Managing Compensation 1– - PowerPoint Presentation

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Managing Compensation

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The Challenges of Human Resources Management

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Chapter Objectives

After studying this chapter, you should be able to

Explain how to formulate a strategic

compensation program.Indicate how

pay is determined.Know how to effectively perform a job evaluation.Explain the purpose of a wage survey.

Define the wage curve, pay grades, and rate ranges as parts of the compensation structure.Understand the importance of using a compensation scorecard.

Identify the major provisions of the federal laws affecting compensation.

LEARNING OUTCOME 1LEARNING OUTCOME 2

LEARNING OUTCOME 3

LEARNING OUTCOME 4

LEARNING OUTCOME 5

LEARNING OUTCOME 6

LEARNING OUTCOME 7

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CompensationPay is a statement of an employee’s worth by an employer.Pay is a perception of worth by an employee.

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Compensation Management and Other HRM Functions

Pay rates affect selectivity

Selection

Selection standards affect level of pay required

Pay can motivate training

Training and Development

Increased knowledge leads to higher pay

Training and development may lead to higher pay

Compensation

Management

A basis for determining employee’s rate of pay

Aid or impair recruitment

Recruitment

Supply of applicants affects wage rates

Low pay encourages

unionization

Labor Relations

Pay rates determined through negotiation

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Total Compensation

Direct

Indirect

Bonuses

Gainsharing

Security Plans

Pensions

Employee Services

Educational assistance

Recreational programs

Commissions

Wages / Salaries

Insurance Plans

Medical

Dental

Life

Time Not Worked

Vacations

Breaks

Holidays

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Compensation Components

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Compensation Alignment

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Strategic Compensation Strategic Compensation 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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Linking Compensation to Organizational Objectives

Many managers believe that compensation programs have not always achieved their intended purpose.

Strategic compensation planning attempts to link employee rewards to specific orga­nizational goals. That is, this planning should facilitate the effective use of employees.

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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Linking Compensation to Organizational Objectives

Value-added CompensationEvaluating 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

To reward employees’ past performanceTo remain competitive in the labor market

To maintain salary equity among employeesTo mesh employees’ future performance with organizational goals

To control the compensation budgetTo attract new employees

To reduce unnecessary turnover

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Strategic Compensation Policy Concerns

The rate of pay within the organization and whether it is to be above, below, or at the prevailing community rate.

The ability of the pay program to gain employee acceptance while motivating employees to perform to the best of their abilities. The pay level at which employees may be recruited and the pay differential between new and more senior employees.

The intervals at which pay raises are to be granted and the extent to which merit and/or seniority will influence the raises.

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 StandardPay-for-Performance StandardThe 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 SystemHow will performance be measured?

How will monies to be allocated for compensation increases.Which employees will be eligible?

How will payouts be made?How often will payouts occur?How large will the payouts be?Will employees perceive the rewards as valued?

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Motivating Employees through CompensationPay 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

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Motivating Employees through CompensationThere are three kinds of pay equity:External equity-people in similar jobs compare themselves to what others are making in different organizations.

Internal equity-people compare themselves to peers in different jobs in the same organization.Individual equity-people compare themselves to others in their organization with the same job.

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Expectancy Theory and PayExpectancy TheoryA 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 CompensationPay SecrecyAn organizational policy prohibiting employees from revealing their compensation information to anyone.

Creates misperceptions and distrust of compensation fairness

and pay-for-performance standards.Arguments against secrecy:Knowledge of base pay is the strongest predictor of pay satisfaction, which is highly associated with work engagementKnowledge of base pay more strongly predicts pay satisfaction than does the actual amount of pay received

by employees.

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The Bases for CompensationHourly WorkWork paid on an hourly basis.Piecework

Work paid according to the number of units produced.Salary WorkersEmployees whose compensation is computed on the basis of weekly, biweekly, or monthly pay periods.

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The Bases for Compensation (cont.)

Nonexempt EmployeesEmployees 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 in a workweek

.Exempt EmployeesEmployees 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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The Pay MixInternal and external factors combine to influence what jobs will be paid.The combination of these factors is called the “wage mix.”

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Factors Affecting the Pay Mix

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The Wage Mix—Internal FactorsEmployer’s Compensation Strategy

Establishes the internal wage relationship among jobs and skill levelsSets organization compensation policy to lead, lag, or match competitors’ pay.

Rewards employee performanceGuides administrative decisions concerning elements of the pay system such as overtime premiums, payment periods, and short-term or long-term incentives.

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The Pay Mix—Internal FactorsSome jobs are worth more to the organization than other jobs.For example, the job of marketing analyst probably has more impact on the success of the organization than the job of a janitor.

Therefore, most persons would argue that the more important jobs should be paid more than the less important jobs.

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The Wage Mix—Internal Factors (cont.)

