chapter 09 managing compensation

Copyright © 2004 South-Western. All rights reserved. 9–2

ObjectivesAfter studying this chapter, you should be able to:

1. Explain employer concerns in developing a strategic compensation program.

2. Indicate the various factors that influence the setting of wages.

3. Differentiate the mechanics of each of the major job evaluation systems.

4. Explain the purpose of a wage survey.

5. Define the wage curve, pay grades, and rate ranges as parts of the compensation structure.


Objectives (cont’d)After studying this chapter, you should be able to:

6. Identify the major provisions of the federal laws affecting compensation.

7. Discuss the current issues of equal pay for comparable worth, pay compression, living-wage laws, and low wage budgets.


Compensation

• Pay is a statement of an employee’s worth by an employer.

• Pay is a perception of worth by an employee.


Total CompensationTotal CompensationTotal CompensationTotal Compensation

DirectDirectDirectDirect IndirectIndirectIndirectIndirect

BonusesBonusesBonusesBonuses

GainsharingGainsharingGainsharingGainsharingSecurity Plans• Pensions

Security Plans• Pensions

Employee Services• Educational assistance• Recreational programs

Employee Services• Educational assistance• Recreational programs

CommissionsCommissionsCommissionsCommissions

Wages / SalariesWages / SalariesWages / SalariesWages / Salaries

Insurance PlansInsurance Plans• MedicalMedical• DentalDental• LifeLife

Insurance PlansInsurance Plans• MedicalMedical• DentalDental• LifeLife

Time Not WorkedTime Not Worked• VacationsVacations• BreaksBreaks• HolidaysHolidays

Time Not WorkedTime Not Worked• VacationsVacations• BreaksBreaks• HolidaysHolidays

Presentation Slide 9–1


Compensation Management and Other HRM Functions

Pay rates affect selectivityPay rates affect selectivityPay rates affect selectivityPay rates affect selectivity SelectionSelectionSelectionSelection Selection standards affect Selection standards affect level of pay requiredlevel of pay required

Selection standards affect Selection standards affect level of pay requiredlevel of pay required

Pay can motivate trainingPay can motivate trainingPay can motivate trainingPay can motivate training Training and Training and DevelopmentDevelopment

Training and Training and DevelopmentDevelopment

Increased knowledge leads Increased knowledge leads to higher payto higher pay

Increased knowledge leads Increased knowledge leads to higher payto higher pay

Training and development may Training and development may lead to higher paylead to higher pay

Training and development may Training and development may lead to higher paylead to higher pay

Compensation Compensation ManagementManagement

Compensation Compensation ManagementManagement

A basis for determining A basis for determining employee’s rate of payemployee’s rate of pay

A basis for determining A basis for determining employee’s rate of payemployee’s rate of pay


Aid or impair recruitmentAid or impair recruitmentAid or impair recruitmentAid or impair recruitment RecruitmentRecruitmentRecruitmentRecruitment Supply of applicants Supply of applicants affects wage ratesaffects wage rates

Supply of applicants Supply of applicants affects wage ratesaffects wage rates

Low pay encourages Low pay encourages unionizationunionization

Low pay encourages Low pay encourages unionizationunionization Labor RelationsLabor RelationsLabor RelationsLabor Relations Pay rates determined Pay rates determined

through negotiationthrough negotiation

Pay rates determined Pay rates determined through negotiationthrough negotiation


Strategic Compensation Planning

• Strategic Compensation PlanningLinks the compensation of employees to the

mission, objectives, philosophies, and culture of the organization.

Serves to mesh the monetary payments made to employees with specific functions of the HR program in establishing a pay-for-performance standard.

Seeks to motivate employees through compensation.


Significant Goals Driving Pay and Reward Changes

Figure 9.1Source: Towers Perrin and Duncan Brown, “Reward Strategies for Real: Moving from Intent to Impact,” WorldatWork Journal 10, no. 3 (Third Quarter 2001): 43. Used with permission.


