Understanding Compensation and Rewards in the Workplace

Compensation

Rewards earned by employees in return for their labor

Direct Financial Compensation

Consisting of pay received in the form of wages, salaries, bonuses, and commissions provided at regular and consistent intervals

Indirect Financial Compensation

Including all financial rewards that are not included in direct compensation and understood to form part of the social contract between the employer and employee such as benefits, leaves, retirement plans, education, and employee services

Equity Theory

States that a person’s motivation is in proportion to the perceived fairness of the rewards he or she receives for the amount of effort he or she exerts, and that this is also compared with what others receive. According to the theory, individuals are motivated to reduce any perceived inequity and will strive to make the ratios of outcomes to inputs equal. As such, equity is a very important factor in compensation

Expectancy Theory

One's motivation of the behavior selection is determined by the desirability of the outcome. How someone will act when they know they are going to get their desired results

Internal Equity

Refers to employees viewing their pay as equitable given other pay rates in the organization

External Equity

When employees in an organization perceive that they are being rewarded fairly in relation to those who perform similar jobs in other organizations

Pay Leader

Pay higher wages and salaries to attract high-quality, productive employees and thus achieve lower per-unit labor costs

Pay Follower

Pay below market rate because of firm’s poor financial condition or belief that it does not require highly capable employees

Market Rate

Pay what most employers pay for the same job

Pay Range

Minimum and maximum pay rate with enough variance between the two to allow for significant pay difference

Pay Curve (or Wage Curve)

Fitting of plotted points to create a smooth progression between pay grades

Merit Pay

Pay increase added to employees’ base pay based on their level of performance

Piecework Pay

Incentive plan in which employees are paid for each unit of produce

Bonus Pay

A one-time annual financial award, based on productivity that is not added to base pay, as more and more companies embrace the concept of pay for performance

Team-Based Pay

It motivates people to work together, provides a benefit for reaching a common goal, helps everyone work toward company objectives

Indirect Financial Compensation AKA Benefits

All rewards not included in direct financial compensation

Total Rewards

Everything an employee perceives as having value

Which Benefits Are Legally Required?

Which benefits are not legally required?

Worker’s Compensation

Provides a degree of protection for employees who incur expenses resulting from job-related accidents or illnesses in the form of coverage of rehabilitation costs and temporary or permanent partial income replacement depending on the severity

Most Expensive Indirect Financial Compensation for Employers?

Health care

Employee Services

Child care, educational assistance, food service/subsidized cafeterias, scholarships for dependents, relocation benefits, domestic partner benefits

Consolidated Omnibus Budget Reconciliation Act

Gives employees the opportunity to temporarily continue coverage they would otherwise lose because of termination, layoff, or other change in employment status

Two Components of Nonfinancial Compensation

Job and job environment