gomez_mhr05_im_10 - Part Five Chapter 10 Managing...

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Part Five Chapter 10 Managing Compensation CHAPTER OVERVIEW (PPT 10.1- 10.2) The way a firm handles compensation-related issues has a direct impact on employees and the business. Compensation affects the firm's ability to attract, retain, and motivate employees. It also has a direct bearing on the extent to which labor costs detract from or contribute to business objectives and profitability. Thus, managers need to understand the important issues related to the design and management of a compensation system. This chapter addresses this matter. It defines the components of compensation and presents the nine criteria used in developing a compensation plan. It also describes the process of designing a compensation plan and concludes with a discussion of the legal and regulatory influences surrounding employee compensation. ANNOTATED OUTLINE I. What Is Compensation? (PPT 10.3) An employee's total compensation has three components. The first and the largest element is base compensation (i.e., salary). The second component of total compensation is pay incentives (i.e., bonuses and profit-sharing). The third component is benefits or indirect compensation (i.e., insurance, vacation, unemployment, and perks). II. Designing a Compensation System (PPT 10.4- 10.7) Most organizations design a compensation system that (1) enables the firm to achieve its strategic objectives and (2) is aligned with the firm's unique characteristics and environment. The criteria for developing a compensation plan are summarized in Figure 10-2 . The nine options presented are not independent of each other. For example, a decision to focus on external equity will affect decisions on the other eight factors. A. Internal versus External Equity Internal equity refers to the perceived fairness of the pay structure within a firm. External equity refers to the perceived fairness of pay relative to what other employers are paying for the same type 134
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Part Five of labor. In considering internal versus external equity, managers can use two basic models: distributive justice and the labor market. Under distributive justice, some employees compare their input/outcome ratio to that of employees in other firms (external equity); but, most compare their ratios to those of their peers in the same organization (internal equity). According to the labor market model the wage rate for an occupation is set at the point where the supply of labor equals the demand for labor in the marketplace. Thus, external equity is achieved when the firm pays its employees competitively or the "going rate" for the type of work they do. B. Fixed versus Variable Pay Fixed pay is a form of variable pay in a predictable monthly paycheck. Variable pay fluctuates according to some preestablished criterion. For select employee groups, such as sales, variable pay can be as high as 100 percent. The higher the form of variable pay, the more risk sharing there is between the employee and the firm. Nevertheless, the fixed pay is the rule in the majority
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This note was uploaded on 03/22/2009 for the course MANAGEMENT 5689-9856 taught by Professor Nialamnu during the Fall '08 term at Indiana State University .

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gomez_mhr05_im_10 - Part Five Chapter 10 Managing...

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