Linking Compensation to Organizational Objectives• Value-added Compensation

Evaluating the individual components of the compensation program (pay and benefits) to see if they advance the needs of employees and the goals of the organization.“How does this compensation practice benefit

the organization?”“Does the benefit offset the administrative

cost?”


Common Strategic Compensation Goals

• To reward employees’ past performance• To remain competitive in the labor market• To maintain salary equity among employees• To mesh employees’ future performance with

organizational goals• To control the compensation budget• To attract new employees• To reduce unnecessary turnover


Strategic Compensation Policy Concerns

• The rate of pay within the organization and whether it is to be above, below, or at the prevailing community rate.

• The ability of the pay program to gain employee acceptance while motivating employees to perform to the best of their abilities.

• The pay level at which employees may be recruited and the pay differential between new and more senior employees.

• The intervals at which pay raises are to be granted and the extent to which merit and/or seniority will influence the raises.

• The pay levels needed to facilitate the achievement of a sound financial position in relation to the products or services offered.


The Pay-for-Performance Standard

• Pay-for-Performance StandardThe standard by which managers tie

compensation to employee effort and performance.

Refers to a wide range of compensation options, including merit-based pay, bonuses, salary commissions, job and pay banding, team/ group incentives, and various gainsharing programs.


Designing a Pay-for-Performance System

• How will performance be measured?• How will monies to be allocated for

compensation increases.

• Which employees will be eligible?• How will payouts be made?• How often will payouts occur?• How large will the payouts be?• Will employees perceive the rewards as valued?


Motivating Employees through Compensation• Pay Equity (also Distributive Fairness)

An employee’s perception that compensation received is equal to the value of the work performed.

A motivation theory that explains how people respond to situations in which they feel they have received less (or more) than they deserve. Individuals form a ratio of their inputs to

outcomes in their job and then compare the value of that ratio with the value of the ratio for other individuals in similar jobs.


Relationship between Pay Equity and Motivation

Figure 9.2

The greater the perceived disparity between my input/output ratio and the comparison person’s input/output ratio, the greater my motivation to reduce the inequity.


Expectancy Theory and Pay

• Expectancy TheoryA theory of motivation that holds that employees

should exert greater work effort if they have reason to expect that it will result in a reward that they value.

Employees also must believe that good performance is valued by their employer and will result in their receiving the expected reward.


Pay-for-Performance and Expectancy Theory

Figure 9.3


Motivating Employees through Compensation

• Pay SecrecyAn organizational policy requiring that

compensation levels and decisions about employee compensation be kept secret and, usually, prohibiting employees from revealing their compensation information to anyone.Can create employee misperceptions and

distrust of compensation fairness and pay-for-performance standards.


The Bases for Compensation

• Hourly WorkWork paid on an hourly basis.

• PieceworkWork paid according to the number of units

produced.

• Salary WorkersEmployees whose compensation is computed on

the basis of weekly, biweekly, or monthly pay periods.


The Bases for Compensation (cont’d)

• Nonexempt EmployeesEmployees covered by the overtime provisions of

the Fair Labor Standards Act.They must be paid time and one-half their

regular pay for all work performed after forty regular hours of work.


The Bases for Compensation (cont’d)

• Exempt employeesEmployees who not covered in the overtime

provisions of the Fair Labor Standards Act.Managers, supervisors, and white-collar

professional employees are exempted on the basis of their exercise of independent judgment and other criteria.


Components of the Wage Mix

WAGEWAGEMIXMIX

Labor MarketConditions

Area WageRates

Cost ofLiving

CollectiveBargaining

LegalRequirements

Compensation Strategyof the Organization

Worth ofthe Job

Employee’sRelativeWorth

Employer’sAbilityto Pay



Factors Affecting the Wage Mix

Figure 9.4


The Wage Mix—Internal Factors

• Compensation StrategySetting organization compensation policy to lead,

lag, or match competitors’ pay.

• Worth of a JobEstablishing the internal wage relationship among

jobs and skill levels.

• Relative Worth of an EmployeeRewarding individual employee performance

• Ability-to-Pay Having the resources and profits to pay

employees.


