HR HR SPRINGSPRINGManaging

Compensation

10-1

10-2

Objectives:

Identify the compensation policies and practices that are most appropriate for a particular firm.

Weigh the strategic advantages and disadvantages of the different compensation options.

Establish a job-based compensation scheme that is internally consistent and linked to the labor market.

Understand the difference between a compensation system in which employees are paid for the skills they use and one in which they are paid of the job they hold.

Make compensation decisions that comply with the legal framework.

10-3

Total Compensation

The package of quantifiable rewards an employee receives for his or her labors. Includes three components: base compensation, pay incentives, and indirect compensation/benefits

10-4

The Elements of Total Compensation

Total Compensation

PayIncentives

IndirectCompensation/

Benefits

BaseCompensation

10-5

Directfinancial

compensation

Indirectfinancial

compensation

Non-financial

compensation

TOTAL COMPENSATION

PraiseSelf-esteemRecognition

BenefitsServices

WagesSalariesBonusesCommissions

10-6

Compensation Policies: Criteria for Effectiveness

AdequateEquitableBalancedCost-effectiveSecureIncentive-providingAcceptable to the employee

10-7

External Influences on Compensation:Government Influences (Wage and Hour Regulations)

PROVISIONS INCLUDE:

Minimum wage

Overtime (Exhibit 10-3)Salaried or exempt (from

overtime pay) employeesHourly or nonexempt

employees

Fair Labor Standards Act (FLSA) of 1938

Child Labor

Equal Pay Act of 1963

10-8

External Influences on Compensation:Government Influences

Earnings gap reduction Nearly 3/4ths of reduction due to men’s earnings decline

Comparable worth (pay equity)

An effort to close the earnings gap between men and women. Four exceptions:

MeritSeniorityQuality or quantity of productionOr any other fact other than sex

EQUAL PAY ACT OF 1963

10-9

External Influences on Compensation:Labor Markets

DOMESTIC LABOR FORCE ISSUESSupply & demand conditions create differential pay levels

Increasing labor force diversity

INTERNATIONAL LABOR FORCE ISSUES Global supply and demand conditionsGlobal wage differentials

American employees working abroadEmploying foreign nationals in their countriesForeign workers training or working in the U.S.

10-10

The Nine Criteria for Developing a Compensation Plan

1. Internal versus External Equity Will the compensation plan be perceived as fair within the company, or will it be perceived as fair relative to what other employers are paying for the same type of labor?

2. Fixed versus Variable Pay Will compensation be paid monthly on a fixed basis —through base salaries —or will it fluctuate depending on such preestablished criteria as performance and company profits?

3. Performance versus Membership Will compensation emphasize performance and tie pay to individual or group contributions, or will it emphasize membership in the organization —logging in a prescribed number of hours each week and progressing up the organizational ladder?

10-11

The Nine Criteria for Developing a Compensation Plan (cont.)

4. Job versus Individual Pay Will compensation be based on how the company values a particular job, or will it be based on how much skill and knowledge an employee brings to that job?

5. Egalitarianism versus Elitism Will the compensation plan place most employees under the same compensation system (egalitarianism), or will it establish different plans by organizational level and/or employee group (elitism)?

6. Below-Market versus Above-Market Compensation Will employees be compensated at below-market levels, at market levels, or at above-market levels?

10-12

The Nine Criteria for Developing a Compensation Plan (cont.)

7. Monetary versus Nonmonetary Awards Will the compensation plan emphasize motivating employees through monetary rewards like pay and stock options, or will it stress nonmonetary rewards such as interesting work and job security?

8. Open versus Secret Pay Will employees have access to information about other workers’ compensation levels and how compensation decisions are made (open pay) or will this knowledge be withheld from employees (secret pay)?

9. Centralization versus Decentralization of Pay Decisions Will compensation decisions be made in a tightly controlled central location, or will they be delegated to managers of the firm’s units?

