MILKOVICH NEWMAN

GERHART

COMPENSATION

TWELFTH EDITION

Introducing the Pay Model and

Pay Strategy

Part One

Chapter One

The Pay Model

2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not
authorized for sale or distribution in any manner. This document may not be copied, scanned,
duplicated, forwarded, distributed, or posted on a website, in whole or part.

11

Overview
Chapter one begins with the importance of
compensation and provides a definition.
The chapter continues with a discussion
on the various forms of compensation.
The major focus presents a pay model
with three main components:
compensation objectives, policy decisions,
and techniques.
2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not
authorized for sale or distribution in any manner. This document may not be copied, scanned,
duplicated, forwarded, distributed, or posted on a website, in whole or part.

12

Compensation: Does It Matter?

Nucor Steel.
A well-designed
compensation system
can help an organization
achieve and sustain
competitive advantage.

General Motors.
Poorly designed
compensation systems
can play a major role in
undermining
organizational success.

2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not
authorized for sale or distribution in any manner. This document may not be copied, scanned,
duplicated, forwarded, distributed, or posted on a website, in whole or part.

13

Society

Stockholders

Compensation

Managers

Employees

Different perspectives on compensation.

2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not
authorized for sale or distribution in any manner. This document may not be copied, scanned,
duplicated, forwarded, distributed, or posted on a website, in whole or part.

14

Incentive and Sorting Effects

Pay can influence employee motivation
and behavior in two ways:
The incentive effect is the degree to which
pay influences individual and aggregate
motivation.
The sorting effect is the effect that pay can
have on the composition of the workforce.
How an organization pays can result in sorting
effects.
2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not
authorized for sale or distribution in any manner. This document may not be copied, scanned,
duplicated, forwarded, distributed, or posted on a website, in whole or part.

15

What is Compensation?

Compensation
All forms of financial returns and
tangible services and benefits
employees receive as part of an
employment relationship.

2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not
authorized for sale or distribution in any manner. This document may not be copied, scanned,
duplicated, forwarded, distributed, or posted on a website, in whole or part.

16

EXHIBIT 1.5

Total Returns For Work

2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not
authorized for sale or distribution in any manner. This document may not be copied, scanned,
duplicated, forwarded, distributed, or posted on a website, in whole or part.

17

A Pay Model
Three basic building blocks:
1. The compensation objectives.
2. The policies that form the foundation of the
compensation system.
3. The techniques that make up the
compensation system.

2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not
authorized for sale or distribution in any manner. This document may not be copied, scanned,
duplicated, forwarded, distributed, or posted on a website, in whole or part.

18

EXHIBIT 1.6

The Pay Model

This model
serves as both
a framework
for examining
current pay
systems and a
guide for most
of the text.
2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not
authorized for sale or distribution in any manner. This document may not be copied, scanned,
duplicated, forwarded, distributed, or posted on a website, in whole or part.

19

Compensation Objectives
Pay objectives guide the design of the pay
system and are standards for judging success.
Efficiency is improving performance, increasing
quality, and controlling costs.
Fairness (procedural fairness) of the process used
to make pay decisions.
Ethics means the organization cares about how its
results are achieved.
Compliance is conforming to federal and state
compensation laws and regulations.
2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not
authorized for sale or distribution in any manner. This document may not be copied, scanned,
duplicated, forwarded, distributed, or posted on a website, in whole or part.

1 10

Four Policy Choices:

Internal Alignment
Internal alignment:
refers to comparisons among jobs or skill
levels inside a single organization.
pertains to the pay rates both for employees
doing equal work and for those doing
dissimilar work.

Pay relationships affect the compensation

objectives of efficiency, fairness and
compliance.
2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not
authorized for sale or distribution in any manner. This document may not be copied, scanned,
duplicated, forwarded, distributed, or posted on a website, in whole or part.

1 11

Four Policy Choices:

External Competitiveness
External competitiveness refers to pay
comparisons with competitors.
Pay is market driven.
Objectives:
To ensure that pay is sufficient to attract and
retain employees.
To control labor costs to ensure competitive
pricing of products/ services.

2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not
authorized for sale or distribution in any manner. This document may not be copied, scanned,
duplicated, forwarded, distributed, or posted on a website, in whole or part.

1 12

Four Policy Choices

Employee Contributions

Management

Understanding the Right people get

basis for judging
the right pay for
performance, helps
achieving the right
perceive pay as
objectives in the
fair.
right way.

2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not
authorized for sale or distribution in any manner. This document may not be copied, scanned,
duplicated, forwarded, distributed, or posted on a website, in whole or part.

1 13

Pay Techniques
Techniques tie the four basic policies to
the pay objectives.
Many variations of pay techniques exist.

2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not
authorized for sale or distribution in any manner. This document may not be copied, scanned,
duplicated, forwarded, distributed, or posted on a website, in whole or part.

1 14

Summary
Chapter one began with the importance of
compensation and provided a definition.
The chapter continued with a discussion
on the various forms of compensation.
The major focus presented a pay model
with three main components:
compensation objectives, policy decisions,
and techniques.
2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not
authorized for sale or distribution in any manner. This document may not be copied, scanned,
duplicated, forwarded, distributed, or posted on a website, in whole or part.

1 15