Worth of a JobA current approach to determining the worth of a job is to judge the job’s total value to the organization

.Establishing the internal wage relationship among jobs

and skill levels.Employee’s Relative WorthRewarding individual employee performanceEmployees can improve their worth to the organization by working smarter or harder or by acquiring advanced skills or job knowledge

.Employer’s Ability-to-Pay Having the resources and profits to pay employees.National or regional economic conditions, competition from domestic or foreign competitors, and strong or poor managerial policies and practices can influence the employer’s ability to grant pay increases.

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Comparison of Compensation Strategies

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The Wage Mix—External FactorsLabor Market ConditionsAvailability and quality of potential employees is affected by economic conditions, government regulations and policies, and the presence of unions.

Area Wage RatesA 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 (cont.)

Cost of LivingLocal 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.Consumer Price Index (CPI)A Bureau of Labor Statistics measure of the average change in prices over time in a fixed “market basket”

of goods and services

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The Wage Mix—External Factors (cont.)

Collective BargainingEscalator clauses in labor agreements provide for quarterly upward cost-of-living (COLA) 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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Job Evaluation SystemsJob EvaluationThe systematic process of determining the relative worth of jobs in order to establish which jobs should be paid more than others within an organization

.Job evaluation helps establish internal equity between various jobs.Three traditional methods of comparison provide the basis for the principal systems of job evaluation:

Rank the value of jobs from highest to lowest.Classify jobs so they can be benchmarked internally and externally.Award points to each job based on how much they are linked to organizational objectives.

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Job Evaluation Systems (cont.)

Job Ranking SystemOldest 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 the 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 (cont.)

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.Used primarily by governments

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Point SystemPoint SystemA quantitative job evaluation procedure that determines the relative value of a job by the total points assigned to it

.Provides a more refined basis for making judgments that either the ranking or classification systems

.Permits jobs to be evaluated quantitatively on the basis of factors or elements—compensable factors—that constitute the job.

Common compensable factors are the skills, efforts, responsibilities and working conditions of a job.The Point ManualA 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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Point Values for Job Factors of the American Association of Industrial Management

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Description of Education Factor and Degrees of the American Association of Industrial Management

1. EDUCATION

This factor measures the basic trades training, knowledge or “scholastic contact” essential as background or training preliminary to learning the job duties. This job knowledge or background may have been acquired either by formal education or by training on jobs of lesser degree or by any combination of these approaches.

1st Degree 14 points

Requires the use of simple writing, adding, subtracting, whole numbers and the carrying out of instructions; and the use of fixed gauges and direct reading instruments and devices in which interpretation is not required.

2nd Degree 28 points

Requires the use of commercial English, grammar and arithmetic such as addition, subtraction, multiplication and division, including decimals and fractions; simple use of formulas, charts, tables, drawings, specifications, schedules, wiring diagrams, together with the use of adjustable measuring instruments, graduates and the like requiring interpretation in their various applications; or the posting, preparation, interpretation, use and checking of reports, forms, records and comparable data.

3rd Degree 42 points

Requires the use of shop mathematics together with the use of complicated drawings, specifications, charts, tables, various types of adjustable measuring instruments and the training generally applicable in a particular or specialized occupation. Equivalent to 1 to 3 years applied trades training.

4th Degree 56 points

Requires the use of advanced shop mathematics, together with the use of complicated drawings, specifications, charts, tables, handbook formulas, all varieties of adjustable measuring instruments and the uses of broad training in a recognized trade or craft. Equivalent to complete, accredited, indentured apprenticeship or equivalent to high school plus a 2-year technical college education.

5th Degree 70 points

Requires the use of higher mathematics involved in the application of engineering principles and the performance of related, practical operations, together with a comprehensive knowledge of the theories and practices of mechanical, electrical, chemical, civil or like engineering field. Equivalent to complete 4 years of technical college or university education.

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Work Valuation MethodsWork Valuation

A job evaluation system that seeks to measure a job’s worth through its value to the organization.

Jobs are be valued relative to financial, operational, or customer service objectives of the organization.Considers that work should be valued relative to the

business goals of the organization rather than by an

internally applied point-factor job evaluation system.Work valuation serves to direct compensation dollars to the type of work pivotal to organizational goals.

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Job Evaluation for Management PositionsHay Profile MethodJob evaluation technique using three factors—knowledge(know-how),

mental activity(problem-solving), and accountability.

—to evaluate executive and managerial positions.

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Compensation Implementation – Pay ToolsWage and Salary SurveyA 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.Labor MarketThe area from which employers obtain certain types of workers.

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Collecting Survey DataOutside Sources of DataBureau of Labor Statistics (BLS)

National Compensation SurveyState and local wage surveysOnline survey dataProblems with Surveys

They are not always compatible with the user’s jobsThe user cannot specify what specific data to collect.

