mgmt 383 chapter 12 total rewards and compensation spring 2009

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Mgmt 383 Mgmt 383 Chapter 12 Chapter 12 Total Rewards and Total Rewards and Compensation Compensation Spring 2009 Spring 2009

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Page 1: Mgmt 383 Chapter 12 Total Rewards and Compensation Spring 2009

Mgmt 383Mgmt 383

Chapter 12Chapter 12

Total Rewards and CompensationTotal Rewards and Compensation

Spring 2009Spring 2009

Page 2: Mgmt 383 Chapter 12 Total Rewards and Compensation Spring 2009

Why Must Employers Provide Why Must Employers Provide Different Types of Compensation?Different Types of Compensation?

• AttractAttract

• RetainRetain

• RewardReward

Page 3: Mgmt 383 Chapter 12 Total Rewards and Compensation Spring 2009

Basic Forms of CompensationBasic Forms of Compensation

• Base Pay Base Pay (Direct Compensation)(Direct Compensation)• WagesWages• SalariesSalaries

• Variable Pay Variable Pay (Direct Compensation)(Direct Compensation)• BonusesBonuses• IncentivesIncentives• Stock OptionsStock Options

• BenefitsBenefits (Indirect Compensation)(Indirect Compensation)• Medical InsuranceMedical Insurance• Paid Time OffPaid Time Off• Retirement PensionsRetirement Pensions• Worker’s CompensationWorker’s Compensation

Page 4: Mgmt 383 Chapter 12 Total Rewards and Compensation Spring 2009

Components of a Compensation Components of a Compensation SystemSystem

Compensation

Direct Indirect

Base Pay ● Wages ● Salary

Variable Pay ● Bonuses ● Incentives ● Stock Options

Benefits ● Health ● Life/Disability ● Paid Time Off ● Retirement ● Ed. Assistance

Page 5: Mgmt 383 Chapter 12 Total Rewards and Compensation Spring 2009

Base PayBase Pay

• Base PayBase Pay – – The basic compensation an The basic compensation an employee receives in exchange for work employee receives in exchange for work performed.performed.• WagesWages - time-based (usually hourly) - time-based (usually hourly)

compensation calculated on the basis of the compensation calculated on the basis of the amount of time worked.amount of time worked.

• SalariesSalaries - payments consistent from time period - payments consistent from time period to time period regardless of the actual amount of to time period regardless of the actual amount of time worked.time worked.

Page 6: Mgmt 383 Chapter 12 Total Rewards and Compensation Spring 2009

Variable PayVariable Pay

• Variable PayVariable Pay - - compensation linked to compensation linked to individual, team and/or organizational individual, team and/or organizational performance. performance. • Piece-ratePiece-rate - productivity-based compensation paid for - productivity-based compensation paid for

each unit of product produced or service provided.each unit of product produced or service provided.

• BonusesBonuses• Profit-sharingProfit-sharing• Gain-sharingGain-sharing• CommissionsCommissions

Page 7: Mgmt 383 Chapter 12 Total Rewards and Compensation Spring 2009

BenefitsBenefits

• BenefitsBenefits - - indirect compensation contingent upon indirect compensation contingent upon organizational membership. [organizational membership. [41% of total payroll 41% of total payroll costscosts or 70% of the base pay rate]. or 70% of the base pay rate].• Health InsuranceHealth Insurance• Life InsuranceLife Insurance• VacationsVacations• PensionsPensions• Sick LeaveSick Leave

Page 8: Mgmt 383 Chapter 12 Total Rewards and Compensation Spring 2009

Matching Compensation with Matching Compensation with Organizational NeedsOrganizational Needs

• New organizations in competitive environments New organizations in competitive environments (emphasis on innovation)(emphasis on innovation)• Lower base payLower base pay• Greater emphasis on variable payGreater emphasis on variable pay

• Established large organizations in stable Established large organizations in stable environments (emphasis on cost containment)environments (emphasis on cost containment)• Structured base pay systemStructured base pay system• Structured benefits programsStructured benefits programs

Page 9: Mgmt 383 Chapter 12 Total Rewards and Compensation Spring 2009

Two Prevailing Philosophies of Two Prevailing Philosophies of CompensationCompensation

• Entitlement OrientationEntitlement Orientation all employees automatically all employees automatically

receive raises every cycle. receive raises every cycle. • Seniority basis Seniority basis

• Cost of living allowances Cost of living allowances (COLAs)(COLAs)

• ““Across the board” raises are Across the board” raises are “due” employees regardless “due” employees regardless of performance or of performance or competitive pressure.competitive pressure.

