compensation & benefits – basic compensation & employee benefits chapter 9 hrm

Compensation & Benefits –

Basic

Compensation

& Employee

Benefits

CHAPTER

9

CHAPTER

9

HRM

9-2Compensation & Benefits –

CompensationCompensation

CompensationCompensation is the set of rewards that organizations provide is the set of rewards that organizations provide

to individuals in return for their willingness to to individuals in return for their willingness to perform various jobs and tasks within the perform various jobs and tasks within the organization.organization.

Internal equityInternal equity in compensation refers to comparisons that in compensation refers to comparisons that

employees make to other employees within the employees make to other employees within the same organization.same organization.

External equityExternal equity in compensation refers to comparisons in compensation refers to comparisons

employees make to others performing similar employees make to others performing similar jobs in different organizations.jobs in different organizations.


Basic Purposes of CompensationBasic Purposes of Compensation

Reward andReward andmotivatemotivate

InternalInternalequityequity

ExternalExternalequityequity

LegalLegal compliance compliance

CompensatioCompensationn

ExpenseExpensecontrolcontrol


Wages versus SalariesWages versus Salaries

WagesWages generally refer to hourly compensation paid to generally refer to hourly compensation paid to

operating employees; the basis for wages is operating employees; the basis for wages is time.time.

SalarySalary is income that is paid an individual not is income that is paid an individual not

on theon thebasis of time, but on the basis of basis of time, but on the basis of performance.performance.


Strategic Options for CompensationStrategic Options for Compensation

Anticipation of Anticipation of setting pay levelsetting pay level

DeterminationDeterminationof market payof market pay

Pay belowPay belowmarket ratemarket rate

Pay above Pay above market ratemarket rate

Pay market Pay market raterate


Organizational Pay RatesOrganizational Pay Rates

Pay Pay above above market market

raterate

Pay at Pay at marketmarket

raterate

Pay Pay below below market market

raterate

• Attracts better employeesAttracts better employees• Minimizes voluntary Minimizes voluntary

turnoverturnover• Fosters strong culture and Fosters strong culture and

competitive superiority competitive superiority

• Additional compensation Additional compensation costscosts

• Sense of entitlementSense of entitlement

• Higher quality of human Higher quality of human resources at midrange of resources at midrange of market-driven compensation market-driven compensation costscosts

• Does not attract higher Does not attract higher performersperformers

• Turnover will vary with labor Turnover will vary with labor demands of competing firmsdemands of competing firms

• Lower compensation costsLower compensation costs• Useful in labor markets Useful in labor markets

where unemployment is where unemployment is highhigh

• Lower-quality employeesLower-quality employees• Low morale/job satisfactionLow morale/job satisfaction• Higher turnover; especially Higher turnover; especially

among high performersamong high performers

AdvantagesAdvantagesDisadvantagesDisadvantages


Determinants of Compensation StrategyDeterminants of Compensation Strategy

Factors contributing to a firm’s compensation strategyFactors contributing to a firm’s compensation strategy

Relationship of overall strategy to compensation strategyRelationship of overall strategy to compensation strategy

Growth rate of firm and demand for human resourcesGrowth rate of firm and demand for human resources

Financial condition of the firm (i.e., ability to pay)Financial condition of the firm (i.e., ability to pay)

Overall attractiveness of firm (i.e., location, culture)Overall attractiveness of firm (i.e., location, culture)

Legal context of federal, state, and local labor regulationsLegal context of federal, state, and local labor regulations

Union influence and presence in labor marketUnion influence and presence in labor market


Pay Surveys and CompensationPay Surveys and Compensation

Pay surveysPay surveys are surveys of compensation paid to are surveys of compensation paid to

employees by other employers in a employees by other employers in a particular geographic area, an industry, or particular geographic area, an industry, or an occupational group.an occupational group.

assist firms in avoiding problems of external assist firms in avoiding problems of external equity when attempting to set compensation equity when attempting to set compensation strategy for themselves.strategy for themselves.


Developing Pay SurveysDeveloping Pay Surveys

Select Employers with Comparable JobsSelect Employers with Comparable Jobs

Determine Jobs to be SurveyedDetermine Jobs to be Surveyed

Decide What Information Is NeededDecide What Information Is Needed

Conduct SurveyConduct Survey


Establishing Pay StructuresEstablishing Pay Structures

Establishing Pay Structures


Traditional Pay Structure vs. Traditional Pay Structure vs. BroadbandingBroadbanding

Traditional Pay Structure vs. Traditional Pay Structure vs. BroadbandingBroadbanding


Pay ScattergramPay ScattergramPay ScattergramPay Scattergram


Determining a Wage and Salary Structure Determining a Wage and Salary Structure

FactorFactorcomparisoncomparison

method method

Job rankingJob rankingmethodmethod

ClassificationClassificationsystemsystem

Point systemPoint systemJob Job

EvaluationEvaluationRegression-Regression-

based systembased system


Job Evaluation and Job WorthJob Evaluation and Job Worth

Job Ranking

Job A B C D Total

A 0

B 1 1 2

C 1 1 1 3

D 1 1

Point System

CompensableFactors

Degree1

Degree2

Degree3

Degree4

Degree5

TotalPoints

Knowledge 10 20 30 40 50 150

Experience 15 30 45 60 75 225

Job responsibilities 25 50 75 100 125 375

Working conditions 5 10 15 20 25 75


Job Evaluation and Job WorthJob Evaluation and Job Worth

Factor comparison methodFactor comparison method assesses jobs on a factor-by-factor basis, using assesses jobs on a factor-by-factor basis, using

a a factor comparison scalefactor comparison scale as a benchmark. as a benchmark. Regression-based systemRegression-based system

uses a statistical technique called uses a statistical technique called multiple multiple regressionregression to develop an equation that to develop an equation that establishes the relationship between different establishes the relationship between different dimensions of the job and compensation.dimensions of the job and compensation.


