84 The Roles of Pay Structure and Pay for Performance
84 The Roles of Pay Structure and Pay for Performance
Learning Objectives
- Explain the factors to be considered when setting pay levels.
- Understand the value of pay for performance plans.
- Discuss the challenges of individual versus team-based pay.
Pay can be thought of in terms of the “total reward” that includes an individual’s base salary, variable pay, share ownership, and other benefits. A bonus, for example, is a form of variable play. A bonus is a one-time cash payment, often awarded for exceptional performance. Providing employees with an annual statement of all these benefits they receive can help them understand the full value of what they are getting.
Pay System Elements
As summarized in the following table, pay can take the form of direct or indirect compensation. Nonmonetary pay can include any benefit an employee receives from an employer or job that does not involve tangible value. This includes career and social rewards, such as job security, flexible hours and opportunity for growth, praise and recognition, task enjoyment, and friendships. Direct pay is an employee’s base wage. It can be an annual salary, hourly wage, or any performance-based pay that an employee receives, such as profit-sharing bonuses.
Table 16.1 Elements of a Pay System
| Nonmonetary pay | Includes benefits that do not involve tangible value. |
| Direct pay | Employee’s base wage |
| Indirect pay | Everything from legally required programs to health insurance, retirement, housing, etc. |
| Basic pay | Cash wage paid to the employee. Because paying a wage is a standard practice, the competitive advantage can only come by paying a higher amount. |
| Incentive pay | A bonus paid when specified performance objectives are met. May inspire employees to set and achieve a higher performance level and is an excellent motivator to accomplish goals. |
| Stock options | A right to buy a piece of the business that may be given to an employee to reward excellent service. An employee who owns a share of the business is far more likely to go the extra mile for the operation. |
| Bonuses | A gift given occasionally to reward exceptional performance or for special occasions. Bonuses can show an employer appreciates his or her employees and ensures that good performance or special events are rewarded. |
Indirect compensation is far more varied, including everything from legally required public protection programs such as social security to health insurance, retirement programs, paid leave, child care, or housing. Some indirect compensation elements are required by law: social security, unemployment, and disability payments. Other indirect elements are up to the employer and can offer excellent ways to provide benefits to the employees and the employer as well. For example, a working parent may take a lower-paying job with flexible hours that will allow him or her to be home when the children get home from school. A recent graduate may be looking for stable work and an afford