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CompensationCompensation

Paul L. Schumann, Ph.D.Paul L. Schumann, Ph.D.

© 2011 by Paul L. Schumann. All rights reserved.© 2011 by Paul L. Schumann. All rights reserved.

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Equity IssuesEquity Issues

External equityExternal equity Internal equityInternal equity Equity TheoryEquity Theory

• My situation is fair if:My situation is fair if:

onsContributi sEmployee'Other

Pay sEmployee'Other

onsContributiMy

PayMy

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Market-Based Pay SystemMarket-Based Pay System Doesn’t use internal job evaluationDoesn’t use internal job evaluation Use market pay data directlyUse market pay data directly

• Use pay data collected by others (compare Use pay data collected by others (compare multiple reliable and valid sources)multiple reliable and valid sources)

www.bls.gov/bls/blswage.htm (problem: broad, match by job title) (problem: broad, match by job title) www.salary.com (sources and participants?) (sources and participants?) http://www.radford.com/ (good) (good) http://www.towerswatson.com/ (good at cleaning data) (good at cleaning data) http://www.wmgnet.com/dnn/ (good) (good) http://www.employersassoc.com/ (good) (good) http://www.erieri.com/ (info on pay differentials by region) (info on pay differentials by region) http://www.positivelyminnesota.com/Data_Publications/Data/All_Data_Tools/http://www.positivelyminnesota.com/Data_Publications/Data/All_Data_Tools/

Occupational_Employment_Statistics.aspx (match on job descriptions, not just Occupational_Employment_Statistics.aspx (match on job descriptions, not just titles)titles)

directory.google.com/Top/Business/Human_Resources/directory.google.com/Top/Business/Human_Resources/Compensation_and_Benefits/Compensation/?tc=1 Compensation_and_Benefits/Compensation/?tc=1

• Use pay data you collect yourselfUse pay data you collect yourself

Market-Based Pay SystemsMarket-Based Pay Systems

AdvantagesAdvantages Easier to explain & Easier to explain &

understand than Point-understand than Point-Factor MethodFactor Method

Competitive focusCompetitive focus Reduce administrative Reduce administrative

burdensburdens Puts the Compensation Puts the Compensation

Analyst on solid ground in Analyst on solid ground in pay discussionspay discussions

DisadvantagesDisadvantages You can’t market price You can’t market price

every jobevery job Room for abuse of the Room for abuse of the

statisticsstatistics You get what you pay for – You get what you pay for –

good surveys cost moneygood surveys cost money You need to participate in You need to participate in

the surveys, which require the surveys, which require expertiseexpertise

May require a culture shift May require a culture shift from internal equity to the from internal equity to the marketmarket

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Point-Factor Pay SystemPoint-Factor Pay System

Define compensable factorsDefine compensable factors Perform job evaluationPerform job evaluation Select benchmark jobsSelect benchmark jobs Get market pay data for benchmark Get market pay data for benchmark

jobsjobs Estimate pay policy linesEstimate pay policy lines Use pay policy lines to determine pay Use pay policy lines to determine pay

for all jobs (directly or pay grades)for all jobs (directly or pay grades)

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Internal vs. External ConflictsInternal vs. External Conflicts

Example:Example:• Suppose market pay has been $12 per Suppose market pay has been $12 per

hour for a particular jobhour for a particular job We have employees at $12We have employees at $12

• When we go to hire a new employee, we When we go to hire a new employee, we discover the market now pays $13discover the market now pays $13

We hire the new employee at $13We hire the new employee at $13

• What do you do with the existing What do you do with the existing employees who are still at $12?employees who are still at $12?

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Internal vs. External ConflictsInternal vs. External Conflicts

Example:Example:• Internal:Internal: Job evaluation determines VP- Job evaluation determines VP-

Marketing & VP-IT have the same value Marketing & VP-IT have the same value to the organizationto the organization

• External:External: Market pay of VP-IT is higher Market pay of VP-IT is higher than market pay of VP-Marketingthan market pay of VP-Marketing

• Option 1: Pay both at VP-IT rateOption 1: Pay both at VP-IT rate• Option 2: Pay both at VP-Marketing rateOption 2: Pay both at VP-Marketing rate• Option 3: Pay VP-IT more than VP-MrktOption 3: Pay VP-IT more than VP-Mrkt

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Incentive Pay TheoriesIncentive Pay Theories

Reinforcement theoryReinforcement theory Expectancy theoryExpectancy theory

• Effort Effort Performance Performance Rewards Rewards Valence: Reward (incentive pay) must be Valence: Reward (incentive pay) must be

valuedvalued Instrumentality: Must have strong link Instrumentality: Must have strong link

between performance & rewardsbetween performance & rewards Expectancy: Must have strong link between Expectancy: Must have strong link between

effort & performanceeffort & performance Agency theoryAgency theory

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Incentive Pay SystemsIncentive Pay Systems Merit payMerit pay Incentive pay bonusIncentive pay bonus

• Individual employee incentive bonusIndividual employee incentive bonus• Group incentive bonusGroup incentive bonus

Profit sharing bonusProfit sharing bonus Stock ownershipStock ownership

• Stock optionsStock options• ESOPESOP

Gain sharing bonusGain sharing bonus Skill based paySkill based pay

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Employee BenefitsEmployee Benefits

Mandatory social insuranceMandatory social insurance• Social SecuritySocial Security

Benefit types: retirement, disability, family, Benefit types: retirement, disability, family, survivors, & Medicaresurvivors, & Medicare

www.ssa.gov www.ssa.gov

• Unemployment InsuranceUnemployment Insurance www.uimn.org/ui/index.htm www.uimn.org/ui/index.htm

• Workers’ CompensationWorkers’ Compensation http://www.doli.state.mn.us/workcomp.asp http://www.doli.state.mn.us/workcomp.asp

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Employee BenefitsEmployee Benefits

Private group insurancePrivate group insurance• Medical insuranceMedical insurance

Types:Types:• Fee for serviceFee for service• Preferred Provider Plan (PPO)Preferred Provider Plan (PPO)• Health Maintenance Organization (HMO)Health Maintenance Organization (HMO)

Plan design elements:Plan design elements:• DeductibleDeductible• Co-paysCo-pays• Co-insuranceCo-insurance

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Employee BenefitsEmployee Benefits

Private group insurance (cont’d.)Private group insurance (cont’d.)• Disability insuranceDisability insurance• Pension plansPension plans

Regulation: ERISARegulation: ERISA Types:Types:

• Defined benefit planDefined benefit plan• Defined contribution planDefined contribution plan

VestingVesting

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Employee BenefitsEmployee Benefits

Other benefitsOther benefits• Pay for time not workedPay for time not worked• Child careChild care• Employee wellness programsEmployee wellness programs

Flexible spending accounts (flex Flexible spending accounts (flex benefits, cafeteria benefits)benefits, cafeteria benefits)