Employee Compensation

AuthorLee Lee
Pages242-245

Page 242

In exchange for job performance and commitment, an employer offers rewards to employees. Adequate rewards and compensations potentially attract a quality work force, maintain the satisfaction of existing employees, keep quality employees from leaving, and motivate them in the workplace. A proper design of reward and compensation systems requires careful review of the labor market, thorough analysis of jobs, and a systematic study of pay structures.

There are a number of ways of classifying rewards. A commonly discussed dichotomy is intrinsic versus extrinsic rewards. Intrinsic rewards are satisfactions one gets from the job itself, such as a feeling of achievement, responsibility, or autonomy. Extrinsic rewards include monetary compensation, promotion, and tangible benefits.

Compensation frequently refers to extrinsic, monetary rewards that employees receive in exchange for their work. Usually, compensation is composed of the base wage or salary, any incentives or bonuses, and other benefits. Base wage or salary is the hourly, weekly, or monthly pay that employees receive. Incentives or bonuses are rewards offered in addition to the base wage when employees achieve a high level of performance. Benefits are rewards offered for being a member of the company and can include paid vacation, health and life insurance, and retirement pension.

A company's compensation system must include policies, procedures, and rules that provide clear and unambiguous determination and administration of employee compensation. Otherwise, there can be confusion, diminished employee satisfaction, and potentially costly litigation.

DETERMINANTS OF COMPENSATION

Fair and adequate compensation is critical to motivating employees attracting high-potential employees, and

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retaining competent employees. Compensation has to be fair and equitable among all workers in the same company (internal equity). Internal equity can be achieved when pay is proportionate to the individual employee's qualifications and contributions to a company. On the other hand, compensation also has to be fair and equitable in comparison to the external market (external equity). If a company pays its employees below the market rate, it may lose competent employees. In determining adequate pay for employees, a manager must consider the three major factors: the labor market, the nature and scope of the job, and characteristics of the individual employee.

Potential employees are recruited from a certain geographic area—the labor market. The actual boundary of a labor market varies depending on the type of job, company, and industry. For example, an opening for a systems analyst at IBM may attract candidates from across the country, whereas a secretarial position at an elementary school may attract candidates only from the immediate local area of the school.

Pay for a job even within the same labor market may vary widely because of many factors, such as the industry, type of job, cost of living, and location of the job. Compensation managers must be aware of these differences. To help compensation managers understand the market rate of labor, a compensation survey is conducted. A compensation survey obtains data regarding what other firms pay for specific jobs or job classes in a given geographic market. Large...

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