1. COMPENSATION:
Introduction
© Nancy Brown Johnson
1/05

2. Why is compensation important?
 Society
 Firm
 Individual

3. What are the elements of
compensation?
 Base pay
 Incentives
 Fringe benefits

4. What are different forms of payment?
 Cash
 Benefits
– Payment for time not worked
– Non-pecuniary benefits (gym
memberships, child care)
 Intrinsic

5. Exchange Theory
 Pay is an exchange for efforts
 Implicit Social Contract
– beliefs about mutual obligations
 Implicit Psychological Contract
 Temporal Quality
– amount of time in job & career

6. Equity Theory
Pay, benefits,
opportunities, etc.
the same
more or less
OUTCOME OUTCOME
INPUTS
<=> INPUTS
?
effort, ability,
experience etc.
A person evaluates fairness by comparing their ratio with others.
IRWIN
©a Times Mirror Higher Education Group, Inc., company, 1997

7. Equity Theory
Workers compare their compensation
with others
If unequal workers attempt to restore
equity

8. Workers Restore Equity by:
 Reducing input
 Attempting to get raise
 Quitting
 Psychological Adjustment

9. Compensation Model
Equity Compensation Objective
Tool
Individual Seniority, Motivation
(Pay for Perf.) Performance
Internal Job Evaluation Retention
(Pay Structure)
External Market Surveys Attraction
(Pay Level)
Procedural Communication, Organization
Justice Appeals Citizenship,
(Pay Commitment
Administration)

10. Internal Equity
 Comparison of Jobs
 Jobs worth to the Employer
– Similarities and differences in
work content
– Relative contribution to
organization objectives
 Accomplished through job
evaluation

11. External Equity
 Value of the job to
the labor market
 Assessed through
wage surveys

12. Individual Equity
 Relative pay between
individuals doing the
same job
 Influences motivation

13. Organizational Justice
Perceived fairness of the pay
system
–Outcomes
–Process Issues
–Interactions
Influences Commitment,
Organization Citizenship

14. Strategic Perspectives
 The strategy balances 4 types of equity
 Best Practice
 Contingency:
– organizations will have pay systems that fit
with their business strategy
– organizations that have “fit” will outperform
those without “fit”
 Strategic Decisions include:
– pay level, pay structure, individual rewards,
team rewards, pay administration

15. Best Practice v. Strategy Debate
 Best practice - there are a set of
compensation practices that are good
for all firms.
 Strategy - the set of compensation
practices that are good for firms will
vary based upon the firm’s goals.

16. Best Practice Examples*
 High wages
 Guarantee of Employment Security
 Use incentives; share gains
 Employee Ownership
 Participation & Empowerment
 Teams
 Smaller pay differences
*Source: Pfeffer, Competitive
Advantage Through People ,

17. Summary
 There are four key elements to equity
 The strategic contingency view is that some
firms may weight those elements differently
depending on firm objectives
 The best practice view is that there are good
practices that all firms should engage in no
matter what their strategy.

18. Summary (continued)
 Equity forms the basis for
compensation management
 Strategy guides the organization in the
balancing of equity components
 The test is whether the compensation
system reinforces sustained competitive
advantage