Compensation
Chapter 9
December 4, 2011
Objectives
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.
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Objectives (cont’d)
1. Identify the major provisions of the
federal laws affecting compensation.
2. Discuss the current issues of equal pay for
comparable worth, pay compression,
living-wage laws, and low wage budgets.
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Compensation
1. Pay is a statement of an employee’s
worth by an employer.
2. Pay is a perception of worth by an
employee.
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Total Compensation
Direct Indirect
Wages / Salaries Time Not Worked
• Vacations
• Breaks
• Holidays
Commissions
Insurance Plans
Bonuses • Medical
• Dental
• Life
Gainsharing
Security Plans
• Pensions
Employee Services
• Educational assistance
• Recreational programs
Presentation Slide 9–1
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Compensation Management and
Other HRM Functions
Supply of applicants
Aid or impair recruitment Recruitment affects wage rates
Selection standards affect
Pay rates affect selectivity Selection level of pay required
Training and Increased knowledge leads
Pay can motivate training
Development to higher pay
Training and development may Compensation A basis for determining
lead to higher pay Management employee’s rate of pay
Low pay encourages Pay rates determined
unionization
Labor Relations through negotiation
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Strategic Compensation Planning
1. Strategic Compensation Planning
• Links 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.
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Significant Goals Driving Pay and
Reward Changes
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Linking Compensation to
Organizational Objectives
1. 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?”
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Common Strategic Compensation
Goals
1. To reward employees’ past performance
2. To remain competitive in the labor market
3. To maintain salary equity among employees
4. To mesh employees’ future performance with
organizational goals
5. To control the compensation budget
6. To attract new employees
7. To reduce unnecessary turnover
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Strategic Compensation Policy
Concerns
1. The rate of pay within the organization and whether it is to
be above, below, or at the prevailing community rate.
2. The ability of the pay program to gain employee acceptance
while motivating employees to perform to the best of their
abilities.
3. The pay level at which employees may be recruited and the
pay differential between new and more senior employees.
4. The intervals at which pay raises are to be granted and the
extent to which merit and/or seniority will influence the
raises.
5. The pay levels needed to facilitate the achievement of a
sound financial position in relation to the products or
services offered.
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The Pay-for-Performance
Standard
1. Pay-for-Performance Standard
• The 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.
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Designing a Pay-for-Performance
System
1. How will performance be measured?
2. How will monies to be allocated for
compensation increases.
3. Which employees will be eligible?
4. How will payouts be made?
5. How often will payouts occur?
6. How large will the payouts be?
7. Will employees perceive the rewards as valued?
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Motivating Employees through
Compensation
1. 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.
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Relationship between Pay Equity
and Motivation
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.
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Expectancy Theory and Pay
1. Expectancy Theory
• A 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.
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Pay-for-Performance and
Expectancy Theory
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Motivating Employees through
Compensation
1. Pay Secrecy
• An 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.
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The Bases for Compensation
1. Hourly Work
• Work paid on an hourly basis.
2. Piecework
• Work paid according to the number of units
produced.
3. Salary Workers
• Employees whose compensation is computed on
the basis of weekly, biweekly, or monthly pay
periods.
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The Bases for Compensation
(cont’d)
1. Nonexempt Employees
• Employees 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.
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The Bases for Compensation
(cont’d)
1. Exempt employees
• Employees 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.
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Components of the Wage Mix
Labor Market Compensation Strategy
Conditions of the Organization
Area Wage
Rates Worth of
the Job
Cost of WAGE
Living
MIX Employee’s
Relative
Worth
Collective
Bargaining
Employer’s
Legal Ability
Requirements to Pay
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Factors Affecting the Wage Mix
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The Wage Mix—Internal Factors
1. Compensation Strategy
• Setting organization compensation policy to lead,
lag, or match competitors’ pay.
2. Worth of a Job
• Establishing the internal wage relationship among
jobs and skill levels.
3. Relative Worth of an Employee
• Rewarding individual employee performance
4. Ability-to-Pay
• Having the resources and profits to pay employees.
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The Wage Mix—External
Factors
1. Labor Market Conditions
• Availability and quality of potential
employees is affected by economic
conditions, government regulations and
policies, and the presence of unions.
2. Area Wage Rates
• A firm’s formal wage structure of rates is
influenced by those being paid by other area
employers for comparable jobs.
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The Wage Mix—External
Factors
1. Cost of Living
• Local 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.
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The Wage Mix—External
Factors
1. Collective Bargaining
• Escalator 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.
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Consumer Price Index (CPI)
1. A measure of the average change in prices
over time in a fixed “market basket” of goods
and services
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Job Evaluation
1. Job Evaluation
• The systematic process of determining the
relative worth of jobs in order to establish
which jobs should be paid more than others
within an organization.
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Job Evaluation Systems
1. Job Ranking System
• Oldest 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.
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Paired-Comparison Job Ranking
Table
Directions: Place an X in the cell where the value of a row job is higher than that of a column job.
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Job Evaluation Systems
1. Job Classification system
• A 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.
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Point System
1. Point System
• A 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.
2. Point Manual
• A handbook that contains a description of the
compensable factors and the degrees to which these
factors may exist within the jobs.
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Factor Comparison System
1. Factor Comparison System
• A 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.
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Characteristics of Key Jobs
1. Key Jobs
• Jobs that are important for wage-setting purposes
and are widely known in the labor market.
2. Characteristics of Key Jobs
• They 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.
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Job Evaluation for Management
Positions
1. Hay Profile Method
• Job evaluation technique using three
factors—knowledge, mental activity, and
accountability—to evaluate executive and
managerial positions.
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The Compensation Structure
1. Wage and Salary survey
• A 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.
2. Labor Market
• The area from which employers obtain
certain types of workers.
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Collecting Survey Data
1. Outside Sources of Data
• Bureau of Labor Statistics (BLS)
- National Compensation Survey
• State and local wage surveys
• Online survey data
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Collecting Survey Data
1. Conducting Employer-initiated Surveys
• Select 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.
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The Wage Curve
1. Wage Curve
• A curve in a scattergram representing the
relationship between relative worth of jobs and
wage rates.
2. Pay Grades
• Groups of jobs within a particular class that are
paid the same rate.
3. Rate Ranges
• A range of rates for each pay grade that may be the
same for each grade or proportionately greater for
each successive grade.
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Freehand Wage Curve
Figure 9.7
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Single Rate Structure
Figure 9.8
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Wage Structure with Increasing Rate
Ranges
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The Wage Curve (cont’d)
1. 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.
2. Red Circle Rates
• Payment rates above the maximum of the pay
range.
3. Broadbanding
• Collapses many traditional salary grades into a few
wide salary bands.
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Government Regulation of Compensation
(Federal Wage Laws)
Required minimum wage, prevailing wage
Davis-Bacon Act
rates, 1½ overtime premium payments by
1931
federal contractors.
Required overtime payments after 8 daily
Walsh-Healy Act
or 40 regular work hours for workers on
1936
federal contracts.
Fair Labor Interstate commerce clause used to cover
Standards Act workers except agricultural and
(FLSA) exempted (managerial) employees, child
1938 labor prohibited.
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Significant Compensation Issues
1. Equal Pay for Comparable Worth
• The 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.
2. Wage-Rate Compression
• Compression of pay differentials between job
classes, particularly the pay differentials between
hourly workers and their managers.
3. Low-wage Budgets
• Current wage budgets reflect the general trend
toward tight compensation cost controls.
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Significant Compensation Issues
1. Living-Wage Laws
• Require 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.
2. Low-wage Budgets
• Current wage budgets reflect the general trend
toward tight compensation cost controls.
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