10-13

The Labor Market ModelW

ag

e

Number of Qualified Workers0

W1

N1

Supply ofQualifiedEmployees

Demand forEmployees

10-14

Pacesetters in demands for pay and benefits

Can help determine wages even for non-unionized employees

Collective bargaining agreements can set wage and benefit levels

Tend to support seniority over merit-based wage increases

External Influences on Compensation:Labor Unions

10-15

Percent of Salary in the Form of Bonus and Long-term Income for Various Pay Salary Brackets

88

6560

5550

4540

3225

167

0

10

20

30

40

50

60

70

80

90

Over$750

$550-$750

$450-$550

$350-$450

$250-$350

$200-$250

$165-$200

$135-$165

$105-$135

$65-$105

$25-$65

Per

cen

t o

f B

ase

Sal

ary

10-16

When to Use a Job-based Pay Policy A job-based pay policy tends to work best in

situations where: Technology is stable Jobs do not change often Employees do not need to cover for one another

frequently Much training is required to learn a given job Turnover is relatively low Employees are expected to move up through the

ranks over time Jobs are fairly standardized within the industry

10-17

Individual-based Compensation Individual-based compensation programs are more

suitable when: The firm has a relatively educated workforce with both the

ability and the willingness to learn different jobs The company’s technology and organizational structure

change frequently Employee participation and teamwork are encouraged

throughout the organization Opportunities for upward mobility are limited Opportunities to learn new skills are present The costs of employee turnover and absenteeism in terms

of lost production are high

10-18

Compensation Decisions:Relative to Three Groups

Same or similar jobs within the organization

(Individual pay determination)

Different jobs within the organization

(Pay-structure)

Similar jobs in other organizations

(Pay-level)

10-19

Compensation Decisions:Pay SurveysTechniques used to collect local, regional, national or international compensation data

Sources for competitive data range from existing surveys to conducting your own

Pay survey issues include:Usefulness of surveysWho will be surveyedThe method usedInformation gathered

10-20

Compensation Decisions:Job EvaluationFormal process for determining the relative worth of various jobs

Essential steps includeInvolving employeesSelecting and weighing criteria (compensable factors)

Frequently used methods includeJob rankingClassification or grading systems (See exhibit 10-7)Point system (See exhibit 10-8)Factor comparison

10-21

Compensation Decisions:Job EvaluationFormal process for determining the relative worth of various jobs

Essential steps includeInvolving employeesSelecting and weighing criteria (compensable factors)

Frequently used methods includeJob rankingClassification or grading systems (See exhibit 10-7)Point system (See exhibit 10-8)Factor comparison

10-22

Contemporary Pay Classifications

Reduction of the number of job levels

Can result in fewer pay grades and greater worker flexibility

Reduction in the number of salary ranges

Creates a smaller number of broad salary ranges

More emphasis on basing salary increases on performance

DELAYERING BROADBANDING

10-23

Pay Structure of a Large Restaurant Developed Using a Job-Based Approach

JobsNumber ofPositions Pay

GRADE 6GRADE 5

GRADE 4

GRADE 3

GRADE 2

GRADE 1

ChefManagerSous-ChefAssistant ManagerLead CookOffice ManagerGeneral CookShort Order CookAssistant to Lead CookClerkServerHostessCashierKitchen HelperDishwasherJanitorBusserSecurity Guard

2112215221

454423262

$20.00-$31.00/hr.$11.50-$21/hr.

$7.50-$12.00/hr.

$6.50-$8.00/hr.

$6.00-$7.00/hr.

$5.50-$6.25/hr.

10-24

Pay Schedule of a Large Restaurant Designed Using a Skill-Based Approach

Skills

5

4

3

• Create new items for menu• Find different uses for leftovers

(e.g., hot dishes, buffets)• Coordinate and control work of all employees

upon manager’s absence• Cook existing menu items following recipe• Supervise kitchen help• Prepare payroll• Ensure quality of food and adherence to

standards• Schedule servers and assign workstations• Conduct inventory• Organize work flow on restaurant floor

$23.00/hr.

$17.00/hr

$10.50/hr

PaySkill Block

10-25

Pay Schedule of a Large Restaurant Designed Using a Skill-Based Approach (cont.)

Skills

2

1

• Greet customers and organize tables• Take orders from customers• Bring food to tables• Assist in kitchen with food preparations• Perform security checks• Help with delivery• Use dishwashing equipment• Use chemicals/disinfectants to clean

premises• Use vacuum cleaner, mop, waxer, and other

cleaning equipment• Clean and set up tables• Perform routine kitchen chores

(e.g., making coffee)

$7.50/hr.