• Performance OrientationPerformance Orientation - - pay is based on performance pay is based on performance differences among differences among employees. employees. • Merit basisMerit basis

• Bonuses tied to performance.Bonuses tied to performance.

• Gaining ground against Gaining ground against entitlement oriented systems.entitlement oriented systems.

• Market adjustmentsMarket adjustments

Page 10: Mgmt 383 Chapter 12 Total Rewards and Compensation Spring 2009

Competency-Based PayCompetency-Based Pay• Competency-Based PayCompetency-Based Pay (a.k.a. Task-based (a.k.a. Task-based

or Skill-Based, Knowledge-Based Pay) – or Skill-Based, Knowledge-Based Pay) – rewards employees for the capabilities they rewards employees for the capabilities they demonstrate and acquire.demonstrate and acquire.• Employees are paid more in jobs requiring Employees are paid more in jobs requiring

more skills and knowledge than those that do more skills and knowledge than those that do not.not.

• Encourages employees to increase their human Encourages employees to increase their human capital.capital.

• Popular in those trades or professions with Popular in those trades or professions with certification programs (accounting, HRM, certification programs (accounting, HRM, finance, architecture, engineering, etc.).finance, architecture, engineering, etc.).

Page 11: Mgmt 383 Chapter 12 Total Rewards and Compensation Spring 2009

Objectives of a Compensation Objectives of a Compensation ProgramProgram

• Equity Equity

• Legal ComplianceLegal Compliance

• Cost EffectivenessCost Effectiveness

Page 12: Mgmt 383 Chapter 12 Total Rewards and Compensation Spring 2009

Perceptions of Pay FairnessPerceptions of Pay Fairness• EquityEquity - the perceived fairness of the - the perceived fairness of the

relationship between a person’s inputs and the relationship between a person’s inputs and the outcomes they receive.outcomes they receive.• Internal EquityInternal Equity (equity within the (equity within the

organization) ensuring that compensation for jobs organization) ensuring that compensation for jobs that are similar in terms of KSA within the that are similar in terms of KSA within the organization are compensated the same.organization are compensated the same.

• External EquityExternal Equity (equity with other (equity with other organizations) ensuring that jobs in our company organizations) ensuring that jobs in our company are paid the same as the same jobs (in terms of are paid the same as the same jobs (in terms of KSA)in other companies.KSA)in other companies.

Page 13: Mgmt 383 Chapter 12 Total Rewards and Compensation Spring 2009

Equity TheoryEquity Theory

• Individual EquityIndividual Equity (J. Stacy Adams)(J. Stacy Adams)• An individual expects his/her outcomes in any An individual expects his/her outcomes in any

exchange relationship to be proportional to his/her exchange relationship to be proportional to his/her inputs.inputs.

• Individuals consciously or unconsciously compare Individuals consciously or unconsciously compare their outcomes and inputs to others in the workplace their outcomes and inputs to others in the workplace and make a value judgement as to whether they are and make a value judgement as to whether they are ““fairfair.”.”

Page 14: Mgmt 383 Chapter 12 Total Rewards and Compensation Spring 2009

J. Stacy Adams’ Equity TheoryJ. Stacy Adams’ Equity Theory

• Outcomes (OOutcomes (Onn)) any and all factors that an any and all factors that an

individual values or desires.individual values or desires.• RaisesRaises• PromotionsPromotions• StatusStatus• Job assignmentsJob assignments• RecognitionRecognition

Page 15: Mgmt 383 Chapter 12 Total Rewards and Compensation Spring 2009

J. Stacy Adams’ Equity TheoryJ. Stacy Adams’ Equity Theory

• Inputs (IInputs (Inn)) any and all factors that an individual any and all factors that an individual

believesbelieves are relevant to being eligible for a are relevant to being eligible for a desired outcome.desired outcome.• Effort Effort • Quality of workQuality of work• ExperienceExperience• EducationEducation• SenioritySeniority• LoyaltyLoyalty

Page 16: Mgmt 383 Chapter 12 Total Rewards and Compensation Spring 2009

J. Stacy Adams’ Equity TheoryJ. Stacy Adams’ Equity Theory

• Individuals consciously or unconsciously Individuals consciously or unconsciously compare their outcomes and inputs to theirs in compare their outcomes and inputs to theirs in the workplace and make a value judgement as the workplace and make a value judgement as to whether they are “to whether they are “fairfair.”.”

