8 • Compensation

Q FORMS OF PAY

Exhibit 1.4 shows the variety of returns people receive from work. They are categorized as total compensation
and relational returns. The relational returns (learning opportunities, status, challenging work, and so on)
are psychological.22 Total compensation returns are more transactional. They include pay received directly
as cash (e.g., base, merit, incentives, cost-of-living adjustments) and indirectly as benefits (e.g., pensions,
medical insurance, programs to help balance work and life demands, brightly colored uniforms).23 So pay
comes in different forms, and programs to pay people can be designed in a wide variety of ways.

Cash Compensation: Base

Base wage is the cash compensation that an employer pays for the work performed. Base wage tends to reflect
the value of the work or skills and generally ignores differences attributable to individual employees. For
example, the base wage for machine operators may be $20 an hour. However, some individual operators may
receive more because of their experience and/or performance. Some pay systems set base wage as a function
of the skill or education an employee possesses; this is common for engineers and schoolteachers.24

Recognition & / \g
Status / \s
Employment Challenging
Security Work

Allowances
Long-Term Work/Life
Base Incentives Balance
Merit/Cost Short-Term
of Living Incentives
Total Returnsfor Work

22 Chun Hui, Cynthia Lee, and Denise M. Rousseau, "Psychological Contract and Organizational Citizenship Behavior in China:
Investigating Generalizability and Instrumentality," Journal of Applied Psychology 89 (2004), pp. 311-321; N. Conway and R. Briner,
Understanding Psychological Contracts at Work: a Critical Evaluation of Theory and Research (Oxford: Oxford University Press,
2005).
23 "Brightly Colored Uniforms Boost Employee Morale," The Onion 36(43) (November 30,2000).
24 Allan Odden and Carolyn Kelley, Paying Teachers for What They Know and Do: New and Smarter Compensation Strategies to Improve
Schools, 2nd ed. (Thousand Oaks, CA: Corwin Press, 2002); Ralph Blumenthal, "Houston Ties Teachers' Pay to Test Scores," New York
Times, January 13,2006, p. A12.