The Wage Mix—External Factors

• Labor Market ConditionsAvailability and quality of potential employees is

affected by economic conditions, government regulations and policies, and the presence of unions.

• Area Wage RatesA firm’s formal wage structure of rates is

influenced by those being paid by other area employers for comparable jobs.



• Cost of LivingLocal housing and environmental conditions can

cause wide variations in the cost of living for employees.

Inflation can require that compensation rates be adjusted upward periodically to help employees maintain their purchasing power.



• Collective BargainingEscalator clauses in labor agreements that

provide for quarterly upward cost-of-living wage adjustments for inflation to protect employees’ purchasing power.

Unions bargain for real wage increases that raise the standard of living for their members.

Real wages are increases larger than rises in the consumer price index; that is, the real earning power of wages.


Consumer Price Index (CPI)• A measure of the average change in prices over time

in a fixed “market basket” of goods and services


Job Evaluation

• Job EvaluationThe systematic process of determining the

relative worth of jobs in order to establish which jobs should be paid more than others within an organization.


Different Job Evaluation Systems

Figure 9.5

JOB AS JOB PARTSBASIS FOR A WHOLE OR FACTORSCOMPARISON (NONQUANTITATIVE) (QUANTITATIVE)

Job vs. job Job ranking Factor comparison system system

Job vs. scale Job classification Point system system

SCOPE OF COMPARISON


Job Evaluation Systems

• Job Ranking SystemOldest system of job evaluation by which jobs

are arrayed on the basis of their relative worth.Disadvantages

Does not provide a precise measure of each job’s worth.

Final job rankings indicate the relative importance of jobs, not extent of differences between jobs.

Method can used to consider only a reasonably small number of jobs.


Paired-Comparison Job Ranking Table

Figure 9.6

Directions: Place an X in the cell where the value of a row job is higher than that of a column job.


Job Evaluation Systems

• Job Classification systemA system of job evaluation in which jobs are

classified and grouped according to a series of predetermined wage grades.

Successive grades require increasing amounts of job responsibility, skill, knowledge, ability, or other factors selected to compare jobs.


Point System

• Point SystemA quantitative job evaluation procedure that

determines the relative value of a job by the total points assigned to it.

Permits jobs to be evaluated quantitatively on the basis of factors or elements—compensable factors—that constitute the job.

• Point ManualA handbook that contains a description of the

compensable factors and the degrees to which these factors may exist within the jobs.


Point Values for Job Factors of The American Association of Industrial Management

HRM 2

1ST 2ND 3RD 4TH 5THFACTORS DEGREE DEGREE DEGREE DEGREE DEGREE

Skill1. Education 14 28 42 56 702. Experience 22 44 66 88 1103. Initiative and ingenuity 14 28 42 56 70

Effort4. Physical demand 10 20 30 40 505. Mental or visual demand 5 10 15 20 25

Responsibility6. Equipment or process 5 10 15 20 257. Material or product 5 10 15 20 258. Safety of others 5 10 15 20 259. Work of others 5 10 15 20 25

Job Conditions10. Working conditions 10 20 30 40 5011. Hazards 5 10 15 20 25

Source: Reproduced with permission of the American Association of Industrial Management, Springfield, Mass.


Factor Comparison System

• Factor Comparison SystemA job evaluation system that permits the

evaluation process to be accomplished on a factor-by-factor basis by developing a factor comparison scale.

The compensable factors of a job evaluated are compared against the compensable factors of key jobs within the organization that serve as the job evaluation scale.


Characteristics of Key Jobs

• Key JobsJobs that are important for wage-setting purposes

and are widely known in the labor market.

• Characteristics of Key JobsThey are important to employees and the

organization.They vary in terms of job requirements.They have relatively stable job content.They are used in salary surveys for wage

determination.



Job Evaluation for Management Positions

• Hay Profile MethodJob evaluation technique using three factors—

knowledge, mental activity, and accountability—to evaluate executive and managerial positions.


The Compensation Structure

• Wage and Salary surveyA survey of the wages paid to employees of other

employers in the surveying organization’s relevant labor market.

