivation). On the other hand, relative pay levels address issues of satisfaction of social and esteem needs. Relative pay levels have to do with the comparisons employees make of pay within the organization, and deal with feelings of fairness or equity. Worker dissatisfaction is likely increase if either internal or external equity principles are violated.

Simply put, internal equity refers to the relative fairness of wages received by other employees in the same organization. External equity is fairness relative to wages outside the organization.

Employees will act to restore equity if they perceive an imbalance (see Equity Theory of Motivation). In evaluating the fairness of their pay, employees balance the ratio of their inputs (e.g., work effort, skills) and  outcomes (e.g., pay, privileges) against those of their coworkers. Workers may thus experience guilt if they feel over-compensated, or they may feel anger if they perceive that they are being under-compensated. The greater the perceived disparity, the greater the tension. In order to relieve this tension, employees may seek balance in a number of ways:

1. modify input or output (e.g., if underpaid, a person may reduce his efforts or try to obtain a raise; if overpaid, he/she may increase efforts or work longer hours without additional compensation -- although they are as likely to be able to rationalize their level of over-compensation);

2. adjust the notion of what is fair (e.g., if underpaid, a worker may think of himself as being the recipient of other benefits—such as doing interesting work; if overpaid, an employee may come to believe he deserves it);

3. change source of equity comparison (e.g., an employee who has compared himself with a promoted co-worker may begin to compare himself with another worker);

4. attempt to change the input or output of others (e.g., asking others not to work so hard or to work harder);

5. withdraw (e.g., through increased absenteeism, mental withdrawal or quitting);

6. force others to withdraw (e.g., trying to obtain a transfer for a co-worker or force him to quit).

Employees use a myriad of factors (both inputs and outputs) to arrive at their perceptions of fairness. As such, reward systems must compensate not only for levels of work done, but also for quality of performance, age, and length of service. The reward system is clearly an integral part of the motivational process. Further, the reward system also serves to protect employees against inflationary pressures.

...evaluation criteria are generally expressed in the form of "compensable factors":

• Skill
• Effort
• Responsibility
• Working Conditions

Through job evaluations, jobs in the firm may be rated according to their relative "importance."

Once a job evaluation has been completed, market comparisons for a few key jobs need to be used as anchors for market reality.

To establish external equity, employers need information about what other employers pay in the same labor market.

In job ranking, each job is ranked subjectively according to its importance in comparison with other jobs in the organization.

In the job grading method, each job is assigned a grade according to it's match with a standard description.

JOB EVALUATION

Compensation management starts with the JOB EVALUATION. The job evaluation is a set of systematic procedures to determine the relative worth of jobs within the organization. The ultimate goal is the establishment of an hierarchical alignment of jobs based on a common set of criteria. These evaluation criteria are generally expressed in the form of "compensable factors":

components of job content or work demands that are felt to provide the basis for compensation.

In general, most organizations use four broad categories of factors:

• Skill
• Effort
• Responsibility
• Working Conditions

Point-factor plans or factor comparison approaches typically employ similar sets of factors.

Some commonly used factors are:

• Knowledge Required
• Supervisory Controls
• Complexity
• Scope and Effect
• Personal Contacts
• Purpose of Contacts
• Guidelines
• Physical Demands
• Work Environment

There are, of course other factors which also play a role in the establishment of a rational compensation policy:

• scarcity of supply of skills or tightness of the labor market
  • labor mobility and market activity in response to pay differentials
• recruitment and retention
  • associated costs of moving - physical and psychological
• life style aspirations of current or prospective employees
• loyalty towards current employer
  • sense of security, willingness to face change
  • attraction of benefits, work relationships, organizational values

Remuneration policy must embrace factors such as the firm's objectives, its finances, cash flow, profitability, government regulations on pay, and any company growth/contraction that may be expected.

Job Evaluations & Market Considerations

A firm can arrive at appropriate wages for positions in the firm on the basis of two main compensation management tools: (1) job evaluations (based on compensable factors such as effort, skill, working conditions, and responsibility), and (2) the going rate (or market value) of a job.