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Bureau of Labor StatisticsNational Compensation Survey

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Bureau of Labor StatisticsNational Compensation Survey (cont.)

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Collecting Survey Data (cont.)

Conducting Employer-initiated SurveysSelect 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 CurveWage CurveA curve in a scatter gram

representing the relationship between relative worth of jobs and wage rates.Pay GradesGroups of jobs within a particular class that are paid the same rate.

Rate RangesA range of rates for each pay grade that may be the same for each grade or proportionately greater for each successive grade.Red Circle RatesPayment rates above the maximum of the pay range.

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Freehand Wage Curve

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Single Rate Structure

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The Federal Wage Poster

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The Wage Curve (cont.)

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.

Greater productivity, increased employee learning and commitment to work, improved staffing flexibility to meet production or service demands, and the reduced effects of absenteeism and turnover,

BroadbandingCollapses many traditional salary grades into a few wide salary bands.

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Compensation AssessmentAssessing the effectiveness of your compensation system is vitally important to linking compensation with strategy.Measures:

help the company detect potential compensation problems,

make compensation decisions more transparent, and improve the alignment of compensation decisions with organizational objectives.

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Compensation Assessment (cont.)

The compensation scorecard collects and displays the results for all the measures that a company uses to monitor and compare compensation among internal departments or units.

The scorecard creates a comparative tool within the organization that can reinforce desired outcomes that are unique to the company’s strategy.

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Compensation Scorecard

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Government Regulation of Compensation

Davis-Bacon Act

(1931)

Required minimum wage, prevailing wage rates, 1

½ overtime premium payments by federal contractors.

Walsh-Healy Act(1936)Required overtime payments after 8 daily or 40 regular work hours for workers on federal contracts.

Fair Labor Standards Act (FLSA) 1938(as Amended)

Interstate commerce clause used to cover workers except agricultural and exempted (managerial) employees, child labor (under 16) is prohibited.

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Minimum Wage Laws in the States

Note: Where Federal and state law have different minimum wage rates, the higher standard applies

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The Federal Wage Poster

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The Issue of Wage Rate CompressionWage-Rate Compression

Compression of pay between new and experienced employees caused by the higher starting salaries of new employees; also the differential between hourly workers and their Managers.Reducing

Wage-Rate CompressionReward high performance and merit-worthy employees with large pay increases.Design the pay structure to allow a wide spread between hourly and supervisory employees.Prepare high-performing employees for promotions to jobs with higher salary levels.

Provide equity adjustments for selected employees hardest hit by pay compression.

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The Issue of Wage Rate CompressionChild Labor Provisions

The “floor” it imposes makes it more difficult for high school students and young adults to find jobsExemption from Overtime Provisions

The FLSA perhaps creates the most confusion in the exemption from overtime requirements for certain groups of employees or from coverage of certain of the act’s provisionsPay Equity ProvisionsThe Equal Pay Act of 1963

Title VII of the Civil Rights Act of 1964Age Discrimination Act of 1967

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Key Termsbroadbanding

competence-based payconsumer price index (CPI)escalator clausesexempt employees

Hay profile methodhourly workjob classification systemjob evaluationjob ranking systemnonexempt employees

pay equity

pay-for-performance standard

pay grades

piecework

point system

real wages

red circle rates

wage and salary survey

wage curve

pay rate compression

work valuation

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Chapter 9 - Learning Outcomes

Learning Outcome

Statements

Related Outcomes from Body of the Text

1Explain how to formulate a strategic compensation program.

Facebook has over 1,700 employees and offices in twelve countries. How would you develop a compensation strategy to match Facebook’s business objectives of continual innovation and growth?

2Indicate how pay is determined.Google’s decision to increase pay by 10 percent was based on many internal and external factors. What specific factors would you say led to Google’s compensation redesign?

3Know how to effectively perform a job evaluation.

During the financial crisis of 2008–2010, companies had to reassess the value of specific jobs—leading to some unfortunate cuts in salary and benefits. How would you determine the worth of someone’s job to ensure equity?

4

Explain the purpose of a wage survey.

Imagine you have been assigned by Delta to decide if the pay being offered to new customer service representatives is consistent with what competitors are paying. What tools would you use to help in your assessment?

5

Define the wage curve, pay grades, and rate ranges as parts of the compensation structure.

One of the objections to Google granting wage increases on a percentage basis is that the lowest-paid employees, who are having the most trouble “dealing with sky-high property prices, mortgages, and those kinds of things,” get the smallest increase, while the highest-paid employees get the largest increase. Is this objection a valid one?

6

Understand the importance of using a compensation scorecard.

How do you know if a company’s compensation system is helping to reach its objectives?

7

Identify the major provisions of the federal laws affecting compensation.

Federal laws governing compensation raise important issues for both employers and employees. How do regulations influence compensation decisions? How do they protect employees from discrimination?