Helps maintain internal and external pay equity for employees.

• Labor MarketThe area from which employers obtain certain

types of workers.


Collecting Survey Data

• Outside Sources of DataBureau of Labor Statistics (BLS)

National Compensation SurveyState and local wage surveysOnline survey data


Collecting Survey Data

• Conducting Employer-initiated SurveysSelect key jobs.Determine relevant labor market.Select organizations.Decide on information to collect: wages/ benefits/

pay policies.Compile data received.Determine wage structure and benefits to pay.


The Wage Curve

• Wage CurveA curve in a scattergram representing the

relationship between relative worth of jobs and wage rates.

• Pay GradesGroups of jobs within a particular class that are

paid the same rate.

• Rate RangesA range of rates for each pay grade that may be

the same for each grade or proportionately greater for each successive grade.


Freehand Wage Curve

Figure 9.7


Single RateStructure

Figure 9.8


Wage Structure with Increasing Rate Ranges

Figure 9.9Presentation Slide 9–5


The Wage Curve (cont’d)

• Competence-based Pay, (also skill-based pay or knowledge-based pay)Compensation for the different skills or increased

knowledge employees possess rather than for the job they hold in a designated job category.

• Red Circle RatesPayment rates above the maximum of the pay

range.

• BroadbandingCollapses many traditional salary grades into a

few wide salary bands.


Davis-Bacon Act1931Davis-Bacon Act1931

Required minimum wage, prevailing wage Required minimum wage, prevailing wage rates, 1rates, 1½½ overtime premium payments by overtime premium payments by federal contractors.federal contractors.

Required minimum wage, prevailing wage Required minimum wage, prevailing wage rates, 1rates, 1½½ overtime premium payments by overtime premium payments by federal contractors.federal contractors.

Walsh-Healy Act1936Walsh-Healy Act1936

Required overtime payments after 8 daily Required overtime payments after 8 daily or 40 regular work hours for workers on or 40 regular work hours for workers on federal contracts.federal contracts.

Required overtime payments after 8 daily Required overtime payments after 8 daily or 40 regular work hours for workers on or 40 regular work hours for workers on federal contracts.federal contracts.

Fair Labor Standards Act (FLSA)1938

Fair Labor Standards Act (FLSA)1938

Interstate commerce clause used to cover Interstate commerce clause used to cover workers except agricultural and workers except agricultural and exempted (managerial) employees, child exempted (managerial) employees, child labor prohibited.labor prohibited.

Interstate commerce clause used to cover Interstate commerce clause used to cover workers except agricultural and workers except agricultural and exempted (managerial) employees, child exempted (managerial) employees, child labor prohibited.labor prohibited.

Government Regulation of Compensation(Federal Wage Laws)


Significant Compensation Issues

• Equal Pay for Comparable WorthThe concept that male and female jobs that are

dissimilar, but equal in terms of value or worth to the employer, should be paid the same.

• Wage-Rate CompressionCompression of pay differentials between job

classes, particularly the pay differentials between hourly workers and their managers.

• Low-wage BudgetsCurrent wage budgets reflect the general trend

toward tight compensation cost controls.


Significant Compensation Issues

• Living-Wage LawsRequire contractors who work for local

governments or private employers that receive government subsidies or tax breaks pay employees an income above the federal poverty level of $18,100 for a family of four—an hourly wage of more than $8 an hour.

• Low-wage BudgetsCurrent wage budgets reflect the general trend

toward tight compensation cost controls.


Salary Budgets by Type of Employee, 1991–2002

Figure 9.10

Source: Reprinted from 2001–2002 Total Salary Increase Budget Survey with permission from WorldatWork, 14040 N. Northsight Blvd., Scottsdale, AZ 85260; phone (877) 951-9191; fax (480) 483-8352; www.worldatwork.org. © 2002 WorldatWork. Unauthorized reproduction or distribution is strictly prohibited.

chapter 09 managing compensation

Recruiting & HR

compensation of employees

pay program

compensation management

compensation budgetto

compensation structure

compensation practice

pay differential

pay levels