Ch. 9 Managing Compensation

Point System

- A quantitative job evaluation procedure that determines the relative value of a bio by the total points assigned to it - The point system permits jobs to be evaluated quantitatively on the basis of factors or elements--commonly called compensable factors--that constitute the job. - The skills, efforts, responsibilities, and working conditions that a job usually entails are the more common major compensable factors that serve to rank one job as more or less important than another.

Pay Equity

- Equity theory, also referred to as distributive fairness, is a motivation theory that explains how people respond to situations in which they feel they have received less (or more) than they deserve. - A central point in the theory makes is that individuals may comparisons with people both inside and outside their organization and that these comparisons influence their motivation. *Pay Equity: an employer's perception that compensation received is equal to the value of the work performed 1. External equity: people in similar jobs compare themselves to what others are making in different organizations 2. Internal equity: people compare themselves to peers in different jobs in the same organization 3. Individual equity: people compare themselves to others in their organization with the same job

The Bases for Compensation

- Hourly work: work paid on an hourly basis - Piecework: work paid according to the number of units produced - 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 Act

Employee's Relative Worth

- In both hourly and salary jobs, employee performance can be recognized and rewarded through promotion and with various incentive systems. - Employees tend to be rewarded more for merely being present than for being productive on the job. - Most increases may lack motivational value to employees when organizational salary budgets are low.

Pay Secrecy

- Managers may justify secrecy on the grounds that most employees prefer to have their own pay kept secret. - Probably one of the reasons for pay secrecy that managers may be unwilling to admit is that it gives them greater freedom in compensation management. - Employees who are not supposed to know what others are being paid have no objective base for pursuing complaints about their own pay. - Secrecy also serves to cover up inequities existing within the internal pay structure.

Davis-Bacon Act of 1931

- The oldest of the three federal wage laws - It requires that the minimum wage rates paid to people employed on federal public works projects worth more than $2,000 be at least equal to the prevailing rates and that overtime be paid at one and one-half times this rate.

Compensation Alignment

* Government Regulation Factors 1. Compensation Strategy - Linking compensation to objectives - Pay-for-performance - Bases for compensation 2. Compensation Design--Pay Mix - Internal factors - External factors - Job evaluation systems 3. Compensation Implementation - Pay Tools - Salary surveys - Wage curve - Pay grades - Rate ranges - Competence-based pay 4. Compensation Assessment - Compensation scorecard

Factors Affecting the Pay Mix

* Internal Factors - Compensation strategy of organization - Worth of job - Employee's relative worth - Employer's ability * External Factors - Conditions of the labor market - Area pay rates - Cost of living - Collective bargaining - Legal requirements

Pay Equity Provisions

* There are three laws that protect employees against pay discrimination. 1. The Equal Pay Act of 1963 prohibits unequal pay for equal or "substantially equal" work performed by men and women. 2. Title VII of the Civil Rights Act of 1964 prohibits wage discrimination on the basis of race, color, sex, religion, or national origin. 3. The Federal Age Discrimination Act of 1967 extends the equal rights provisions by forbidding wage discrimination based on age for employees age 40 and older.

Compensation Assessment

* With the right measures, you can: 1. help the company detect potential compensation problems 2. make compensation decisions more transparent 3. improve the alignment of compensation decisions with organizational objectives - Compensation scorecard: displays the results for all the measures that a company uses to monitor and compare compensation among internal departments or units

Motivating Employees through Compensation

- Because pay represents a reward received in exchange for an employee's contributions, it is essential, according to the equity theory, that the pay be equitable in terms of those contributions. - It is essential also that an employee's pay be equitable in terms of what other employees are receiving for their contributions.

Broad-banding

- Collapses many traditional salary grades into a few wide salary bands - Pay employees through broad-bands enables organizations to consider job responsibilities, individual skills and competencies, and career mobility patterns in assigning employees to bands.

Cost of Living

- Consumer price index (CPI): a measure of the average change in prices over time in a fixed "market basket" of goods and services - The consumer price index is based on prices of food, clothing, shelter, fuels, and transportation fares, charges for medical services, and prices of other goods and services that people buy for day-to-day living. - Escalator clauses: clauses in labor agreements that provide for quarterly cost-of-living adjustments in wages, basing on the adjustments on changes in the consumer price index

What is Compensation?

- Direct compensation: encompasses employee wages and salaries, incentives, bonuses, and commissions - Indirect compensation: comprises the many benefits supplied by employers - Non-financial compensation: includes employee recognition programs, rewarding jobs, organizational support, work environment, and flexible work hours to accommodate personal needs

Fair Labor Standards Act of 1938 (as amended) [Wage and Hour Act]

- It covers employees who are engaged in the production of goods for interstate and foreign commerce, including those whose work is closely related to or essential to such production. - The act also covers agricultural workers, as well as employees of certain retail and service establishments whose sales volume exceeds a prescribed amount.

