Chapter 10: Compensation Objectives After reading this chapter, you should be able to: - PowerPoint Presentation

Chapter 10: Compensation

Objectives After reading this chapter, you should be able to: Describe the purpose of compensation. Discuss the importance of equity relative to a firm’s compensation decisions. Understand the process and rationale for establishing internal alignment of pay systems. Explain how a firm ensures that it is externally competitive in what it pays. Identify alternative compensation approaches that companies can use. Describe the impact organizational demands have on a how a company manages its compensation decisions. Discuss environmental factors that affect the compensation that a firm offers. Outline the regulations that affect how employees are compensated.

Purpose of Compensation To entice employees to work for the company To motivate employees to perform at a high level To ensure employees stay at the company

Total Compensation Compensation – monetary and nonmonetary rewards employees receive in exchange for work they do for organization Total rewards – sum of all aspects of compensation package Compensation philosophy – communicates information to employees about what is valued

Internal Alignment Relative worth among jobs in the company Job evaluation – systematic process of establishing the relative worth of the jobs within the company Pay rates established for jobs, not people

Types of Job Evaluation Job Ranking Job Classification Point Method Factor Comparison

Job Ranking Qualitative method Involves reviewing job descriptions and listing jobs in order from highest to lowest worth to company Easier to do with fewer jobs Subjective so harder to explain to employees

Job Ranking Example Jobs for a hotel are listed based on “relative worth” to the company with first job listed having most worth: General manager Comptroller Facilities manager Housekeeping supervisor Front desk clerk Bell hop

Job Classification Qualitative method Involves developing broad descriptions for groups that are similar in terms of tasks, duties, responsibilities, and qualifications Variation used by government Challenge is what to do with jobs with parts that fit two categories

Job Classification Example ECONOMIST, GS-0110-13 Scope of assignment The scope of economist assignments typical of the GS-13 level, as at other levels, may be based on either breadth or depth. In a large and varied operation, the GS-13 economist will characteristically be responsible for a pattern of small studies or program segments which represents in itself an integrated program. Such assignments involve the initiation, formulation, planning, execution, and control of major special studies or continuing projects. Partial description from: http://www.opm.gov/policy-data-oversight/classification-qualifications/classifying-general-schedule-positions/standards/0100/gs0110.pdf

Point Method Quantitative method Assigns compensable factors to create relative worth hierarchy for jobs in the company Compensable factors – aspects of jobs, such as skill, effort, responsibility, and working conditions, that exist across jobs in a company, that are needed by employees for the firm to achieve its objectives, and for which the company is willing to pay

Benchmark Jobs Used to represent range of jobs in a company Used for comparing jobs in companies with jobs in other companies to establish pay rates Typically benchmark jobs are: Stable over time Well known and recognized Clearly and concisely described Accepted in external labor market for setting wage rates Compensated at an appropriate wage rate

Job Grades Groupings of jobs with comparable points that reflect the hierarchy of jobs in a company to establish wage rates Company may have one or many job grade plans

Factor Comparison Quantitative method Ranks benchmark jobs in relation to each other on factors such as mental requirements, physical requirements, skill, responsibility, working conditions Hybrid method combining aspects of job ranking and point method Breaks wage rate down into small parts and assigns amount of wage to each part Complex and challenging and requires frequent updating

Salary Surveys Systematic process for collecting information about wages in external labor market Reliability and validity important Data usually from salaries in same industry Benchmark jobs should represent range and type of jobs in company

Job Pricing Systematic process of assigning monetary rates to jobs Helps ensure internal wages align with external wages Used to develop company pay policy Wage curve – market line that represents the relationship between job evaluation points and salaries paid for the jobs

Company Pay Policy Decision should follow pay philosophy: Pay at the market Pay above the market Pay below

Pay Grades and Pay Ranges Each grade and range has: Minimum of range Midpoint of range Maximum of range Also: Overlap of range important as signal to employees Nonbenchmark jobs slotted into appropriate pay grades once plan is established

Broadbanding Consolidates large number of pay grades into a few “broad” grades (bands) Maximum pay range 100% - 400% higher than minimum Gives managers more flexibility Need to ensure there is logic for jobs to be in same band

Setting Employee Pay Initially determined by education, work experience, and related Current employee pay result of meeting performance metrics and COLAs Two special cases: Red-circled jobs – person is paid above maximum of range Green-circled jobs – person is paid below minimum of range

Alternative Approaches to Compensation Skill-Based and Knowledge-Based Pay Competency-Based Pay Market Pricing

Administering Compensation Need: Handbook explaining plan Trained managers Communication with all employees Evaluation of plan success Plan can be: Closed pay system Open pay system

Compensation in Practice:Organizational Demands Strategy Internal value of jobs Compensation mix Company characteristics Ability to provide compensation Types of compensation

Compensation in Practice: Organizational Demands (continued) Culture Priorities of firm’s compensation policies Employees’ expectations and attitudes toward compensation Employee concerns Equity versus equality Fairness of rewards (e.g., inversion , compression )

Compensation in Practice:Environmental Demands Labor force Level of compensation Form of compensation employee desires Technology Ease of collecting compensation data How compensation is tracked and delivered What is considered compensable work

Compensation in Practice: Environmental Demands ( continued ) Globalization impacts Where compensation decisions are made Acceptableness of compensation Pay rates Ethics/social responsibility What compensation signals to employees Attitudes about the living wage and comparable worth

Compensation in Practice: Regulations Davis-Bacon Act Contractors and subcontractors with contracts in excess of $2,000 with federal government must pay workers minimum wage Wage must be at least equal to local prevailing wages Also must provide local prevailing benefits

Compensation in Practice: Regulations (continued) Walsh-Healey Public Contracts Act (PCA) Applies to contractors with over $10,000 in contracts involved in manufacturing or providing goods and services to U.S. government Requires paying workers federal minimum wage for first 40 hours and 1.5 times minimum for additional work during week

Compensation in Practice: Regulations (continued) Fair Labor Standards Act (FLSA) Establishes minimum wage Defines exempt versus nonexempt employees and requirements for each Sets what constitutes a work week and overtime requirements for pay over those hours Restricts use of child labor Requires employers to keep records