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PART V Compensation

CHAPTER 10 Managing Compensation

CHALLENGES

After reading this chapter, you should be able to deal more effectively with the following challenges:

1 Learn about the components of total compensation.
2 Learn how to design a compensation system.
3 Understand the difference between job and individual pay options.
4 Develop familiarity with compensation tools.
5 Become familiar with the legal environment affecting compensation and pay system governance.

Sigma, Inc., is a medium-sized biotechnology firm specializing in genetic engineering. The firm was founded in 2004 by Dr. Roger Smith, who is still Sigma’s chief executive officer and continues to be actively involved in all hiring and pay decisions. He repeatedly tells his line managers that Sigma “will pay whatever it takes to hire the best talent in the market.”

During the past year Smith has noticed an erosion in Sigma’s “family atmosphere” and an increase in the number of dissatisfied employees. There have been three pay-related complaints during the past week alone, and Smith suspects that this is only the tip of the iceberg. The first complaint came from a software developer who has been with Sigma for five years. He is upset that another developer was hired last year at a salary 15 percent higher than his. Smith explained that such starting salaries are necessary to attract top experienced programmers from other firms despite the severe recession at the end of the last decade. The second complaint came from a software engineer who feels that Sigma’s best technical people—the lifeblood of a biotechnology firm—are discriminated against in pay because supervisors (who, in his words, are often “failed engineers”) receive 30 percent more pay. The third complaint was filed by a head secretary who has been with Sigma from the start. She is angry that janitors are getting more money than she is, and she is not satisfied with Smith’s explanation that it is difficult to hire and retain reliable people who are willing to clean up and dispose of dangerous chemicals.

In addition, a 49-year-old engineer who was purportedly terminated for poor performance has just filed an age discrimination suit against the company, arguing that the firm is replacing older, higher-earning employees with Indian employees on temporary visas who are willing to work at much lower wages.

Source: © ZUMA Press, Inc./Alamy.

The Managerial Perspective

Sigma’s experience raises several important questions that managers and HR personnel must face in designing and administering compensation programs, such as the following:

▪ Who should be responsible for making salary decisions?
▪ Should pay be dictated by what other employers are paying?
▪ What types of activities should be rewarded with higher salaries?
▪ What criteria should be used to determine salaries?
▪ Which employee groups should receive special treatment when scarce pay resources are allocated?
▪ How does an employer balance ethical concerns for employees’ welfare versus the need to save on labor costs?

The pay system is one of the most important mechanisms that firms and managers can use to attract, retain, and motivate competent employees to perform in ways that support organizational objectives. It also has a direct bearing on the extent to which labor costs detract from or contribute to business objectives and profitability. At the same time, compensation is critical to the welfare of employees and hence fairness in how the pay system is managed becomes one of the most important objectives in human resource management.

In the first part of this chapter, we define the components of compensation and examine the nine criteria used to develop a compensation plan. Then we explore the process of designing a compensation plan and the legal and regulatory influences on compensation.

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Table of Contents for PART V Compensation

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Table of Contents for
PART V Compensation