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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)