Job evaluation

Through job evaluations, jobs in the firm may be rated according to their relative "importance." Each job might be given its own rate, or jobs of comparable importance may be grouped into a single wage classification, or pay grades. Job evaluations compare positions in an organization with respect to such factors as effort, skill, working conditions, responsibility, and so on.

For the job evaluation to be useful, a detailed list of compensable factors needs to be articulated. To increase the utility of the job evaluation, workers may be asked to participate in the process of evaluating the firm's jobs. Employees can add valuable insight into the essential job attributes for various positions.

Job evaluations, then, reflect the relative value or contribution of different jobs to an organization.

Once a job evaluation has been completed, market comparisons for a few key jobs need to be used as anchors for market reality. In theory, other jobs in the job evaluation can be adjusted correspondingly.

Market considerations

In practice, results of job evaluations are often compromised by market considerations. For example, no matter what the firm's  job evaluation may indicate, it is unlikely that the firm will be able to pay wages drastically lower (or higher) than the going rate. Whereas the "market" clearly plays a role in the establishment of wages, the market is not totally free. Legal constraints such as pay equity schemes and minimum wage legislation clearly affect wages.

To establish external equity, employers need information about what other employers pay in the same labor market. Wage surveys of jobs in similar industries should describe jobs accurately, as positions may vary widely, even for jobs with the same title.

Job evaluations and market surveys

In setting wages, it is essential to reconcile market information and job evaluation results rather than to rely on only one or the other.

JOB EVALUATION METHODOLOGIES

A variety of methodologies may be used to arrive at the hierarchical alignment of jobs required for purposes of arriving at equitable wages.

JOB RANKING

In job ranking, each job is ranked subjectively according to its importance in comparison with other jobs in the organization. Unfortunately, overall rankings of jobs frequently fail to differentiate between the relative importance of the jobs. For example, a ranking system may fail to show that the value of a number two ranked job is essentially the same as that of the number one ranked job (and, consequently, worth almost as much in terms of compensation), whereas the number three ranked job may contribute not nearly as much value to the firm (and, consequently, be worth substantially less in terms of compensation).

JOB GRADING

In the job grading method, each job is assigned a grade according to it's match with a standard description. Each job description is compared with the standard "grading" description.

JOB GRADE STANDARD DESCRIPTIONS

The factor comparison methods requires jobs to be compared on critical job components.

Critical job components are those factors common to all jobs in the organization being evaluated.

The factor comparison methods requires jobs to be compared on critical job components.

Critical job components are those factors common to all jobs in the organization being evaluated. In general, these factors can be grouped into four broad categories:

• skill
• effort
  • mental effort
  • physical effort
• responsibility
• working conditions

A Step-by-Step Approach to Factor Comparison:

POINT SYSTEM

The point system involves an evaluation of critical factors with an allocation of points instead of dollars to ascertain the relative worth of a variety of jobs to the firm.

Job evaluation plans are the principal means for establishing the comparability of jobs and, as such, they are used in efforts to achieve greater pay equity. However, they remain controversial because they have often been found to contain gender biases.

For example, the selection of factors and factor weights in most job evaluations is designed to reflect market wage relationships. It is argued that a firms wages must reflect "reality". However, the use of such factors and factor weights may serve to institutionalize gender biases contained in prevailing market rates. It cannot be assumed that market rates are free of bias.

Further, job evaluations are highly subjective in their application and gender biases may be introduced at any number of steps in the process.

For more information on pay equity and gender biases, please see the information provided by the Canadian Human Rights Commission.

BEYOND WAGES AND SALARIES

In this discussion, we have focussed on wages and salaries. It is important to remember that a consistent finding of studies of pay and motivation is that cash compensation, while important, is often overshadowed by employees' needs for growth, challenge, and the feeling of being valued and appreciated.

Money is not the only way to attract the best people. The best way to attract and keep good people is to offer them:

1. Responsibility

2. A good working environment

3. A sense of accomplishment

4. A belief in the business and

5. A fair salary