Compansation determinant
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The document discusses the determinants of individual financial compensation, highlighting four main factors: the organization, the labor market, the job, and the employee. It explains how compensation policies, market rates, and job evaluations influence pay levels, as well as the impact of performance, experience, and external factors like legislation and economic conditions. Ultimately, it emphasizes the complexity of determining fair compensation amid various influences including organizational politics and individual circumstances.
Compansation determinant
- 1. Determinants of individual financial compensation
- 2. Determinants of individual financial compensation: Compensation theory has never been able to provide a completely satisfactory answer to what an individual is worth for performing jobs. 1. The Organization, 2. The Labor Market, 3. The Job, and 4. The Employee These all have an impact on job pricing and the ultimate determination of an individual’s financial compensation.
- 3. 1. The Organization as a Determinant of Financial Compensation: Compensation Policies: An organization often establishes (formally or informally) compensation policies that determine whether it will be a pay leader, a pay follower, or strive for an average position in the labor market. a. Pay Leaders: Those organizations that pay higher wages and salaries than competing firms. b. Market Rate or Going Rate: The average pay that most employers provide for the same job in a particular area or industry.
- 4. Continue.. c. Pay Followers: Companies that choose to pay below the market rate because of poor financial condition or a belief that they simply do not require highly capable employees. d. Organizational Politics: Political considerations may also enter into the equation. A sound, objective compensation system can be destroyed by organizational politics. Managers should become aware of this possibility and take appropriate action. e. Ability to Pay:An organization’s assessment of its ability to pay is also an important factor in determining pay levels. Financially successful firms tend to provide higher-than-average compensation. However, an organization’s financial strength establishes only the upper limit of what it will pay.
- 5. 2. The labor market as a determinant of financial compensation: Compensation Surveys:Large organizations routinely conduct compensation surveys to determine prevailing pay rates within labor markets. Compensation surveys: Provide information for establishing both direct and indirect compensation. Benchmark job: A job that is well known in the company and industry, one that represents the entire job structure, and one in which a large percentage of the workforce is employed. Cost of Living:A pay increase must be roughly the equivalent to the cost of living increase if a person is to maintain a previous level of real wages. COLA: Cost of living Allowance
- 6. Continue.. Society:Compensation paid to employees often affects a firm’s pricing of its goods and/or services. Economy:In most cases, the cost of living will rise in an expanding economy. Thus, the economy’s health exerts a major impact on pay decisions. Rate of inflation helps to determine the cola.. Legislation:The amount of compensation a person receives can also be affected by certain federal and state legislation.
- 7. 3. The job as a determinant of financial compensation: Organizations pay for the value they attach to certain duties, responsibilities, and other job- related factors. Techniques used to determine a job’s relative worth include job analysis, job descriptions, and job evaluation. Job Analysis and Job Descriptions—Before an organization can determine the relative difficulty or value of its jobs, it must first define their content, which it normally does by analyzing jobs. Job analysis is the systematic process of determining the skills and knowledge required for performing jobs. The job description is the primary by-product of job analysis, consisting of a written document that describes job duties and responsibilities. Job descriptions are used for many different purposes, including job evaluation. Job Evaluation—That part of a compensation system in which a firm determines the relative value of one job compared with that of another.
- 8. 4. The employee as a determinant of financial compensation In addition to the organization, the labor market, and the job, factors related to the employee are also essential in determining pay and employee equity. Performance Based Pay: Performance Appraisal data provide the input for such approaches as merit pay, variable pay, skill-based pay, and competency-based pay. Merit Pay: A pay increase given to employees based on their level of performance as indicated in the appraisal. Bonus: The most common type of variable pay for performance and is a one-time award that is not added to employees’ base pay. Skill-based Pay: A system that compensates employees on the basis of job-related skills and knowledge they possess, not for their job titles. Competency-Based Pay: A compensation plan that rewards employees for their demonstrated expertise.
- 9. Continue.. Experience:Regardless of the nature of the task, very few factors has a more significant impact on performance than experience. Seniority:The length of time an employee has been associated with the company, division, department, or job is referred to as seniority. Potential:Organizations do pay some individuals based on their potential.
- 10. Continue.. Political Influence: Political influence is a factor that obviously should not be used as a determinant of financial compensation. However, to deny that it exists would be unrealistic. Luck: The expression has often been stated, “It certainly helps to be in the right place at the right time.” There is more than a little truth in this statement as it relates to the determination of a person’s compensation. Special Employee Classes:These include pay for executives, which are discussed in a later section, and pay for professionals and sales employees.