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Compensation

The simple act of receiving a paycheck for one's job is the result of many complex processes involved in the art and science of compensation. Compensation systems are designed to comply with a large number of organizational objectives, including serving as an exchange for hourly labor, motivating behavior, and accomplishing social objectives such as covering the cost of medical insurance. The design of compensation systems and methods for distributing pay and benefits is influenced by cultural traditions and legal requirements.

Within the organizational sciences, compensation has traditionally encompassed base pay, pay raises, pay systems, benefits, the psychology of pay, and legal issues. Recently, the area of compensation has expanded to include nontraditional conceptions of pay that are often captured under the term total compensation. Total compensation includes not only pay and benefits but also nonmonetary rewards, such as the value of positive job characteristics (e.g., having a creative job has a positive nonmonetary value that should be seen as part of total compensation). A second change that has occurred in the area of compensation over the last 20 years is an increased emphasis on at-risk pay, variable pay, or pay for performance. Despite the importance of these two recent trends, compensation will be treated here in its more traditional fashion, although brief mention will be made of total compensation and at-risk pay.

Base Pay

Establishing the base pay, the basic annual salary or hourly wage, for a job can be a challenge. Organizations often rely on the market, which can be assessed through market surveys. However, the market can be unstable and unreliable. Industrial and organizational psychologists have made a significant contribution to the field of compensation through their work on job analysis and job evaluation systems. Job evaluation systems, particularly the point system, provide reliable, valid methods of measuring the compensable worth of jobs through the ratings of job characteristics such as skill, effort, responsibility, and working conditions. Job evaluation systems allow for the distribution or slotting of jobs into grades. Jobs within a grade receive the same base pay, although there can be fluctuations based on the step within the grade.

During the 1990s, the idea of broadbanding became more popular. Under a traditional system, there may be as many as 12 to 20 grades. Under a broadband system, there may be as few as 3 to 5 grades. Broadbanding systems are seen as allowing for greater managerial discretion and flexibility in the assignment of initial rates of base pay.

Pay Raises

In traditional pay systems, individuals start at a certain entry pay rate. Over time, they receive pay increases. In most systems, these increases are a function of both seniority and the cost of living. Pay raises may also depend on merit. Although merit may be based on some type of objective performance criteria, it is usually operationalized based on supervisor recommendations or ratings. Thus, the merit component is heavily dependent on the perceived fairness of the performance appraisal system. In addition to individual performance, pay raises may vary based on organizational performance, organizational productivity, or market conditions.

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