Strategic Compensation

- It is the compensation of employees in ways that enhance motivation and growth, while at the same time aligning their efforts with the objectives of the organization. - Strategic compensation goes beyond determining the appropriate market rates to pay employees, although market rates are one element of compensation planning. - Strategic compensation should also purposefully link compensation to the organization's mission and general business objectives. - Strategic compensation serves to mesh the monetary payments made to employees with other HR initiatives, such as recruitment, selection, training, retention, and performance appraisal.

Using the Point Manual

- Job evaluation under the point system is accomplished by comparing the job descriptions and job specification, factor by factor, against the various factor-degree descriptions contained in the manual. - Each factor within the job being evaluated is then assigned the number of points specified in the manual.

Collective Bargaining

- One of the primary functions of a labor union is to bargain collectively over conditions of employment, the most important of which is compensation. - The union's goal in each new agreement is to achieve increases in real wages--wage increases larger than the increase in the CPI--thereby improving the purchasing power and standard of living of its members. - This goals includes gaining wage settlements that equal or exceed the pattern established by other unions within the area.

Competence-Based Pay

- Pay based on an employee's skill level, variety of skills possessed, or increased job knowledge - Competence-based pay systems represent a fundamental change in the attitude of management regarding how work should be organized and how employees should be paid for their work efforts. - The most frequently cited benefits of competence-based pay include greater productivity, increased employee learning and commitment to work, improved staffing flexibility to meet production or service demands, and reduced effects of absenteeism and turnover, because managers can assign employees where and when needed. * Difficulties with this system - Some plans limit the amount of compensation employees can earn, regardless of the new skills or competencies they acquire. - It is difficult to write specific knowledge and skills descriptions for jobs that employees perform and then establish accurate measures of acquired skills or knowledge.

Employer's Ability to Pay

- Pay levels are limited by earned profits and other financial resources available to employers. - An organization's ability to pay is determined in part by the productivity of its employees. - This productivity is a result not only of their performance but of the amount of capital the organization has invested in labor-saving equipment. - Increases in capital investment reduce the number of employees required to perform the work and increase an employer's ability to provide higher pay for those it employs.

Rate Ranges

- Rate ranges generally are divided into a series of steps that permit employees to receive increases up to the maximum rate for the range on the basis of merit or seniority of a combination of the two. - Most salary structures provide for the ranges of adjoining pay grades to overlap. - The purpose of the overlap is to permit an employee with experience to earn as much as more than a person with less experience in the higher job classification. - Red circle rates: payment rates above the maximum of the pay range

Expectancy Theory and Pay

- The expectancy theory of motivation predicts that one's level of motivation depends on the attractiveness of the rewards sought and the probability of obtaining those rewards. - Expectancy theory holds that employees should exert greater work effort if they have reason to expect that it will result in a reward that is valued. - How employees view compensation can be an important factor in determining the motivational value of compensation. - The effective communication of pay information together with an organizational environment that elicits employee trust in management can contribute to employees' having more accurate perceptions of their pay. - The perceptions employees develop concerning their pay are influenced by the accuracy of their knowledge and understanding of the compensation program's strategic objectives.

Labor Market Conditions

- The labor market reflects the forces of supply and demand for qualified labor within an area. - These forces help influence the pay rates required to recruit or retain competent employees.

Job Ranking System

- The simplest and oldest system of job evaluation by which jobs are arrayed by which jobs are arrayed on the basis of their relative worth - The basic disadvantage of the job ranking system is that it does not provide a very precise measure of each job's worth. - Another weakness is that the final ranking of jobs indicates the relative importance of the job, not the differences in the degree of importance that may exist between jobs. - A final limitation of the job ranking method is that it can be used only with a small number of jobs, probably no more than 15.

HRIS and Salary Surveys

- Wage and benefits survey data can be found on numerous websites. - Managers and compensation specialists can search for applicable surveys for either purchase or participation

Collecting Survey Data

- While many organizations conduct their own wage and salary surveys, a variety of "pre conducted" pay surveys are available to satisfy the requirements of most public and not-for-profit or private employers. * 2 problems with all published surveys: 1. they are not always compatible with the user's jobs 2. the user cannot specify what specific data to collect

Relationship between Pay Equity and Motivation

1. Inequity (Feelings of Being Underpaid) - High input/output ratio - Low comparison person's input/output ratio - Doing more and receiving less 2. Equity (Feelings of Being Paid Fairly) - High input/output ratio - High comparison person's input/output ratio - Doing the same and receiving the same 3. Inequity (Feelings of Being Overpaid) - Low input/output ratio - High comparison person's input/output ratio - Doing Less and Receiving More

Compensation strategy

At a minimum, both large and small employers should set pay policies reflecting: 1. the internal wage relationship among jobs and skill levels 2. the external competition, or an employer's pay position relative to what competitors are paying 3. a policy of rewarding employee performance 4. administrative decisions concerning elements of the pay system such as overtime premiums, payment periods, and short-term or long-term incentives

Job Evaluation for Management Positions

Hay profile method: a job evaluation technique using three factors--knowledge, mental activity, and accountability--to evaluate executive and managerial positions

Walsh-Healy Act of 1936 (the Public Contracts Act)

The act requires contractors to pay employees at least the prevailing wage rates established for the area by the Secretary of Labor and overtime of one and one-half times the regular rate for all work performed in excess of eight hours in one day or 40 hours in one week, depending on which basis provides the larger premium.

