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  Cash, Bonuses, Insurance,
     Vacation, Holidays
     Perks, Recognition
      What does
 compensation (what
 you receive for your
services) mean to you?
           A Definition . . .
• All forms of
  – financial return,
  – tangible services and
  – benefits
• that employees receive as part of their
  employment relationship
      Components of a Total
     Compensation Program - 1
• Financial
• Direct
  – wages, salaries, commissions, bonuses
• Indirect
  – insurance plans
     • life, health, dental, disability
  – social assistance benefits
     • retirement plans, social security, workers’ comp
  – paid absences
     • vacations, holidays, sick leave
     Components of a Total
    Compensation Program - 2
• Non-Financial
• The Job
  – interesting, challenging, responsible
  – opportunity for recognition, advancement
  – feeling of achievement
• Job Environment
  – policies, supervision, co-workers, status
    symbols, working conditions, flextime,
    compressed work week, job sharing,
    telecommuting, flexible benefits programs
   Factors that Influence Wage
    Conditions of
    Labor Market           Compensation
                             Policy of
 Area Wage
   Rates                        Worth of
  Cost of           WAGE
                     MIX       Employee’s
                              Relative Worth
       Legal               Ability to Pay
Designing a Compensation
 Steps in the Decision Process
  Step 1 - Establish General
 Wage Level for Organization
• Factors to consider:
• Other firm’s rates
• Union demands
• Cost-of-living changes
• Firm’s ability to pay
   Step 2 - Establish Wage
 Structure (The Pay for Each
• Employ a job evaluation system
  –   Ranking
  –   Job Classification
  –   Point System
  –   Factor Comparison
• Results:
  – pay grades
  – rate ranges
Step 3 - Establish Pay for Each
    Individual on Each Job
• Inputs:
• Performance appraisal information
• Seniority system
     A Pay Model -- 3 Basic
• I. Compensation Objectives
• II. Foundation Concepts
• III. Techniques for Management
       A Pay Model
I. Compensation Objectives - 1
• Organization Performance
• Labor Costs
• Attitudes and Behaviors
• Laws and Regulations
       A Pay Model
I. Compensation Objectives - 2
• Influence forms & procedures
• For example:
  – if objective is pay for performance,
    emphasize incentives, merit pay plans
  – if objective is stable, experienced
    workforce, emphasize seniority-based
           A Pay Model
     II. Foundation Concepts
• Equity
• External Equity
• Comparison: outside organization
• Internal Equity
• Comparison: inside organization,
  among jobs
• Employee Equity
• Comparison: individuals doing same
  job for same organization
              Equity Theory
                   Op/Ip = Oo/Io
            Under-reward Inequity
               Op/Ip < Oo/Io
             Over-reward Inequity
                Op/Ip > Oo/Io

           p = personal, o = comparison other

         I = Inputs                O = Outcomes
effort, ability, experience      pay, benefits, perks
 Why does Equity Matter?

What Behaviors are Likely to
Occur when Inequity is Felt?
          A Pay Model
III. Techniques for Management

• A. Pay Level
• B. Pay Structure
• C. Individual Pay Rates
              A Pay Model
    III. Techniques for Management
            A. Pay Level
• Defined: average rates paid by
• Applicable concept: External Equity
• 3 Pure Alternatives
  – lead competition
  – match competition
  – lag competition
• Mechanism used: Market Wage
      Market Wage and Salary
   Select key jobs.
   Determine relevant labor market.
   Select organizations.
   Decide on information to collect:
    wages/benefits/pay policies.
   Compile data received.
   Determine wages and benefits to pay.
            Market Wage Levels

•Which company is leading the market?
•Which company is lagging the market?
•What would the wage level line look like for a company
that was meeting/matching the market?
              A Pay Model
    III. Techniques for Management
          B. Pay Structure
• Defined: pay rates for different jobs
  within a single organization
• Applicable concept: Internal Equity
• Pay more for jobs with
  – greater qualifications
  – less desirable working conditions
  – more valuable output
• Mechanism used: Job Analysis & Job
             Job Evaluation
• defined: the systematic evaluation of
  job descriptions
• outcome: a hierarchy of organizational
  jobs according to their content and
  value to the organization
• Methods:
  –   ranking
  –   classification
  –   factor comparison
  –   point method
    Job Ranking System

   Simplest and oldest system of job
evaluation by which jobs are arrayed
  on the basis of their relative worth
  Job Classification System

 System of job evaluation by which jobs
  are classified and grouped according
to a series of predetermined wage grades
            Point System

  Quantitative job evaluation procedure
that determines the relative value of a job
     by the total points assigned to it
 Factor Comparison System

 Job evaluation system that permits the
 evaluation process to be accomplished
on a factor-by-factor basis by developing
        a factor comparison scale
    Hay Profile Method

Job evaluation technique using three
factors – knowledge, mental activity,
  and accountability – to evaluate
 executive and managerial positions
              A Pay Model
    III. Techniques for Management
     C. Individual Pay Rates
• Defined: pay rates for different
  individuals doing the same job within
  an organization
• Applicable concept: Employee Equity
• 2 Techniques
  – Flat Rate
  – Pay Ranges
• Mechanisms used: Performance or
          Wage Curve

 Curve in a scattergram representing
the relationship between relative worth
         of jobs and wage rates
Components of the Wage Structure
            Pay Grades

 Groups of jobs within a particular class
that are paid the same rate or rate range
Elements of the Rate Range
  Common Pay Grade Ranges
• Laborers & Trades, up to 20%
• Clerical, Technical, Para-professional,
• First Level Supervisors, Professionals
• Middle and Senior Level
  Management, 40-100%
   Monitoring Compensation
• Compra-Ratio
• Formula:
       Actual Average Pay for Grade
          Midpoint Pay for Grade

• A compra ratio < 1 indicates lag
• A compra-ratio > indicates excess
How Would You Handle Outliers?
    An individual whose current pay is beyond
    the maximum of the pay grade for his/her

   An individual whose current pay is
   below the minimum of the pay grade
   for his/her job
Federal Wage Laws

            Davis-Beacon Act
                 of 1931

               Walsh-Healy Act
                   of 1936

                Fair Labor
             Standards Act of
     Nonexempt Employees

   Employees covered by the overtime
provisions of the Fair Labor Standards Act
      Exempt Employees

Employees not covered by the overtime
provisions of the Fair Labor Standards
     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
  Wage-Rate Compression

 Compression of differentials between
job classes, particularly the differential
  between hourly workers and their

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