Equity: Equity: 00ii 00oo

IIii I Ioo

==

Page 17: Mgmt 383 Chapter 12 Total Rewards and Compensation Spring 2009

J. Stacy Adams’ Equity TheoryJ. Stacy Adams’ Equity Theory

• Over payment: Over payment: 00ii 00oo .1 .1.1 .1

IIi i I Io o .8 1.0.8 1.0

.125 .125 > .1> .1

• Underpayment: Underpayment: 00ii 00oo

IIii IIoo

• Individuals will always attempt to achieve equityIndividuals will always attempt to achieve equity

<<

>> >>

.1 .125<<

Page 18: Mgmt 383 Chapter 12 Total Rewards and Compensation Spring 2009

J. Stacy Adams’ Equity TheoryJ. Stacy Adams’ Equity Theory

• Methods of Reducing Perceived Inequity Methods of Reducing Perceived Inequity (overpayment or underpayment).(overpayment or underpayment).• Change inputsChange inputs - increase or decrease - increase or decrease

effort.effort.• Change outcomesChange outcomes - request more pay, - request more pay,

status, etc. or join a union [today we often status, etc. or join a union [today we often sue].sue].

• Distort perceptionsDistort perceptions - rationalize. - rationalize.• TurnoverTurnover - leave the job- leave the job

Page 19: Mgmt 383 Chapter 12 Total Rewards and Compensation Spring 2009

Factors Affecting EquityFactors Affecting Equity

• Procedural JusticeProcedural Justice - - the perceived fairness the perceived fairness of the process and procedures used to make of the process and procedures used to make pay decisions. How the raises are pay decisions. How the raises are determined.determined.

• Distributive JusticeDistributive Justice - - the perceived the perceived fairness of the amount of compensation fairness of the amount of compensation given for the level of performance.given for the level of performance.

Page 20: Mgmt 383 Chapter 12 Total Rewards and Compensation Spring 2009

Secret v. Open Pay systemsSecret v. Open Pay systems

• Secret Pay SystemsSecret Pay Systems - policies that prohibit - policies that prohibit discussion of pay between employees.discussion of pay between employees.• Subverted by the grapevine.Subverted by the grapevine.• Employees suspect that the ulterior motive is to Employees suspect that the ulterior motive is to

hide unfair practices.hide unfair practices.

• Open Pay SystemsOpen Pay Systems - employees can gain - employees can gain access to each others pay levels.access to each others pay levels.• Works best under true merit pay systems.Works best under true merit pay systems.• Concerns about employee privacy.Concerns about employee privacy.

Page 21: Mgmt 383 Chapter 12 Total Rewards and Compensation Spring 2009

Factors Affecting EquityFactors Affecting Equity

• External Equity – External Equity – how the compensation in how the compensation in your organization compares to similar jobs in your organization compares to similar jobs in other organizationsother organizations

Page 22: Mgmt 383 Chapter 12 Total Rewards and Compensation Spring 2009

Market Competitiveness and Market Competitiveness and CompensationCompensation

• Market PositioningMarket Positioning• Pay MarketPay Market - match competitors - match competitors• Lead the MarketLead the Market - pay more than competitors - pay more than competitors• Lag the MarketLag the Market - pay less than competitors - pay less than competitors

• Market PricingMarket Pricing - basing wages on the immediate - basing wages on the immediate labor market and the industry.labor market and the industry.• Houston, TX v. NYCHouston, TX v. NYC• $45,000 v. $109,051$45,000 v. $109,051• $30,948 v. $75,000$30,948 v. $75,000

Source:Source: Salary Comparison (April 2, 2009) http://cgi.money.cnn.com/tools/costofliving/costofliving.html Salary Comparison (April 2, 2009) http://cgi.money.cnn.com/tools/costofliving/costofliving.html

Page 23: Mgmt 383 Chapter 12 Total Rewards and Compensation Spring 2009

Market Pricing & Cost of LivingMarket Pricing & Cost of Living

• If you move from Jackson, MS to New If you move from Jackson, MS to New York (Manhattan) NY:York (Manhattan) NY:• Groceries will cost 66%more.Groceries will cost 66%more.• Housing will cost 440%more.Housing will cost 440%more.• Utilities will cost 61% more.Utilities will cost 61% more.• Transportation will cost 22% more.Transportation will cost 22% more.• Healthcare will cost 32% more.Healthcare will cost 32% more.

