Employee Compensation

Summary

This video discusses the key concepts of employee compensation, covering both financial and non-financial rewards. It explains three main compensation decisions: pay level, pay variability, and pay structure. Pay level decisions involve determining whether wages should be set above, below, or at market rates. Pay variability ties compensation to performance, with options like commissions, profit sharing, and stock plans. Pay structure decisions involve organizing internal pay distributions, with hierarchical structures focusing on large pay differences, while compressed structures emphasize fairness and teamwork. The video highlights the pros and cons of each approach, suggesting that hierarchical structures work best for independent work, but can lead to high turnover among top managers.

Takeaways

• 😀 Compensation includes both financial and non-financial rewards given to employees for their work.
• 😀 There are three key compensation decisions: pay level, pay variability, and pay structure.
• 😀 Pay level decisions determine whether to pay workers below, above, or at market wages based on job evaluation.
• 😀 Job evaluation helps determine the value of each job and the market rate for the required skills and knowledge.
• 😀 Companies may choose to pay above-market wages to attract qualified employees, reduce turnover, and increase job acceptance.
• 😀 Pay variability ties employee compensation to individual or organizational performance through methods like commissions and profit sharing.
• 😀 Common pay variability options include piecework, sales commissions, profit sharing, employee stock ownership plans (ESOPs), and stock options.
• 😀 Pay structure decisions relate to the internal distribution of pay levels, which can be hierarchical or compressed.
• 😀 Hierarchical pay structures have large differences between pay levels, aiming to motivate employees to work harder to reach higher positions.
• 😀 Compressed pay structures have fewer levels and smaller pay differences, promoting cooperation, fairness, and better group performance.
• 😀 While hierarchical pay structures can work well for independent roles with clear individual contributions, they may harm organizational performance and employee retention in other contexts.

Q & A

What is the definition of employee compensation?

Employee compensation refers to both the financial and non-financial rewards that organizations provide to employees in exchange for their work.

What are the three basic types of compensation decisions?

The three basic compensation decisions are pay level, pay variability, and pay structure.

How do companies determine their pay level decisions?

Companies determine their pay level decisions by evaluating whether to pay workers below, above, or at the current market wage, using job evaluations to set pay structures based on market value of required skills and knowledge.

Why do some companies pay above average wages?

Companies may pay above average wages to attract a larger pool of qualified job applicants, reduce hiring time, improve job acceptance rates, and increase employee retention.

What is pay variability and how is it linked to employee performance?

Pay variability refers to how much an employee's pay varies based on individual and organizational performance. Linking pay to performance is intended to motivate employees to work harder and improve their performance.

What are some common pay variability options used by companies?

Common pay variability options include piecework, sales commissions, profit sharing, employee stock ownership plans (ESOPs), and stock options.

How do hierarchical pay structures differ from compressed pay structures?

Hierarchical pay structures involve significant pay differences between job levels, while compressed pay structures have fewer pay levels with smaller differences, promoting fairness and teamwork.

What are the advantages of hierarchical pay structures?

Hierarchical pay structures are designed to motivate employees to work harder by offering higher pay at higher organizational levels, and they are most effective when individual performance can be easily measured.

What challenges are associated with hierarchical pay structures?

Hierarchical pay structures can lead to dissatisfaction among lower-level employees, contribute to a disconnect between top management pay and company performance, and increase employee turnover.

What type of work environments benefit most from hierarchical pay structures?

Hierarchical pay structures work best in environments where individual performance is easily measurable, and little coordination with others is required to complete tasks.