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Management 4403-01]
Chapter #01: The Pay Model
O VERVIEW
• Chapter one begins with the importance of compensation and provides a definition.
• The chapter continues with a discussion on the various forms of compensation.
• The major focus presents a pay model with three main components:
o Compensation objectives, policy decisions, and techniques.
COMPENSATION [COMPENSATION DOES NOT MEAN THE SAME THING TO EVERYONE.]
• What is Compensation?
o All forms of financial returns and tangible services and benefits employees receive as part of an
employment relationship.
• Society
o Some people see pay as a measure of justice.
▪ Gap between male/female earnings differentials.
▪ Benefits may also be a reflection of equality or justice in society.
▪ Some see benefits as a measure of success.
o Job losses (or gains) in a country is partly a function of labor costs (and productivity).
o What does compensation mean in a society perspective?
▪ Social status, who is more important. The billionaire or me?
o What does it say to an individual that is being paid based hourly or salary?
▪ You work at a job that pays for all your benefits. What does that say about you in society? IT
SAYS THAT YOURE VALUABLE. Because an organization just does not give that away.
• Stakeholders
o Some stockholders say using stock to pay employees creates a sense of ownership.
▪ Others argue it dilutes stockholder wealth.
o Stockholders have a particular interest in executive pay.
▪ Linking executive pay to company performance increases stockholders' returns.
▪ How much is a CEO worth?
o What is a stakeholder?
▪ If CSULA disappeared, who would be affected? Los Angeles City, the state of California.
• Managers
o Compensation influences manager’s success in two ways.
▪ First, it is a major expense that must be managed.
▪ Second, it is a major determinant of employee attitudes and behaviors.
o Minimizing compensation costs may actually be more expensive… how?
▪ Less productivity for employees. You cut my pay, I cut my effort. [Equity Theory]
o What does this mean to managers?
▪ Cost of labor. Cost is the first thing that comes to mind to managers when thinking about
compensation.
▪ Cut costs OR make more money.
• Employees [What does compensation mean to employees?
o Pay is usually a major source of financial security.
o Employees may see compensation as:
▪ A return in an exchange.
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▪ An entitlement for being an employee of the company.
▪ An incentive to take/stay in a job and invest in performing well.
▪ As a reward for having done so.
o Pay can influence employee motivation and behavior in two ways:
▪ The incentive effect is the degree to which pay influences individual and aggregate
motivation. [This is the most obvious one.]
• What does incentive mean? A motivation to do something.
▪ The sorting effect is the effect that pay can have on the composition of the workforce.
• How an organization pays can result in sorting effects.
• What does this mean?
o The way we structure how to pay people will attract people to our
organization. At the same time it will sort of push the people out of this
system.
o A glass company changed from a salary-only compensation plan to an individual incentive plan.
▪ Productivity increased by 44%
▪ Half of this increase was due to productivity increases in individual employees
▪ Where did the other half come from?
• The people that did not like this system had quit.
o Reason of being there, the value of their labor. Although, is compensation is important to
employees? Yes it is!
o Social Desirability is what shows when someone is just wanting to know the amount of how much
money they will get. This makes you look greedy. It is frowned upon society.
FORMS OF PAY
• Forms of pay are categorized in two ways.
o Total compensation:
▪ Is pay received directly as cash and indirectly as benefits.
o Relational Returns:
▪ Are psychological.
▪ Examples?
TOTALS RETURNS FOR WORK
C ASH COMPENSATION
• Base Wage
o Cash that an employer pays in return for the work performed.
o A function of the skill or education an employee possesses.
o Example
Page: 01
l OM oARc PSD|14 99 6 42 5
Management 4403-01]
Chapter #01: The Pay Model
O VERVIEW
• Chapter one begins with the importance of compensation and provides a definition.
• The chapter continues with a discussion on the various forms of compensation.
• The major focus presents a pay model with three main components:
o Compensation objectives, policy decisions, and techniques.
COMPENSATION [COMPENSATION DOES NOT MEAN THE SAME THING TO EVERYONE.]
• What is Compensation?
o All forms of financial returns and tangible services and benefits employees receive as part of an
employment relationship.
• Society
o Some people see pay as a measure of justice.
▪ Gap between male/female earnings differentials.
▪ Benefits may also be a reflection of equality or justice in society.
▪ Some see benefits as a measure of success.
o Job losses (or gains) in a country is partly a function of labor costs (and productivity).
o What does compensation mean in a society perspective?
▪ Social status, who is more important. The billionaire or me?
o What does it say to an individual that is being paid based hourly or salary?
▪ You work at a job that pays for all your benefits. What does that say about you in society? IT
SAYS THAT YOURE VALUABLE. Because an organization just does not give that away.
• Stakeholders
o Some stockholders say using stock to pay employees creates a sense of ownership.
▪ Others argue it dilutes stockholder wealth.
o Stockholders have a particular interest in executive pay.
▪ Linking executive pay to company performance increases stockholders' returns.
▪ How much is a CEO worth?
o What is a stakeholder?
▪ If CSULA disappeared, who would be affected? Los Angeles City, the state of California.
• Managers
o Compensation influences manager’s success in two ways.
▪ First, it is a major expense that must be managed.
▪ Second, it is a major determinant of employee attitudes and behaviors.
o Minimizing compensation costs may actually be more expensive… how?
▪ Less productivity for employees. You cut my pay, I cut my effort. [Equity Theory]
o What does this mean to managers?
▪ Cost of labor. Cost is the first thing that comes to mind to managers when thinking about
compensation.
▪ Cut costs OR make more money.
• Employees [What does compensation mean to employees?
o Pay is usually a major source of financial security.
o Employees may see compensation as:
▪ A return in an exchange.
, l OM oARc PSD|14 99 6 42 5
Page: 02
▪ An entitlement for being an employee of the company.
▪ An incentive to take/stay in a job and invest in performing well.
▪ As a reward for having done so.
o Pay can influence employee motivation and behavior in two ways:
▪ The incentive effect is the degree to which pay influences individual and aggregate
motivation. [This is the most obvious one.]
• What does incentive mean? A motivation to do something.
▪ The sorting effect is the effect that pay can have on the composition of the workforce.
• How an organization pays can result in sorting effects.
• What does this mean?
o The way we structure how to pay people will attract people to our
organization. At the same time it will sort of push the people out of this
system.
o A glass company changed from a salary-only compensation plan to an individual incentive plan.
▪ Productivity increased by 44%
▪ Half of this increase was due to productivity increases in individual employees
▪ Where did the other half come from?
• The people that did not like this system had quit.
o Reason of being there, the value of their labor. Although, is compensation is important to
employees? Yes it is!
o Social Desirability is what shows when someone is just wanting to know the amount of how much
money they will get. This makes you look greedy. It is frowned upon society.
FORMS OF PAY
• Forms of pay are categorized in two ways.
o Total compensation:
▪ Is pay received directly as cash and indirectly as benefits.
o Relational Returns:
▪ Are psychological.
▪ Examples?
TOTALS RETURNS FOR WORK
C ASH COMPENSATION
• Base Wage
o Cash that an employer pays in return for the work performed.
o A function of the skill or education an employee possesses.
o Example