Page 24: Mgmt 383 Chapter 12 Total Rewards and Compensation Spring 2009

Fair Labor Standards (1938)Fair Labor Standards (1938)

• Minimum wageMinimum wage • 3 step increase is scheduled as follows:3 step increase is scheduled as follows:

• $5.85$5.85 – July 24, 2007 – July 24, 2007• $6.55$6.55 - July 24, 2008 - July 24, 2008• $7.25$7.25 - July 24, 2009 - July 24, 2009

• OvertimeOvertime (time & one-half for each our worked (time & one-half for each our worked in excess of 40 during a 168 consecutive hour in excess of 40 during a 168 consecutive hour work week).work week).

Page 25: Mgmt 383 Chapter 12 Total Rewards and Compensation Spring 2009

Fair Labor Standards (1938)Fair Labor Standards (1938)

• Child laborChild labor• Hazardous jobs Hazardous jobs >> 18. 18.• Unlimited hours Unlimited hours >> 16. 16.• 14 to 15, 3 hours limit on school days, 18 hours in 14 to 15, 3 hours limit on school days, 18 hours in

school weeks. 8 hours and 40 hours respectively in school weeks. 8 hours and 40 hours respectively in nonschool weeks. No work between 7 pm & 7 am nonschool weeks. No work between 7 pm & 7 am except June 1 to Labor Day-- 9pm to 7am.except June 1 to Labor Day-- 9pm to 7am.

Page 26: Mgmt 383 Chapter 12 Total Rewards and Compensation Spring 2009

Employees under FLSAEmployees under FLSA• Classification of employeesClassification of employees::

• Hourly (nonexempt)Hourly (nonexempt)

• Salaried-NonexemptSalaried-Nonexempt

• Salaried-ExemptSalaried-Exempt - Those not protected - Those not protected by the FSLAby the FSLA

Page 27: Mgmt 383 Chapter 12 Total Rewards and Compensation Spring 2009

Exempt Employees under the Exempt Employees under the FLSAFLSA

• Exempt EmployeesExempt Employees• ExecutiveExecutive

• AdministrativeAdministrative

• ProfessionalProfessional

• Computer EmployeesComputer Employees

• Outside salesOutside sales

Page 28: Mgmt 383 Chapter 12 Total Rewards and Compensation Spring 2009

Bona Fide Executives under Bona Fide Executives under FLSAFLSA

• Bona fide executives (management)Bona fide executives (management)• Have the authority to hire and fire or make Have the authority to hire and fire or make

recommendations regarding decisions affecting the recommendations regarding decisions affecting the employment status of others; and regularly exercise employment status of others; and regularly exercise a high degree of independent judgment in their a high degree of independent judgment in their work. work.

• No more than 20% of time spent performing No more than 20% of time spent performing nonexemept duties.nonexemept duties.

• Retail & service, no more than 40% of time spent Retail & service, no more than 40% of time spent performing nonexemept duties.performing nonexemept duties.

• Supervises 2 or more employees.Supervises 2 or more employees.• Salary is Salary is >> $345 per week $345 per week

Page 29: Mgmt 383 Chapter 12 Total Rewards and Compensation Spring 2009

21-Factor Control Test to Determine 21-Factor Control Test to Determine Independent Contractor StatusIndependent Contractor Status

• The The Internal Revenue ServiceInternal Revenue Service, building on the common law test, has set , building on the common law test, has set forth a more detailed test for determining whether an individual is an forth a more detailed test for determining whether an individual is an independent contractor for purposes of paying employment tax and independent contractor for purposes of paying employment tax and withholding. These factors and their applications are as follows: withholding. These factors and their applications are as follows:

1. An individual who is required to follow instructions is more likely to be 1. An individual who is required to follow instructions is more likely to be considered an employee.considered an employee.

2. The greater the amount of training needed for the individual to complete an 2. The greater the amount of training needed for the individual to complete an assigned task, the greater the likelihood that the individual will be assigned task, the greater the likelihood that the individual will be considered an employee.considered an employee.

3. Where an individual is integrated into the employer’s business to a great 3. Where an individual is integrated into the employer’s business to a great extent, the individual is more likely to be considered an employee.extent, the individual is more likely to be considered an employee.

