Compensation and Benefits

The overall objective of a compensation plan is to recruit the best human capital, motivate employees to perform at their peak and retain employees. The compensation package is critical to the strategic HRM plan since much of an organization's budget is devoted to employee compensation. This chapter details compensation options, compensation theories, and applicable laws regarding compensation. It also differentiates between financial, indirect, and non-financial compensation. Perform and answer exercise question one, which asks you to research your intended career and consider your compensation expectations with what you learn.

Types of Pay Systems

Key Takeaways

  • A job evaluation system should be used to determine the relative value of one job to another. This is the first step in setting up a pay system.
  • Several types of pay systems can be implemented. A pay grade system sets up specific pay levels for particular jobs, while a going rate system looks at the pay through the industry for a certain job title. Management fit gives maximum flexibility for managers to pay what they think someone should earn.
  • HR managers can also develop pay systems based on skills and competency and utilize broadbanding, which is similar to pay grades. Another option might include variable pay.
  • There are several motivational theories in regard to pay. First, the equity theory says that people will evaluate their own satisfaction with their compensation by comparing it to others' compensation. The expectancy theory says people will put in only as much work as they expect to receive in rewards. Finally, the reinforcement theory says if high performance is followed by a reward, high performance is likely to happen in the future.
  • Other pay considerations include the size of the organization, whether the company is global, and the level of communication and employee involvement in compensation. HR managers should always be aware of what others are paying in the industry by performing market surveys.
  • There are several laws pertaining to pay. Of course, the EEOC ensures that pay is fair for all and does not discriminate. FLSA sets a minimum wage and establishes standards for child labor. FUTA requires employers to pay unemployment taxes on employees. FECA ensures that federal employees receive certain benefits.