Compensation

Question 1

Why is compensation management important?

Answer 1

• Attract and retain qualified personnel
• Motivation
• Reinforce organizational culture
• Maintain products’ or services’ market competitiveness

Question 2

What are the three types of equity?

Answer 2

External Equity: wage based on surveys
Internal Equity: how equitable your pay is compared to other people from the same company
Individual Equity: Based on performance appraisal.

Question 3

How to evaluate internal equity?

Answer 3

1. Define the factors that require compensation (The Hay Plan - know-how, accountability, and problem solving)
2. Rate jobs considering the compensable factors (attribute points)
3. Create a salary line, correlating salary with number of points.

Question 4

What are the different ways of compensation?

Answer 4

• Cash (salary)
• Benefits (car, gym, meals)
• Indirect compensation (health, holidays)
• Intrisinc rewards (responsability, autonomy, development)
• Social rewards

Question 5

How should a firm structure their incentives?

Answer 5

1. Define goals and expected outcomes.
2. Stablish the eligible people receiving the incentive (company, team, individual).
3. Stablish a time horizon (short, medium, long terms).
4. Effort vs results: reward means or outcomes.
5. Structure the incentives: annual bonus, stock options, commissions.
6. They should be transparent, accurate, and equal! Measurement is critical.

Question 6

Different types of Human Capital

Answer 6

From rarely portable to often portable

• Company Specifict HC(firm-specific) - knowledge of procedures, culture, and systems unique to a company
• Relationship HC (firm-specific) - effectiveness stemming from established relationships with colleagues.
• Industry HC (firm-specific) - knowledge unique to an industry p.e. regulatory, techniques
• Strategic HC - specific strategic skills p.e. cost cutting
• General Management HC - gathering, cultivating, deploying financial, technical, and human resources

Question 7

General HC vs Firm-Specific HC

Answer 7

General HC: Increases the value of employees in the labour market (competitors). The cost is usually supported by the workers, indirectly, in lower salaries, or directly, through payment of fees.
Firm-Specific HC: more difficult since it has no market value (only firm-specific). The cost is supported by the company.