4. The fact that an individual personally renders services will weigh in favor 4. The fact that an individual personally renders services will weigh in favor of employee status.of employee status.

5. The fact that the individual hires, fires, and pays assistants, and the 5. The fact that the individual hires, fires, and pays assistants, and the employer has no right to do so, indicates independent contractor status.employer has no right to do so, indicates independent contractor status.

6. The existence of a continuing relationship is indicative of employee status.6. The existence of a continuing relationship is indicative of employee status.

Page 30: Mgmt 383 Chapter 12 Total Rewards and Compensation Spring 2009

21-Factor Control Test to Determine 21-Factor Control Test to Determine Independent Contractor StatusIndependent Contractor Status

7. The establishment of a set amount of work hours suggests employee 7. The establishment of a set amount of work hours suggests employee status.status.

8. An individual whose time is substantially devoted to the job is more likely 8. An individual whose time is substantially devoted to the job is more likely to be considered an employee.to be considered an employee.

9. The fact that an individual works on the employer’s premises suggests 9. The fact that an individual works on the employer’s premises suggests employee status.employee status.

10. An individual who works according to a sequence set by the employer 10. An individual who works according to a sequence set by the employer will more likely be deemed an employee.will more likely be deemed an employee.

11. The fact that an individual submits regular or written reports to the 11. The fact that an individual submits regular or written reports to the employer will weigh in favor of employee status.employer will weigh in favor of employee status.

12. An individual who is paid by the project, rather than by the hours, or 12. An individual who is paid by the project, rather than by the hours, or other period of time, will more likely be considered an independent other period of time, will more likely be considered an independent contractor.contractor.

13. An individual who is reimbursed for expenses is more likely an 13. An individual who is reimbursed for expenses is more likely an employee.employee.

Page 31: Mgmt 383 Chapter 12 Total Rewards and Compensation Spring 2009

21-Factor Control Test to Determine 21-Factor Control Test to Determine Independent Contractor StatusIndependent Contractor Status

14. An individual who furnishes the necessary tools and materials for the job 14. An individual who furnishes the necessary tools and materials for the job is more likely an independent contractor.is more likely an independent contractor.

15. That an individual makes an investment in the facilities in which he or 15. That an individual makes an investment in the facilities in which he or she works weights in favor of independent contractor status.she works weights in favor of independent contractor status.

16. The fact that an individual’s work results in the possible realization of a 16. The fact that an individual’s work results in the possible realization of a profit or the risk of a loss suggests independent contractor status.profit or the risk of a loss suggests independent contractor status.

17. An individual who works for more than one firm at a time is more likely 17. An individual who works for more than one firm at a time is more likely to be an independent contractor.to be an independent contractor.

18. An individual who makes his or her services available to the general 18. An individual who makes his or her services available to the general public is more likely to be considered an independent contractor.public is more likely to be considered an independent contractor.

19. The fact that the employer has the right to discharge the individual 19. The fact that the employer has the right to discharge the individual suggests an employment relationship (independent contractor suggests an employment relationship (independent contractor relationships are more likely to be contractual).relationships are more likely to be contractual).

20. The fact that the individual has the right to terminate the relationship also 20. The fact that the individual has the right to terminate the relationship also suggests an employment relationship because independent contractors are suggests an employment relationship because independent contractors are usually bound by a contract. usually bound by a contract.

Page 32: Mgmt 383 Chapter 12 Total Rewards and Compensation Spring 2009

State Compensation StatutesState Compensation Statutes

• The governmental entity with the The governmental entity with the largest largest minimum wage always prevailsminimum wage always prevails..• Example: the minimum wage in Washington is Example: the minimum wage in Washington is

$7.93.$7.93.• Example: the minimum wage in California is Example: the minimum wage in California is

$7.50.$7.50.• Example: the minimum wage in San Francisco Example: the minimum wage in San Francisco

is $9.36. is $9.36. (as of July 2007)(as of July 2007)

Page 33: Mgmt 383 Chapter 12 Total Rewards and Compensation Spring 2009

State Minimum WagesState Minimum Wages

• States with minimum States with minimum wages higher than FLSA:wages higher than FLSA:

AlaskaAlaska MassachusettsMassachusetts

CaliforniaCalifornia MinnesotaMinnesota

ConnecticutConnecticut New YorkNew York

DelawareDelaware OregonOregon

FloridaFlorida VermontVermont

IllinoisIllinois WashingtonWashington

MaineMaine

• States with no States with no minimum wage:minimum wage:

AlabamaAlabama

ArizonaArizona

LouisianaLouisiana

MississippiMississippi

South CarolinaSouth Carolina

TennesseeTennessee

Page 34: Mgmt 383 Chapter 12 Total Rewards and Compensation Spring 2009

Garnishment LawsGarnishment Laws

• GarnishmentGarnishment – a court action which directs – a court action which directs that a portion of an employee’s wages are to that a portion of an employee’s wages are to be side aside to pay a debt owed by the be side aside to pay a debt owed by the employee to a creditor.employee to a creditor.

Page 35: Mgmt 383 Chapter 12 Total Rewards and Compensation Spring 2009

Davis-Bacon Act (1931)Davis-Bacon Act (1931)

• Federal construction contractors with Federal construction contractors with contracts or subcontracts in excess of contracts or subcontracts in excess of $2000.$2000.• Enacted to encourage hiring union labor in the Enacted to encourage hiring union labor in the

Great Depression.Great Depression.• Requires employers to pay the “prevailing Requires employers to pay the “prevailing

wage” for the area (the union wage scale for the wage” for the area (the union wage scale for the area).area).

Page 36: Mgmt 383 Chapter 12 Total Rewards and Compensation Spring 2009

Walsh-Healey Act (1936)Walsh-Healey Act (1936)

• Federal supply and service contractors with Federal supply and service contractors with contracts or subcontracts in excess of contracts or subcontracts in excess of $10,000.$10,000.• Requires employers to pay the “prevailing Requires employers to pay the “prevailing

wage” for the area (the union wage scale for the wage” for the area (the union wage scale for the area).area).

Page 37: Mgmt 383 Chapter 12 Total Rewards and Compensation Spring 2009

McNamara-O’Hara Service McNamara-O’Hara Service Contract Act (1965)Contract Act (1965)

• Employers who hold contract or subcontracts to Employers who hold contract or subcontracts to provide provide services in excess of $2,500services in excess of $2,500 to the United to the United States government.States government.

• Must pay their employees the Must pay their employees the prevailing wageprevailing wage for for the geographic area in which the work is being the geographic area in which the work is being performed.performed.

• Must provide Must provide fringe benefitsfringe benefits to service employees to service employees comparable to the prevailing benefits.comparable to the prevailing benefits.

Page 38: Mgmt 383 Chapter 12 Total Rewards and Compensation Spring 2009

Equal Pay Act (1963)Equal Pay Act (1963)• Equal pay for equal work.Equal pay for equal work.

• Differentials are permitted for:Differentials are permitted for:• MeritMerit• SenioritySeniority• Quantity of workQuantity of work• Quality of workQuality of work• EducationEducation• Level of responsibilityLevel of responsibility• Working conditions Working conditions

Page 39: Mgmt 383 Chapter 12 Total Rewards and Compensation Spring 2009

The Equal Pay MythThe Equal Pay Myth• The myth:The myth: Women in the workplace earn only Women in the workplace earn only

7474¢ for every $1 made by men.¢ for every $1 made by men.• Fact:Fact: Men pursue jobs that are more Men pursue jobs that are more

dangerous and receive higher pay for context. dangerous and receive higher pay for context. (92% of all job-related deaths involve men).(92% of all job-related deaths involve men).

• Fact:Fact: Men are more represented in the higher Men are more represented in the higher paying professions.paying professions.

• Fact:Fact: Women who never had children made Women who never had children made 98¢ for every $1 men made.98¢ for every $1 men made.

Source: Source: Diana Furchtgott-Roth, et al. (1999). Diana Furchtgott-Roth, et al. (1999). Women's Figures: An Illustrated Women's Figures: An Illustrated Guide to the Economic Progress of Women in AmericaGuide to the Economic Progress of Women in America . .

Page 40: Mgmt 383 Chapter 12 Total Rewards and Compensation Spring 2009

Developing a Base Pay SystemDeveloping a Base Pay System

• Job EvaluationJob Evaluation - the systematic - the systematic determination of the relative worth of jobs determination of the relative worth of jobs within an organization.within an organization.

