Compensation Strategy

Chapter 4 – Components of Compensation Strategy

Introduction

What role should each of the three compensation components (base pay, performance pay, indirect pay) play in the compensation mix, and how should each component be structured?

See figure 4.1 p. 113

Fundamental Components of the Compensation Mix

Base Pay – the portion of an individual’s compensation based on unit of time worked

Compensation: base pay – 75 – 80%

Performance pay – 5 – 10%

Indirect pay – 15%

Out-put related pay is only practical when output is:

1. easy to measure

2. easy to price in terms of its value to the employer

3. easy to attribute to individual employees

4. controllable by the individual employee

5. relatively stable

Why use base pay?

1. flexibility – buying employee’s time

2. allows employer to recognize and encourage important job behaviours that don’t directly produce output

3. signal the relative importance of jobs within the organization – higher position, higher pay

4. demonstrate greater commitment of employer to employee and vice versa

5. setting up base pay strategy also support a particular managerial strategy, ie pay for knowledge base pay strategy supports high-involvement managerial strategy

6. simplicity – simple to implement and administer than out-put related system

Disadvantages of Base Pay

1. represents more of a fixed employer commitment than performance pay, especially salaries are used. Base pay is not linked to variability in an employer’s ability to pay

2. base pay contribute to membership behaviour, but does not motivate task behaviour, nor signal key task behaviour

3. since it does not relate to organizational success, so does not contribute directly to citizenship behaviour

4. not self-correcting.

Performance Pay

Performance Pay – type of financial reward provided when...