Determining Pay Rates

Employee compensation?includes all forms of pay going to employees and arising from their employment. It has two main components,?direct financial payments?(wages, salaries, incentives, commissions, and bonuses) and?indirect financial payments?(financial benefits like employer-paid insurance and vacations).
employee compensation
All forms of pay or rewards going to employees and arising from their employment.
direct financial payments
Pay in the form of wages, salaries, incentives, commissions, and bonuses.
indirect financial payments
Pay in the form of financial benefits such as insurance.
1 List the basic factors determining pay rates.
In turn, employers can make direct financial payments to employees based on increments of time or based on performance. Time-based pay still predominates. Blue-collar and clerical workers receive hourly or daily wages, for instance. Others, like managers or Web designers, tend to be salaried and paid weekly, monthly, or yearly.
The second direct payment option is to pay for performance. For example, piecework ties compensation to the amount of production (or number of ?pieces?) the worker turns out. Sales commissions tie pay to sales. Many employers? pay plans combine time-based pay and incentives.
In this chapter, we explain how to formulate plans for paying employees a time-based wage or salary. Subsequent chapters cover performance-based financial incentives and bonuses (Chapter?12) and employee benefits (Chapter?13).
Several factors should influence any pay plan?s design. These include strategic policy considerations, as well as?equity, legal, and union considerations.
Aligning Total Rewards with Strategy
The compensation plan should first advance the firm?s strategic aims?management should produce an?aligned reward strategy.?This means creating a compensation package (including wages, incentives, and benefits) that produces the employee behaviors the firm needs to achieve its competitive strategy.2
We will see that many employers formulate a total rewards strategy to support their broader strategic aims.?Total rewards?encompass the traditional pay, incentives, and benefits, but also things such as more challenging jobs (job design), career development, and recognition programs.
Table?11-1?lists illustrative questions to ask when crafting a strategy-oriented pay policy.
TABLE?11-1?Do Our Compensation Policies Support Our Strategic Aims?
What are our strategic aims?
What employee behaviors and skills do we need to achieve our strategic aims?
What compensation policies and practices?salary, incentive plans, and benefits?will help to produce the employee behaviors we need to achieve our strategic aims?

HR in Practice at the Hotel Paris
Even the most casual review by Lisa Cruz and the CFO made it clear that the Hotel Paris?s compensation plan wasn?t designed to support the firm?s new strategic goals. To see how they handled this, see the case on page?361?of this chapter.
Equity?and Its Impact on Pay Rates
In studies at Emory University, researchers investigated how capuchin monkeys reacted to inequitable pay. Some monkeys got sweet grapes in return for trading pebbles; others got cucumber slices. If a monkey receiving a cucumber slice saw a neighbor get grapes, it slammed down the pebble or refused to eat.3?The moral may be that even lower primates demand fair treatment in pay.
Equity Theory?of Motivation
Amongst humans too,?the?equity theory?of motivation?postulates that people are motivated to maintain a balance between what they perceive as their contributions and their rewards.?Equity theory?states that if a person perceives an inequity, a tension or drive will develop that motivates him or her to reduce the tension and perceived inequity. Research tends to support?equity theory, particularly as it applies to those underpaid.4?For example, in one study turnover of retail buyers was significantly lower when the buyers perceived fair treatment in rewards and in how employers allocated rewards.5?Overpaying can sometimes backfire too, perhaps ?due to feelings of guilt or discomfort.?6
In compensation, one can address?external, internal, individual, and?procedural?equity.7
External?equity?refers to how a job?s pay rate in one company compares to the job?s pay rate in other companies.
Internal?equity?refers to how fair the job?s pay rate is when compared to other jobs within the same company (for instance, is the sales manager?s pay fair, when compared to what the production manager earns?).
Individual?equity?refers to the fairness of an individual?s pay as compared with what his or her coworkers are earning for the same or very similar jobs within the company, based on each person?s performance.
Procedural?equity?refers to the ?perceived fairness of the processes and procedures used to make decisions regarding the allocation of pay.?8
Managers use various means to address such?equity?issues. For example, they use salary surveys (surveys of what other employers are paying) to monitor and maintain external?equity. They use job analysis and comparisons of each job (?job evaluation?) to maintain internal?equity. They use performance appraisal and incentive pay to maintain individual?equity. And they use communications, grievance mechanisms, and employees? participation to help ensure that employees view the pay process as procedurally fair. Some firms administer surveys to monitor employees? pay satisfaction. Questions typically include, ?How satisfied are you with your pay?? and ?What factors do you believe are used when your pay is determined??9
To head off discussions that might prompt feelings of internal inequity, some firms maintain strict secrecy over pay rates, with mixed results.10?However, ?open pay? policies can backfire. In one firm, employees vigorously opposed paying a high salary to a great candidate unless everyone else?s pay went up too, for instance.11?And for external?equity, online pay sites like? it easy to see what one could earn elsewhere.