• Evaluation criteria of jobs:Evaluation criteria of jobs:• Relative importance of one job to other jobs.Relative importance of one job to other jobs.• Skills required to perform TDR of one job as Skills required to perform TDR of one job as

compared to other jobs.compared to other jobs.• Difficulty (complexity) of the job compared with Difficulty (complexity) of the job compared with

other jobs.other jobs.

Page 41: Mgmt 383 Chapter 12 Total Rewards and Compensation Spring 2009

Job Evaluation MethodsJob Evaluation Methods

• Ranking MethodRanking Method - jobs are ranked from highest to - jobs are ranked from highest to lowest in importance.lowest in importance.• Very subjective.Very subjective.

• Awkward with large numbers of jobs.Awkward with large numbers of jobs.

• Classification MethodClassification Method - categories are established to - categories are established to group jobs of similar KSA.group jobs of similar KSA.• U.S. Civil Service GS system, e.g. U.S. Civil Service GS system, e.g.

• Very subjectiveVery subjective

• Overly reliant on job titles and descriptions and assumes Overly reliant on job titles and descriptions and assumes similarity between agencies and job context.similarity between agencies and job context.

Page 42: Mgmt 383 Chapter 12 Total Rewards and Compensation Spring 2009

Job Evaluation MethodsJob Evaluation Methods

• Point MethodPoint Method - jobs are broken into compensable factors - jobs are broken into compensable factors [job dimension common across job categories] and [job dimension common across job categories] and weights or points are assigned to the factors. weights or points are assigned to the factors. Hay SystemHay System is the most popular (60%).is the most popular (60%).• Advantages:Advantages:

• Simple enough for managers to understand.Simple enough for managers to understand.

• Allows for comparison between jobsAllows for comparison between jobs

• Can be used by people who are not specialistsCan be used by people who are not specialists

• DisadvantagesDisadvantages• Time consumingTime consuming

• Results in job rigidity [highly delineated TDR].Results in job rigidity [highly delineated TDR].

Page 43: Mgmt 383 Chapter 12 Total Rewards and Compensation Spring 2009

Job Evaluation MethodsJob Evaluation Methods

Hay System (1943)

Know How Problem Solving Accountability

1. Functional Expertise 1. Environment 1. Freedom to Act

2. Managerial Skills 2. Challenge 2. Impact of End Results

3. Human Relations 3. Magnitude

Page 44: Mgmt 383 Chapter 12 Total Rewards and Compensation Spring 2009

Job Evaluation MethodsJob Evaluation Methods

• Factor Comparison MethodFactor Comparison Method - sophisticated - sophisticated quantitative combination of both ranking and quantitative combination of both ranking and point methods.point methods.• (1) Benchmark jobs are identified (those performed by (1) Benchmark jobs are identified (those performed by

workers with similar TDR and similar KSA).workers with similar TDR and similar KSA).

• (2) Market rates are gathered for benchmark jobs.(2) Market rates are gathered for benchmark jobs.

• (3) Monetary values are assigned to each factor.(3) Monetary values are assigned to each factor.

• (4) All other jobs [with their corresponding factors] are (4) All other jobs [with their corresponding factors] are compared to the benchmark jobs.compared to the benchmark jobs.

Page 45: Mgmt 383 Chapter 12 Total Rewards and Compensation Spring 2009

Job Evaluation MethodsJob Evaluation Methods

• Factor Comparison MethodFactor Comparison Method - -

• DisadvantagesDisadvantages• Expensive and can only be done by trained specialists.Expensive and can only be done by trained specialists.

• Complicated and difficult for some managers to Complicated and difficult for some managers to understand.understand.

• May lead to employee dissatisfaction or worse (litigation, May lead to employee dissatisfaction or worse (litigation, AFSCME v. State of WashingtonAFSCME v. State of Washington).).

Page 46: Mgmt 383 Chapter 12 Total Rewards and Compensation Spring 2009

Job Evaluation MethodsJob Evaluation Methods

• Computerized Job EvaluationComputerized Job Evaluation - simply the - simply the application of existing job evaluation methods application of existing job evaluation methods to computer technology.to computer technology.

Page 47: Mgmt 383 Chapter 12 Total Rewards and Compensation Spring 2009

Pay StructurePay Structure

Pay Structure - the array of pay rates for different jobs with in a single organization

Pay Survey(external)

Establish Determine Development Pay Grades Pay for Scattergram and Ranges Specific Jobs

JobEvaluation(internal)

Page 48: Mgmt 383 Chapter 12 Total Rewards and Compensation Spring 2009

Pay StructurePay Structure

• Pay SurveyPay Survey - collecting compensation data from - collecting compensation data from similar jobs in other organizations.similar jobs in other organizations.

