MGT 352 Ch. 9: Compensation (9 MC, 1 SA)

Determining "real" wages >> If employer offers union a wage increase of 4% but inflation has increased 2% since last wage increase, what is the real wage increase in this scenario?

= 2% wage increase = 2% of the 4 just brought us back to

Fair Labor Standards Act Provisions (4)

1. Minimum Wage 2. Overtime 3. Child Labor 4. Equal Pay

Example internal equity problems:

1. Wage Compression 2. Wage Inversion

Rate Ranges >> Broadbanding

- collapsing multiple grades into larger bands - more flexibility to managers who must stay within the pay budget

1. Minimum wage provision: Why did Congress enact this provision?

Workers would have more money to spend; disposable income thus creating more demand for jobs.. a big circle

Determining Internal Equity: Job Evaluation >> Scenerio

Job = Compensation specialist Organizations: manufacturing plant v. (Hr is staff function; necessity but not central or core) HR consulting firm. (other companies payroll)(doing something that generates revenue= would earn more w/ consulting firm) (higher strategic value) Would this job be "worth" the same to these organizations? = Not worth the same; could be identical as far as content(what is done) worth diff based on job evaluation.)=worth more to the consulting firm because they are core to the consulting company; HR dept

Pay 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. • Allow for variation in pay within grades (within max and min) • Differences such as tenure, education, performance, when learning the job, etc. • Range width? - How long do ees stay in this pay grade? (e.g., 1 v. 5 yrs) • Range overlap? o Maximum 50% overlap o Top of lower grade should be below midpoint of higher grade o Red circle jobs - jobs whose base wages exceed range and are frozen until ranges shift upward Broadbanding - collapsing multiple grades into larger bands - more flexibility to managers who must stay within the pay budget

Overtime (OT) provision Exempt vs Nonexempt

A) Exempt employee: Excluded NOT covered by the OT provision and therefore not eligible for being paid OT (generally all managers, supervisors, and white-collar professional employees) B) Nonexempt employee: IS covered by the OT provision and must be paid 1 ½ for all hours worked over 40 in a week.

Which one of these goals (ARM) do you think organizations do the best at achieving?

Attraction; getting ppl to say yes to the job

3. Individual equity

Comparisons with others inside the organization in the same job

Overtime (OT) provision: Why did Congress enact this provision?

Encouraged employers to hire more people

Factors Affecting the Wage Mix (Compensation Rate): A) Internal B) External

Factors Affecting the Wage Mix (Compensation Rate) Internal Factors: • Compensation strategy of org • Worth of job • Employee's relative worth • Employer's ability to pay External Factors: • Conditions of the labor market • Product Market Competitors' Wage Rates • Area wage rates • Cost of living • Collective bargaining

wage inversion v. wage compression

Inversion-a higher skill job is paid less than a lower skill job Compression: lower skill/level job is paid at a rate similar to a higher skill/level job

??Determining Internal Equity: Job Evaluation

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. External Labor Market = floor- supply/demand Ex. Sonic offering $10 an hour, Economy booming in oklahoma, min wage was $4 but no one wanted to work fastfood for min wage when everyone has jobs. • Job Analysis - job content • Job Evaluation - job value Job Evaluation determines the contribution of a job to an organization's strategic goals (i.e., value to the org) *Note that the same job can be valued quite differently depending on the organization it is in

Wage Compression

Wage compression - a lower skill/level job is paid at a rate similar to a higher skill/level job Junior Accountant - $45,000 (might prefer to stay jr) Senior Accountant - $46,000

Wage Curve

- A curve in a scatter gram representing the relationship between relative worth of jobs and wage rates.

Consumer Price Index (CPI)

- A measure of the average change in prices over time in a fixed "market basket" of goods and services

Collecting Survey Data (External Equity)- Outside Sources of Data

- Bureau of Labor Statistics (BLS) www.bls.gov, Online survey data Adv - Govt data is free Disadv - Data is usually dated, Can be useful as a general ballpark estimate

FLSA >> 4. Equal Rights provision

- Equal Pay Act (1963) Amendment to the FLSA: • illegal to discriminate in terms of compensation based on gender for "equal work" where equal work is defined as work requiring the same skill, effort, responsibility, and working conditions.

Pay Grades

- Groups of jobs within a particular class that are paid the same rate. • All jobs in the same grade would be paid the same regardless of ee tenure, etc. • This graph is an example of a flat rate system*** X (Pay grade), Y (Wage Rates) = Org wage cure = Single rate structure

Pay Rate Ranges >> Range width?

