How Companies Compensate Their Employees – Part I

The compensation scheme is one of the main tools companies use to motivate employees. In many cases it’s the person’s main reason for wanting to work. A comprehensive pay apparatus should meet a considerable portion of the worker’s needs – and not just his physical needs. Various elements of compensation should provide a solution for a range of needs.
This week we’re launching a series of articles that assess various aspects of the employees’ material compensation. The first article presents a framework for setting base salaries at organizations


Many studies were conducted during the 20th century to assess people’s motivation to work. They were aimed primarily at ways to improve worker productivity. According to their results, achieving this depends on providing the worker’s needs – a natural part of the mutual relationship between employee and employer based on a simple principle: the company provides work, and the employee provides certain needs.
The first underlying assumption was that a person works primarily to make a living. Therefore at first scholars evaluated the assumption that the worker’s primary drive is material. In this regard much has been written about scientific management. According to this approach optimal efficiency can be achieved at an organization by creating a precise monetary compensation system based on task distribution and creating an orderly system with close oversight. The fundamental assumption of this approach is that the employee’s motivations are solely economic and his thinking is rational.
But later it was found that production is affected by the way he’s treated and the extent to which the company meets his other human needs, such as the need to learn and develop, the need for status and sometimes even the sense of carrying out a mission for the company.
Many researchers drew a distinction between providing for material needs and providing for motivational needs

Although this series of articles focuses on material compensation, this includes elements on non-material reward as well. The pay level of a senior manager, for instance, is not just the amount of money he earns, but also an expression of his status at the organization, his professional status, his feelings of self-worth, etc. Therefore in most cases the distinction between material needs and motivational needs, including all of the matters related to material compensation, are not dichotomous, but rather contiguous. In other words determining whether a certain amount of compensation is more to satisfy basic existential needs or more for motivational needs is done on an individual basis. A clear distinction can be made between the two material compensation arrangements companies operate: the primary compensation, monetary reward for working, and the secondary form of compensation, reward given to him as a human being who spends a considerable portion of his life at the workplace.
Compensation for work is differential, i.e. work of varying value is rewarded with different compensation. The base pay for a systems analyst is different from the base pay for a cleaning worker. The bonus for a quality sale will be higher for a lower quality sale, etc. On the other hand material compensation given to an employee as a person is supposed to be uniform, based on the principle of equality. Thus the holiday present the low-level worker receives should not be any different in value from the present a high-level manager receives. Both of them are human beings who are supposed to receive the gift as show of appreciation for being a member of the company’s staff, not in exchange for the level of performance or the centrality of their jobs.

An organization compensates its employees through several components. Each component has a different task in providing for the working person’s needs. For instance, base pay reflects skills and the area of responsibility, incentives are given for quantifiable performance, social benefits seek to create a sense of security relating to the employee’s future and appreciatory compensation expresses appreciation for exceptional work.

In this article we’ll survey base pay, the core of material compensation, which primarily reflects the value of the nexus between the employee’s skills and the amount of responsibility placed on his shoulders. Base pay is not necessarily determined by the worker’s abilities. However, it usually carries considerable weight in the total compensation package. Therefore it’s safe to assume the pay for a software engineer with a mediocre work record will be higher than the total pay for a warehouse worker with a good work record. The amount of the base pay is based on the typical pay level in the employment market, with its fluctuations, but it is also affected by various factors, such as the organization’s financial situation, which has direct repercussions on the amount budgeted for pay. A company where the situation is improving may decide, for instance, that the pay budget will be increased by 3% during the next year.

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Regarding how pay levels are determined, large companies generally have a pay policy and pay scales for various professions according to the type of job and the skills needed to carry it out. For instance, the pay scale for a senior software engineer can be NIS 12,000-15,000. A salary beyond this range is only given in isolated cases, e.g. if the company wants to hire someone with unique skills or an exceptional reputation, and it generally requires obtaining approval from the board of directors. Within this range the salary level is affected by a variety of factors: the negotiating abilities of the job candidate and the person doing the hiring, the way the job candidate sells himself and of course how urgent it is for the company to fill the job quickly.
At well-organized workplaces where employees are represented by workers’ organizations that discuss salary level with the management, the base salary is set primarily through collective negotiations. At such workplaces seniority also carries weight. Considering seniority a significant element in setting salary rates has also penetrated companies that don’t have unions both because it’s a longstanding tradition that has taken root in the Israel job market and because of the assumption that with seniority comes experience, so the employee’s skills improve.