• Develop Wage Curve or ScattergramDevelop Wage Curve or Scattergram - using - using survey data and the internal job evaluation a pay survey data and the internal job evaluation a pay scatter gram is developed.scatter gram is developed.

• Market LineMarket Line – a trend line showing the – a trend line showing the relationship between job value (resulting from job relationship between job value (resulting from job evaluation) and the pay survey rates.evaluation) and the pay survey rates.

Page 49: Mgmt 383 Chapter 12 Total Rewards and Compensation Spring 2009

Wages

JE Points

Scattergram & Market Line

.

. Market Line

. . . .

.

.

. .

. . .

. . .

.

. .

. .

. .

.

.

Page 50: Mgmt 383 Chapter 12 Total Rewards and Compensation Spring 2009

Pay StructurePay Structure

• Using the Wage Curve, pay grades and pay Using the Wage Curve, pay grades and pay ranges are developed.ranges are developed.• Pay GradesPay Grades - grouping individual jobs having - grouping individual jobs having

approximately the same worth.approximately the same worth.• Pay RangePay Range - establishing the maximum and - establishing the maximum and

minimum range of compensation for each job.minimum range of compensation for each job.• BroadbandingBroadbanding – the practice of using fewer pay – the practice of using fewer pay

grades having broader ranges than a tradition grades having broader ranges than a tradition compensation system.compensation system.

Page 51: Mgmt 383 Chapter 12 Total Rewards and Compensation Spring 2009

Pay RangePay Range

• Pay RangePay Range• Determines the maximum and minimum each job Determines the maximum and minimum each job

incumbent may earn.incumbent may earn.• Differentials within the range are based on Differentials within the range are based on

seniority/time in grade.seniority/time in grade.• The lower the level the job, the narrower the range The lower the level the job, the narrower the range

and and vice versavice versa..

Page 52: Mgmt 383 Chapter 12 Total Rewards and Compensation Spring 2009

Wages

JE Points

Tradition Pay Structure

$48,000

$58,000

$68,000

$25,000

$35,000

$45,000

. Green Circle

. Red Circle

Market Line

Page 53: Mgmt 383 Chapter 12 Total Rewards and Compensation Spring 2009

Wages

Job Evaluation Points

Broadbanding

$68,000

$25,000Min.

Max.

Market Line

Page 54: Mgmt 383 Chapter 12 Total Rewards and Compensation Spring 2009

Pay RangePay Range

• Red-circled employeesRed-circled employees are those employees are those employees whose pay goes beyond the the established range whose pay goes beyond the the established range for their particular job (usually due to an for their particular job (usually due to an inordinate amount of longevity).inordinate amount of longevity).

• Green-circled employeesGreen-circled employees are those paid below are those paid below the the established range for their particular job. the the established range for their particular job. (usually due to pay compression). (usually due to pay compression).

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Pay CompressionPay Compression

• Pay CompressionPay Compression - pay - pay differencedifferences between s between persons with different levels of experience persons with different levels of experience and performance and performance are smallare small..

• Usually occurs when labor market pay Usually occurs when labor market pay levels rise faster than internal pay levels rise faster than internal pay adjustments.adjustments.

• Example: An employee with 10 years Example: An employee with 10 years longevity makes $45,000/yr, a newly hired longevity makes $45,000/yr, a newly hired employee makes $43,000.employee makes $43,000.

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Pay InversionPay Inversion

• Pay InversionPay Inversion may sometimes occur. New may sometimes occur. New hires make hires make moremore than veteran (more than veteran (more experienced) employees.experienced) employees.

• Usually occurs when internal pay Usually occurs when internal pay adjustments lag behind labor market pay adjustments lag behind labor market pay levels.levels.

• Example: An employee with 10 years Example: An employee with 10 years longevity makes $45,000/yr, a newly hired longevity makes $45,000/yr, a newly hired employee makes $50,000.employee makes $50,000.

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Cost EffectivenessCost Effectiveness

• Cost Effectiveness - ideally, in a Cost Effectiveness - ideally, in a competitive environment, increases in competitive environment, increases in productivity should be greater than productivity should be greater than increases in compensation.increases in compensation.

Output InputInputLabor Cost =