Linking Compensation to Organizational Objectives

* Common goals of a strategic compensation policy include the following: 1. To reward employees' past performances 2. To remain competitive in the labor market 3. To maintain salary equity among employees 4. To mesh employees' future performances with organizational goals 5. To control the compensation budget 6. To attract new employees 7. To reduce unnecessary turnover * Formal statements of compensation policies typically include the following: 1. The rate of pay within the organization and whether it is to be above, below, or at the prevailing market 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

The Wage Curve

- A curve in a scattergram representing the relationship between relative worth of jobs and pay rates - This curve may indicate the rates currently paid for jobs within an organization, new rates resulting from job evaluation, or rates for similar jobs currently being paid by other organizations within the labor market.

Area Pay Rates

- A formal pay structure should provide rates that are in line with those being paid by other employers for comparable jobs within the area. - Data pertaining to area pay rates may be obtained from local wage surveys. - Wage surveys serve the imprint function of providing external pay equity between the surveying organization and other organizations competing for labor in the surrounding labor market. - Data from area wage surveys can be used to prevent the rates for jobs from drifting too far above or below those of other employers in the region.

Work Valuation

- A job evaluation system that seeks to measure a job's worth through its value to the organization - With work valuations, work is measured through standards that come directly from business goals. - The work evaluation process ends with a work hierarchy that is an array of work by value to the organization. - The work hierarchy is eventually priced through wage surveys to determine individual pay rates.

Pay-for-Performance Standard

- A standard by which managers tie compensation to employee effort and performance. - The term "pay for 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. - Each of these compensation systems seeks to differentiate between the pay of average performers and that of outstanding performers. - You need to consider how employee performance will be measured. - A critical concern for a successful pay-for-performance system is the perceived fairness of the pay decision.

Wage and Salary Surveys

- A survey of the wages paid to employees of other employers in the surveying organization's relevant labor market

Job Classification System

- A system of job evaluation in which jobs are classified and grouped according to a series of predetermined wage grades - The descriptions of each of the job classes constitute the scale against which the specifications for the various jobs are compared. - While this system has the advantage of simplicity, it is less precise than the point system because the job is evaluated as a whole.

Compression Lavor Provisions

- Another concern with the minimum wage is that the "floor" it imposes makes it more difficult for high school students and young adults to find jobs. - Many employers who might otherwise be willing to hire these individuals are unwilling to pay them the same rate as adults because of their lack of experience.

Employer-Initiated Surveys

- Employers wishing to conduct their own wage and salary survey must first select the jobs to be used in the survey and identify the organizations with whom they actually compete for employees. - Since it is not feasible to survey all the jobs in an organization, normally only key jobs, also called benchmark jobs, are used.

Pay Grades

- Groups of jobs within a particular class that are paid the same rate - The number is determined by such factors as the slope of the wage curve, the number and distribution of the jobs within the structure, and the organization's wage administration and promotion policies.

Job Evaluation Systems

- Job evaluation: a systematic process of determining the relative worth of jobs to establish which jobs should be paid more than others within an organization * Three traditional methods of comparison provide the basis for the principal systems of job evaluation: 1. Rank the value of jobs from highest to lowest 2. Classify jobs so they can be benchmarked internally and externally 3. Award points to each job based on how much they are linked to organizational objectives

Worth of a Job

- Organizations without a formal compensation program generally base the worth of jobs on the subjective opinions of people familiar with the jobs. - In such instances, pay rates may be influenced heavily by the labor market or, in the case of unionized employers, by collective bargaining. - Organizations with formal compensation are more likely to rely on a system of job evaluation to aid in rate determination. - In today's competitive environment, compensation professionals believe that the worth of a bio should be based on more than market prices or using only an internally driven job evaluation program. - Valuing work not only properly enables organizations to price "important" jobs effectively but also provides insight into how a job relates to the organization's objectives.

Minimum Wage and Pay Compression

- Pay 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 * Organizations wishing to minimize the problem may incorporate the following ideas into their pay policies: - Reward 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.

Wage and Hour Provisions

- The minimum wage is assessed every few years to ensure it is adjusted for cost-of-living factors. - This minimum rate applies to the actual earning rate before any overtime premiums have been added. - An overtime rate of one and one-half times the base rate just be paid for all hours worked in excess of 40 during a given week. - When employees are given time off in return for overtime work (referred to as compensatory time off or comp time), it must be granted at one and one-half times the number of hours that were worked as overtime.

The Point Manual

- The point system requires the use of a point manual. - The point manual is a handbook that contains a description of the compensable factors and the degrees to which these factors may exist within the jobs. - A manual also will indicate the number of points allocated to each factor and to each of the degrees into which these factors are divided.