[Slide 2 – Here is our overarching framework again. As previously mentioned, firm’s would not like to see their talented employees leave them for other organizations after they have spent considerable company resources on attracting and developing them. As such, attention needs to be given to concerns such as provision of a safe, secure working environment, one that is free from workplace disturbances such as sexual harassment. In some firms, maintaining a positive relationship with a union will be a consideration. Both those issues are discussed in your textbook. We will focus more specifically on the issue of compensation in this module.
 

[Slide 3 -Compensation has both a direct component and an indirect component. The direct component is the paycheck….the wage or salary. But there is also an indirect compensation through benefits an employee receives – while this isn’t direct payment it is still part of the overall compensation package. We will discuss both aspects in this module.

So, how does one decide how much to pay their employees? What wage or salary should be associated with a given job? How much should a secretary be paid compared to a receiving clerk, or a supervisor? On what basis do we make that type of determination? Compensation is a very complex aspect of human resource management – more complex than we can cover in this introductory course. But it is a critical part of making sure we maintain an effective workforce for our organization.

[Slide 4 – Imagine you are a bartender at a local establishment in town. You have lots of bartending experience and are good at your job. You’ve even earned a certificate in Bartending from a local community college. You work hard, and come home exhausted each night. You earn $10 hour. Let’s further suppose your establishment hires a new bartender, a woman in this case. This is her first job as a bartender, and she’s pretty slow behind the bar and makes a lot of mistakes. As far as you can tell, she spends most of her time socializing with friends at the bar. She also makes $10.00 an hour.

So, how does this make you feel? How are you likely to respond? If you are like most people, you feel like you are getting an unfair deal. You are bringing a lot more to this job, in terms of experience, education, skill, compared to your new co-worker, and you are getting the same outcomes…the same $10.00 an hour rate. And if you factor in how exhausted you feel at the end of a hard day’s night, you might feel an even stronger sense of injustice.

We may be able to live with a certain amount of unfairness for a while, but research has shown, at some point, we will have to act in such a way to rectify what we see as an unfair situation. So you might go ask your boss for a raise, which would be the rational thing to do given that you are “worth more” to him, so to speak. Or, you might begin to slack off your effort and performance, to make things “more fair”. Or you might begin to pilfer items home at night, to help offset this sense of unfairness. Or you might quit your job. All of these actions would be predicted by a theory known as Equity Theory.

[Slide 5 –Equity theory provides the underpinnings of our understanding of compensation systems (you’ll be hearing more about Equity theory in an upcoming module on motivation). Equity theory posits that a fundamental motive in all humans is the maintenance of fair, equitable relationships. We compare ourselves to others all the time. We could compare ourselves to a co-worker, a roommate, a family member. If, like the bartender example, we believe inequity exists, we will try to restore equity. As managers, we are unable to predict exactly what the employee will do, but we know at some point he or she will do something.

Interestingly, this basic human motivation has also been recently discovered in other species. In 2003, research on monkeys illustrated the same search for equity.

[Slide 6 – The experiment was conducted between multiple pairs of monkeys. The two monkeys were to perform a similar task - to give the researcher a rock. In exchange, upon receiving the rock the monkey would receive “payment” in the form of a piece of cucumber. So, monkey #1 would give the researcher the rock, and receive a piece of cucumber. Monkey #2 would do the same. In this initial treatment, the monkey pairs completed the exchange 96% of the time. Then, the researcher changed the conditions of the experiment. Monkey #1 would still receive a cucumber upon making the rock exchange; but Monkey #2 would receive a grape in exchange, which is a more desirable food than the cucumber. Monkey #1 would be observing this exchange with the grape, and fairly quickly its compliance rate was reduced to 60%. Finally, the researcher allowed Monkey #2 to receive the grape even without making the rock exchange. Under this final condition, the compliance rate of Monkey #1 fell to 20%. This pattern of compliance was repeated across hundreds of trials, and multiple monkey pairs. The researcher’s attributed this fall in compliance to the equivalent of a “monkey work slow-down or strike” upon perceiving an
unfair or inequitable situation, and concluded that this urge for equity may be a genetically ingrained instinct in higher-order species which may have evolved as a survival trait to foster cooperation and harmony within the group.

So we may be genetically programmed to seek equitable situations. If we believe we bring more to the job we should receive more, compared to those who bring less.

[Slide 7 – So, we still haven’t really answered our initial question….how do we decide who is “worth more” in our organization….is a waiter’s job worth more than a receptionist’s job? How much more? How much less? The way we determine this is through determining the value of the job. There are different techniques available to managers to do this…some are fairly qualitative and judgmental in nature. For instance, the manager may just rank-order all the jobs in his operation in terms of his or her own assessment of their relative worth/importance. More often, however, firms rely on more quantitative techniques to get at the true value/worth/importance of the job. There are different accepted methods which are beyond the scope of this class, but they all refer back to the job analysis we have conducted previously on our jobs. These quantitative methods look at factors such as KSA’s needed for the job, degree of responsibility and decision making, the environment in which the job is performed, etc.

We also need to consider what other waiters or receptionists are paid in other organizations. If waiters in one restaurant are paid significantly less than in other’s, our waiters may feel a sense of unfairness. We keep tabs on what these jobs in other organizations are paid through what we call a market survey.

