Chapter 4: Components of Compensation Strategy

* The first strategic decision is about the relative proportions of base pay, performance pay, and indirect pay to include in the compensation mix. * Three other choices follow – what method(s) should be used for establishing base pay, what type(s) of performance pay(if any) should be provided, and which elements of indirect pay should be included.

Compensation Mix choices:
Base pay job evaluation, market pricing, and pay for knowledge
Performance pays individual performance, group performance, and organization performance
Indirect pay Mandatory benefits, pension plan, health and life insurance, pay for time not worked, employee services, and other benefits.

Base pay: * Base pay: is the portion of an individual’s compensation that is based on time worked not on the output produced or results achieved. * Base pay accounts for 75 to 80 percent of the compensation for a typical employee, performance pay about 5 to 10percent, and indirect pay about 15 percent of the total compensation. However these proportions vary across firms. * Base pay is guaranteed by the employer if a person works for a certain amount of time; he or she is paid a prespecified amount of money. In some case, this amount is calculated on a hourly basis, in others daily, in others weekly, or monthly, or annually. * When base pay is calculated on an hourly basis, base pay is known as wage * When base pay is calculated on a weekly, monthly, or annual basis, it is known as a salary.
Why use base pay? Advantages * Base pay is sometimes preferable to out-put pay, even where out-put related pay is feasible * Substitution of output related pay for time based pay is feasible only for jobs in which the output is : 1) easy to measure, 2) easy to price in terms of its value to the employer, 3) easy to