Final Exam Review Sheet Chapter 1: The Pay Model What is compensation? Definition of Compensation o Refers to all forms of financial returns and tangible services and benefits employees receive as part of an employment relationship. What are the different views of compensation: society, stockholders, managers, and employees? Society —some people see pay as a measure of justice Stockholders —Some believe stock to pay employees creates a sense of ownership that will improve performance, which will, in turn, increase stockholder wealth. But others argue that granting employees too much ownership dilutes stockholder wealth. Managers —Compensation influences their success in two ways. First it is a major expense. However, rather than treating pay only as an expense to be minimized, a manager can also use it to influence employee behaviors and to improve the organization’s performance. Employees —may see compensation as a return in an exchange between their employer and themselves, as an entitlement for being an employee of the company, or as a reward for a job well done. Forms of pay: transactional vs. relational Transactional returns are total compensation. o Pay received directly as cash compensation and indirectly as benefits. The relational returns are psychological. o Includes Recognition & Status, Employment Security, Challenging Work, and Learning Opportunities. Direct vs. indirect pay Direct Pay Form o Cash Compensation: Base o Cash Compensation: Merit Pay/ Cost-of-Living Adjustments o Cash Compensation: Incentives o Long-Term Incentives Indirect Pay Form o Benefits: Income Protection o Benefits: Work/Life Balance o Benefits: Allowances The Pay Model: objectives (efficiency, fairness, compliance, ethics), policy decisions, and techniques Compensation Objectives —Pay systems are designed to achieve certain objectives. o Efficiency can be stated more specifically: Improving performance, increasing quality, delighting customers and stockholders, and Controlling labor costs. o Fairness is a fundamental objective of pay systems.
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- Management, Organization Factors