In certain cases the pay policy can differ from one group of workers to the next. For example, if an organization draws a distinction between what it views as core skills and other types of work. A communications company, for example, might determine that the minimum salary for its high-tech experts would be higher than the average monthly salary in the job market, while the salary for customer service workers would be about the same as the average monthly wage.

Another organization might decide to pay bonuses only to workers in certain fields, e.g. if that year a gap formed between the average wages at the company in this field and the average wages for that field in the market for that same field of enterprise. For example, in the 1990s, when the large wave of immigration arrived from the FSU and drove a massive wave of construction across the country, real-estate companies were finding it difficult to hire a construction engineer. As a result of rising demand their pay went up accordingly. A similar phenomenon occurred in the high-tech market during the same period, when programmers were in high demand. When the bubble burst at the beginning of the present decade many projects were shut down and their pay decreased substantially.

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At organizations where worker relations are not organized comparative salary surveys are occupying a more central role as the method for determining pay. Companies provide figures on their salary levels and those conducting the survey collect data from a large number of organizations, process the data and present the average salary level in various industries and professions, according to various cross-sections. This provides organizations an indication of typical rates in the job market at a certain point in time and based on this data they implement their salary policy.
For example, an organization that wants to hire top employees and trumpets the value it places on excellence will be prepared to pay high salaries relative to those same professions at other organizations. Another company, with a reputation as a good employer, can get by with average salaries and still be considered an attractive enough employer among jobseekers and among its good employees (who it wants to retain) – because it offers its employees significant added value, e.g. job security or tempting conditions like frequent travel abroad (but not too frequent to avoid fatigue).
The use of salary surveys as a foundation for setting salary levels started in the US. Israeli high-tech companies, which were exposed to salary surveys through their connections with foreign companies, imported them to Israel. Eventually this method made its way to other industries, even traditional manufacturing. These comparative apparatuses are primarily useful at large companies; for small companies with a few dozen workers they are less important, but there are some small companies striving for “orderly” management that use this or similar tools.  

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The following two examples serve to illustrate the discussion above:
Fair wages, above the average for the industry in question, are a central part of a large international communications company that has been operating for decades in Israel and employs thousands of workers. This type of wage level allows it to recruit very good employees, which is considered a highy important factor, and at the same time allows it to continue receiving development assignments from the parent company. The company’s primary enterprise in Israel, development, competes with the company’s other development setups in different parts of the world. Therefore it has been asked to keep wage levels down to a reasonable level, otherwise the price of labor will shoot up and it will no longer be worthwhile for the parent company to send development projects their way.
Every position at the company has a salary scale. Within that range the salary is based on the worker’s attributes. For example, in engineering experience carries substantial weight. The salary is also dependent on the employee’s performance.
Likewise at a medium-size manufacturing company the compensation policy calls for wages about the average in its industry – steel. But when it comes to professions in large demand, such as engineers, to bring in talented employees it has to compete with the entire job market – including leading high-tech companies – so the aim is to ensure wages are at least like the average amount for that profession commonly offered in the job market.
Although the base salaries for production workers at this company are typically just slightly above minimum wage, only rarely is this their actual take-home pay for three main reasons: professional skill and experience entitle the worker to higher pay, overtime hours are routine and once a month production workers receive bonuses for personal and team achievements.

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An important component in the organization’s compensation policy is the way raises are given. At high-tech and other large companies it’s customary to discuss employees’ performance and their base pay at the end of every year and compensate them accordingly. At one large high-tech company, for example, the worker’s salary level is evaluated according to his performance, position, the state of the market and the state of the company. Compensation can be in the form of a one-time bonus, but generally it is granted in the form of a pay raise or a promotion to a higher rank in the pay scale. The criteria for receiving a raise vary from one company to the next.
On the other hand, the annual salary talks at the international communications company mentioned above do not always conclude with a pay raise. The talks are used to assess the employee’s salary level and to compare it to similar professionals in the market. This means even if his performance was satisfactory, but his current pay is above typical rates in the job market (e.g. if the year before he received a handsome pay raise) he won’t necessarily receive another raise. In most cases the worker is not disappointed even if it may be natural for him to expect a raise, because increasing the salary level is only one component in his monetary compensation. At other companies there are no scheduled salary talks, but at these companies, like at the manufacturing company mentioned above, salary is tied to the managers’ satisfaction with how a given worker carries out his job. If a manager wants to give a raise to the key workers in his unit, he will ask the executive board for permission. 

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