Milkovich pay model

Milkovich−Newman: Compensation, Eighth Edition

Front Matter 1. The Pay Model © The McGraw−Hill Companies, 2004

1

The Pay Model Chapter Outline

Chapter One

The Employment Relationship Combines Transactional and Relational Returns

Variations in Transactional and Relational Expectations

A Pay Model Compensation Objectives Four Policies Pay Techniques

Book Plan

Caveat Emptor—Be an Informed Consumer

1. Does the Research Measure Anything Useful?

2. Does the Study Separate Correlation from Causation?

3. Are There Alternative Explanations?

Your Turn: Glamorous Internships? or House Elves?

Compensation: Definition, Please? Society Stockholders Managers Employees Global Views—Vive la différence

Forms of Pay Cash Compensation: Base Cash Compensation: Merit Pay/ Cost-of-Living Adjustments Cash Compensation: Incentives Long-Term Incentives Benefits: Income Protection Benefits: Work/Life Focus Benefits: Allowances Total Earnings Opportunities: Present Value of a Stream of Earnings Relational Returns from Work

A friend of ours writes that she is in one of the touring companies of the musical Cats. In the company are two performers called “swings” who sit backstage during each perfor- mance. Each swing must learn five different lead roles in the show. During the perfor- mance, the swing sits next to a rack with five different costumes and makeup for each of the five roles. Our friend, who has a lead in the show, once hurt her shoulder during a dance number. She signaled to someone offstage, and by the time she finished her num- ber, the swing was dressed, in makeup, and out on stage for the next scene.

Our friend is paid $2,000 per week for playing one of the cats in the show. She is ex- pected to do a certain number of performances and a certain number of rehearsals per week. She gets paid for the job she does. The swing gets paid $2,500 per week, whether she performs 20 shows that week or none. She is paid for knowing the five roles, whether she plays them or not.

Milkovich−Newman: Compensation, Eighth Edition

Front Matter 1. The Pay Model © The McGraw−Hill Companies, 2004

2 Chapter 1 The Pay Model

Think of all the other employees, in addition to the performers, required for putting on a performance of Cats. Electricians, trombonists, choreographers, dressers, janitors, nurses, vocal coaches, accountants, stagehands, payroll supervisors, ushers, lighting tech- nicians, ticket sellers—the list goes on. Consider the array of wages paid to these employ- ees. Why does the swing get paid more than other performers? Why does the performer get paid more (or less) than the trombonist? How are these decisions made, and who is involved in making them? Whether the pay is our own or someone else’s, compensation questions engage our attention.

Does the compensation received by all the people connected with Cats matter? Most employers believe that how people are paid affects people’s behaviors at work, which af- fect an organization’s chances of success. Compensation systems can help an organiza- tion achieve and sustain competitive advantage.1

COMPENSATION: DEFINITION, PLEASE?

What image does the word “compensation” bring to mind? It does not mean the same thing to everyone. Yet how people view compensation affects how they behave at work. Thus, we begin by recognizing different perspectives.

Society Some people see pay as a measure of justice. For example, a comparison of earnings of women with those of men highlights what many consider inequities in pay decisions. The gender pay gap in the United States, after adjustment for differences in education, experi- ence, and occupation, narrowed from 36 percent in 1980 to 12 percent in 2003. But this measure masks tremendous variations. When educational choices are taken into account, women’s earnings are 94 percent of those of men. For people age 21 to 35 who live alone and have no children, the gap is close to zero. (Of course, this constitutes a very small segment of the labor force.)2 The gap even varies by cities. Most people were surprised when 2000 census data showed that women in Wichita, Kansas, earn about half of what men earn but that women in Oakland, California, earn more than men.3

Sometimes differences in compensation among countries are listed as a cause of loss of jobs from more developed, higher-wage economies to less developed ones. As Exhibit 1.1 reveals, labor costs in Mexico are about 12 percent of those in the United States. However,

1E. Lawler III, Rewarding Excellence (San Francisco: Jossey-Bass, 2000); Patricia Zingheim and J. R. Schuster, Pay People Right! (San Francisco: Jossey-Bass, 2000); B. Gerhart, “Pay Strategy and Firm Performance,” in Compensation in Organizations: Current Research and Practice, eds. S. L. Rynes and B. E. Gerhart (San Francisco: Jossey-Bass, 2000); B. E. and Mark Huselid, “High Performance Work Systems and Firm Performance: A Synthesis of Research and Management Implications,” in Research in Personnel and Human Resources, ed. G. Ferris (Greenwich, CT: JAI Press, 1998); Barry Gerhart and Sara Rynes Compensation: Theory, Evidence, and Strategic Implications (Thousand Oaks, CA: Sage, 2003). 2H. J. Cummins, “Mommy Wage Gap: It’s Real, but Is It Fair?” Minneapolis Star & Tribune, May 11, 2003; Genaro C. Armas, “White Men Still Outearn Other Groups,” Associated Press, March 21, 2003; F. Blau, and L. Kahn, “Analyzing the Gender Pay Gap,” Quarterly Review of Economics and Finance 39 (1999), pp. 625–646; Francine D. Blau and Lawrence M. Kahn, “Understanding International Differences in the Gender Pay Gap,” NBER Working Paper W8200, Cambridge, MA, April 2001. 3Laurent Belsie, “Gender Pay Gap Varies by City,” Christian Science Monitor, December 12, 2001.