Factor Comparison Method of Job EvaluationFactor Comparison Method of Job Evaluation

Six steps:Six steps: Comparison factors are selected and defined.Comparison factors are selected and defined. Benchmark or key jobs are identified.Benchmark or key jobs are identified. Benchmark jobs are ranked on each Benchmark jobs are ranked on each

compensation factor.compensation factor. A part of each benchmark job’s wage rate is A part of each benchmark job’s wage rate is

allocated to each job factor.allocated to each job factor. Two sets of ratings are prepared, based on the Two sets of ratings are prepared, based on the

ranking and the assigned wages, to determine ranking and the assigned wages, to determine the consistency demonstrated by the the consistency demonstrated by the evaluators.evaluators.

A job comparison chart is developed to display A job comparison chart is developed to display the benchmark jobs and the monetary values the benchmark jobs and the monetary values that each job receives for each factor.that each job receives for each factor.


A Sample Wage StructureA Sample Wage Structure

Sal

ary

(in

do

llar

s)S

alar

y (i

n d

oll

ars)

||

11

ABCABC

||

22

DEFDEF

||

33

GHIGHI

||

44

JKLMJKLM

55

NOPNOP

MidpointMidpointMinimumMinimum

MidpointMidpointMaximumMaximum

MaximumMaximum

MinimumMinimum

MinimumMinimum

MidpointMidpoint

MaximumMaximum

MinimumMinimum

MidpointMidpoint

MaximumMaximum

MinimumMinimum

MidpointMidpoint

MaximumMaximum

Grade (class):Grade (class):

Containing jobs:Containing jobs:


Wage and Salary AdministrationWage and Salary Administration

Managing compensationManaging compensation allows the organization to control compensation allows the organization to control compensation

costs and to maintain a compensation structure costs and to maintain a compensation structure that fits the needs of both the organization and that fits the needs of both the organization and its employees. As organizational circumstances its employees. As organizational circumstances change, it may become necessary to modify or change, it may become necessary to modify or change the compensation strategy.change the compensation strategy.

Determining individual wagesDetermining individual wages has its basis in the organization’s awarding has its basis in the organization’s awarding

differential compensation to employees on the differential compensation to employees on the basis of qualifications, seniority, or other job-basis of qualifications, seniority, or other job-related factors.related factors.


Wage and Salary AdministrationWage and Salary Administration

Pay secrecyPay secrecy refers to the extent to which an individual’s refers to the extent to which an individual’s

compensation in an organization is secret.compensation in an organization is secret. Arguments for pay secrecyArguments for pay secrecy

An individual’s compensation is a private matter and An individual’s compensation is a private matter and not for public knowledge.not for public knowledge.

Knowing pay levels fosters jealousy and resentment.Knowing pay levels fosters jealousy and resentment. Argument against pay secrecyArgument against pay secrecy

Public knowledge about an open-pay system creates Public knowledge about an open-pay system creates proper perceptions of equity and motivates proper perceptions of equity and motivates performance.performance.

Pay compressionPay compression occurs when individuals of substantially occurs when individuals of substantially

different levels of experience or seniority are different levels of experience or seniority are paid similar wages or salaries.paid similar wages or salaries.


Typical Employee CompensationTypical Employee Compensation

Work wages $32,000

68%

Benefits $15,000

32%


Meet employee Meet employee expectationsexpectations

Improve Improve satisfaction/ satisfaction/

decrease turnoverdecrease turnover

Respond to Respond to external forcesexternal forces

Attract better Attract better employeesemployees

Indirect Compensation and Employee BenefitsIndirect Compensation and Employee Benefits

Indirect Indirect compensation compensation and employee and employee

benefitsbenefits


Mandated by LawMandated by Law OptionalOptional

Health CareHealth Care

Unemployment InsuranceUnemployment Insurance

Workers’ CompensationWorkers’ Compensation

Time Not Worked PayTime Not Worked Pay

Social SecuritySocial Security

Unpaid Leave (FMLA)Unpaid Leave (FMLA)

Life & Care InsuranceLife & Care Insurance

Retirements & PensionsRetirements & Pensions

Types of Employee BenefitsTypes of Employee Benefits

Benefits refer to rewards, incentives, and other things of value Benefits refer to rewards, incentives, and other things of value that an organization provides its employees beyond their wages, that an organization provides its employees beyond their wages,

salaries, and other forms of direct financial compensation.salaries, and other forms of direct financial compensation.


Paid Time OffPaid Time Off

Paid holidaysPaid holidays

Paid vacationsPaid vacations Sick leaveSick leave

Personal leavePersonal leave


Cafeteria-Style Benefit PlansCafeteria-Style Benefit Plans

Cafeteria-style benefit plansCafeteria-style benefit plans allow employees to choose the benefits they really want.allow employees to choose the benefits they really want. maximize the effectiveness of the benefit program for the maximize the effectiveness of the benefit program for the

organization and the employees.organization and the employees. can lead to increased satisfaction and reduced turnover.can lead to increased satisfaction and reduced turnover. can be used to encourage employees to chose more cost-can be used to encourage employees to chose more cost-

effective benefits (e.g., HMO versus traditional medical effective benefits (e.g., HMO versus traditional medical plans).plans).

can entail significant administrative costs.can entail significant administrative costs. mean that costs of some benefits cannot be amortized mean that costs of some benefits cannot be amortized

across less-intense users (adverse selection).across less-intense users (adverse selection). must be monitored to ensure that employees make rational must be monitored to ensure that employees make rational

choices about benefits.choices about benefits.

compensation & benefits – basic compensation & employee benefits chapter 9 hrm

Documents