[Slide 8 - So determining the relative worth of the job through a quantitative assessment of key job factors is important in determining compensation, as is knowing what the area wage rates are for comparable jobs. However, in the overall wage mix, other internal and external factors also will influence our firm’s compensation structure and what we ultimately pay for different jobs. We may factor in our organization’s compensation philosophy: do we want to lead, match, or lag whatever the market rate for different positions are. Depending on this philosophy our compensation will be higher, the same as, or lower than the prevailing wages externally. We will also likely want to factor in the individual’s merit or performance in the job. Do we want to pay higher performing employees more? For most firms, the answer to this is, increasingly, yes.
 

[Slide 9 – The saying that “we get what we reward” is quite true. We can use our compensation system not only as a way to provide the basic wage and salary to employees but also as an incentive system….to motivate them towards certain behaviors. This type of compensation is sometimes referred to as variable pay, but is more commonly known as incentive pay. The purpose is to link more directly individual performance to specific organizational goals, and to also reward superior performance….. a basic equity theory consideration. Examples of variable pay include bonuses, profit-sharing, employee stock option plans, commissions and piece-rate.

[Slide 10 – We would like our incentive system to focus direction to those behaviors important to an organization. For some organizations, encouraging retention and tenure is important, especially for organizations which typically have high turnover. Thus, the incentive might be based on seniority….. every 6 months an individual receives a bump in pay or a one time bonus, for example. Other firms may reward employees for acquiring new skills. However, the majority of firms today are turning their attention to incentives based on merit or performance. These plans, more commonly referred to as pay-for-performance plans, are discussed more thoroughly in a future module on motivation. However, these types of plans definitely impact our entire compensation system. One of the activities you will engage in with this module is exploring CEO compensation and whether CEO pay-for-performance plans do in fact encourage higher CEO and organizational performance.

[Slide 11 – Now let’s briefly look at the area of indirect compensation…that of employee benefits.

[Slide 12 – It really wasn’t until the 1900s that the concept of benefits become a factor in employee compensation. As unions gained strength in the 1920s and 1930s, they began to collectively bargain for basic benefits such as sick leave, an 8-hour work day, and pensions. In 1935 President Roosevelt signed into law the Social Security Act, thus providing a required benefit for all workers. This landmark decision made the general public more aware of additional compensation one could receive aside from just the basic paycheck. But it wasn’t until the war years of WWII that the idea of benefits really took off. During WWII, to stem wage inflation in a time of labor scarcity, a wage freeze was instituted for most American businesses. Since organizations could no longer attract and maintain effective workers through wage and salary increases, managers began to offer additional benefits. This began a dramatic rise in the extent of benefits offered by companies.

[Slide 13 – The benefit side of the compensation package, formerly referred to as “fringe benefits” is no longer so “fringe”. In 2000, benefits accounted for 40% of all payroll costs, on average. Compare this to 1945 figures where benefits averaged on 5% of payroll. The average firm pays approximately $20,000 per employee/ per year in benefits. Definitely not so fringe! However, despite this hefty indirect pay, firms in general don’t do a very good job communicating to employees about the value of their benefits packages.

[14 – There are a wide variety of benefits firms choose to offer to their employees. However, most of these are discretionary. Legally, firms are only required to offer four basic benefits to their workforce.

One of these is Social Security, more officially known as the Federal Insurance Contribution Act, or FICA. You see here a picture of President Roosevelt signing this law into effect.

[Slide 15 – This Act was established as a minimal safety net, to protect workers and their dependents against loss of earnings due to retirement, death, or disability. Both the employer and the employee pay a percentage of the employee’s paycheck to the Social Security Fund which is then designed to be invested in Federal bonds, growing at a safe though modest rate to cover all current and future demands on the Fund. However, as you may be well aware, there is a good deal of controversy regarding the solvency of Social Security and whether it will be able to adequately cover the expected heavy demands upon it in future years. You will explore this issue more fully in one of the activities associated with this module.

[Slide 16 – The other three benefits which are legally required by law are Worker Compensation, Unemployment Compensation, and the newest benefit, the Family and Medical Leave Act, passed in 1995 by President Clinton.

[Slide 17 – Of course, most firms offer many more benefits beyond these four, but they are offered at the organization’s discretion…they are not legally required. The Society for Human Resource Management (SHRM) is one of the major professional associations for human resource professionals. Every 5 years they publish a survey on benefits, to see what kinds of benefits are being offered by organizations. This slide shows you a small sampling of the percentage of firms offering various benefits.

[Slide 18 – Because of the variety of possible benefits which could be offered, and because not all employees will necessarily want the exact same benefits package, more and more organizations are moving towards what in known as a Flexible Benefits Plan. In this plan, employees are offered a basic “core” plan…typically consisting of the legally required benefits and a basic level of health, retirement, and life insurance. Beyond this, employees are given benefit credits which they can then spend on tailoring a benefit package which more suits their individual needs and interests. While this may be more time consuming to communicate to workers and a bit more expensive to administer, many firms are recognizing that the appeal of this type of flexibility has great appeal to workers, making the additional cost worth it to the organization.