$6.00/hr.

PaySkill Block

10-26

The Key Steps in Creating Job-Based Compensation Plans

© 1998 by Prentice Hall

1. Job AnalysisJob Evaluation for Internal Equity

2. Job Descriptions

IdentifyCompensable Factors

3. Job Specifications

4. Rate Worth of All JobsUsing a PredeterminedSystem

5. Job Hierarchy

7. Establish Final PayPolicy

Individual Pay Assignment

6. Classify Jobs byGrade Levels

1. Check Market Value Using Benchmark or Key Jobs

Market Surveys forExternal Equity

Within-Pay-Range Positioning Criteria for Individual Equity

Criteria for Pay Positioning Within Range for Each Job• Experience• Seniority• Performance

© 2001 by Prentice Hall 10-26

10-27

MAA National Position Evaluation Plan

1st Degree

Skill1. Knowledge2. Experience3. Initiative and IngenuityEffort4. Physical Demand5. Mental or Visual DemandResponsibility6. Equipment or Process7. Material or Product8. Safety of Others9. Work of OthersJob Conditions10. Working Conditions11. Hazards

142214

105

5555

105

Factor2nd

Degree

284428

2010

10101010

2010

3rd Degree

426642

3015

15151515

3015

4thDegree

568856

4020

20202020

4020

5thDegree

70110

70

5025

25252525

5025

Points Assigned to Factor Degrees

10-28

Hierarchy of Clerical Jobs, Pay Grades, and Weekly Pay Range for a Hypothetical Office

1Points

2Grade

3Weekly Pay Range

30029829023022522017517016516012512012011595808060

5

4

3

2

1

$500-$650

$450-$550

$425-$475

$390-$430

$350-$400

Customer Service Rep.Executive Secretary/Admin. Asst.Senior SecretarySecretarySenior General ClerkCredit and CollectionAccounting ClerkGeneral ClerkLegal Secretary/AssistantSenior Word Processing OperatorWork Processing OperatorPurchasing ClerkPayroll ClerkClerk-TypistFile ClerkMail ClerkPersonnel ClerkReceptionist

10-29

Market Salary Data for Selected Benchmark Office Jobs

Weekly Pay Percentile

1. Customer Service Rep.2. Credit and Collection Clerk3. Accounting Clerk4. Word Processing Operator5. Clerk-Typist

25thWeekly Pay

Average

$400$400$370$380$330

50th 75th

$500$450$425$390$350

$650$550$475$430$400

$495$455$423$394$343

Benchmark Jobs

10-30

Drawbacks of Job-based Compensation Programs Job-based compensation plans do not take into account the nature of the

business and its unique problems. The process of establishing job-based compensation plans is much more

subjective and arbitrary than its proponents suggest. Job-based systems are less appropriate at higher levels of an

organization. As the economy has become more service oriented and the

manufacturing sector has continued to shrink, jobs have become more broadly defined.

Job-based compensation plans tend to be bureaucratic, mechanistic, and inflexible.

The job-evaluation process is biased against those occupations traditionally filled by women.

Wage and salary data obtained from market surveys are not definitive. In determining internal and external equity, it is the employees’

perceptions of equity that count, not the assessments of job-evaluation committees.

10-31

Suggestions for Implementing Job-based Compensation Plans Think strategically in making policy decisions

concerning pay. Secure employee input. Increase each job’s range of pay while expanding its

scope of responsibility. Expand the proportion of employees’ pay that is variable

(bonuses, stock plans, and so forth). Establish dual-career ladders for different types of

employees so that moving into management ranks or up the organizational hierarchy is not the only way to receive a substantial increase in pay.

10-32

Example of a Dual-Career LadderManagerial Individual ContributorBand

PresidentExecutiveVice PresidentVice PresidentAssistantVice PresidentDirectorSenior ManagerManager

1312

1110

9876543

2

1

Executive ConsultantSenior Consultant

ConsultantSenior AdviserAdviserSenior SpecialistSpecialistSenior TechnicianSenior Administrative Support,TechnicianAdministrative Support,Senior Manufacturing AssociateClerical Support, ManufacturingAssociate