- How long do ees stay in this pay grade? (e.g., 1 v. 5 yrs)

Legal requirements

- Laws pertaining to compensation and benefits administration must be considered

Two primary laws legislating compensation and who enforces? :

1) Fair Labor Standards Act (FLSA; 1938) Enforced by the Department of Labor 2) Equal Pay Act (EPA; 1963) EPA is a part of FLSA, Enforced by Equal Employment Opportunity Commission

Point System

1. Develop a Point Manual A handbook that contains a description of the compensable factors and the degrees to which these factors may exist within the jobs; Each compensable factor is defined as well as its rating scale points and # of points assigned to each scale point is determined 2. Rate each job relative to the CFs in the point manual 3. Add up the total points across CFs to determine the job's "worth" to the organization. 4. Total points can then be used to determine compensation for that job. (in the case of the job evaluated on the next slide, number of points = 239) If internally equitable multiplier = .08, then the internally equitable wage rate for this job would be $19.12 / hr

Components of Pay Equity (3)

1. Internal 2. External 3. Individual equity

3. Child labor provision: Why did Congress enact this provision?

= To get kids out of factories and encourages hiring adults

Pay Equity: A) How can an organization cause internal equity perception problems? B) How can an organization cause external equity perception problems? = ignore external labor market, don't pay attention to whats going on outside org, don't adjust internal salary to match external market (wages not competitive) C) How can an organization cause individual equity perception problems?

A) = my job higher level and im getting paid less than a lower job? B) = ignore external labor market, don't pay attention to whats going on outside org, don't adjust internal salary to match external market (wages not competitive) C) = (caused when pay is fixed= paid for showing up) = don't pay based on performance; solve by taking portion of pay and making it variable (performance based- earned by performing at certain level) *don't care what happens to the guy in cube next to me is doing, internal locus of control for pay

Factors Affecting the Wage Mix (Compensation Rate): A) Which factor will most likely set the theoretical "floor" for wages? (sensitive to inflation) B)Which factor is most likely to be used to set the maximum wage? C) Which factor will would set the absolute maximum wage that an employer could pay?

A) Labor market and supply and demand for labor. B) Product market C) Ability to pay

Equity Theory >> A) What might a person do who feels under-rewarded? B) What might a person do who feels over-rewarded?

A) Not work as hard, steal supplies; or find ways to justify B) Work harder, help others Note: Theory doesn't apply to everyone—some people are ok with underreward inequity (benevolents) and some are ok with overreward inequity (entitled)

Management Equity Tools: A) Internal Equity B) External C) Individual

A) formal evaluation to determine relative worth of jobs in an org critically look at each job and what its worth in the org; Most valuable job paid most least valuable paid least B) wage and salary surveys monitoring what other orgs pay for similar jobs; annual basis go out or contract external 3rd party to collect this info = so job offers are competitive C) performance-based pay tying some or all of pay to level of output; (Fixed pay but portion of pay is variable based on performance)

Linking Equity Perceptions and Compensation Goals >> Which equity perceptions would be most critical for attraction, retention and motivation? A) Internal Equity B) External C) Individual

A) retention (comfortable, like cowoerkers B) attraction (want people to come in, need to consider what going on outside) C) motivation: tie pay to perf, work harder

Chapter 9: Compensation (9 MC, 1 SA)

Goals of compensation: attraction, retention, motivation; three equity perceptions: internal, external and individual equity; linking the goals of compensation to the equity perceptions; wage inversion v. wage compression; internal and external factors in determining wage mix, determining "real" wages, factors most likely to be used by organizations to set the wage ceiling and wage floor; job evaluation methods for maintaining internal equity (job ranking, job classification, point method), compensable factors; pay ranges, range overlap, pay grades, compa-ratio; Fair Labor Standards Act provisions (minimum wage, overtime, child labor, equal pay), Equal Pay Act and its relationship to compensable factors

1. Internal equity

Pay comparisons with others inside the organization

2. External equity

Pay comparisons with others outside the organization

Wage Inversion

a higher skill job is paid less than a lower skill job; More extreme compensation problem Junior Accountant - $50,000 Senior Accountant - $48,000

Pay Rate Ranges >> Red circle jobs

jobs whose base wages exceed range and are frozen until ranges shift upward

Compensation Assessment - Compa-ratio

reflects how managers pay employees in relation to range mid-points Comp Ratio = Average rate of pay / Range midpoint

Criteria for Compensable Factors

• Acceptable (to employees, management, union) • Important to the job • They help to distinguish among jobs (jobs must vary on the CF) • Objectively measured • No overlap between factors (e.g., innovation & creativity)

3 Goals of Compensation: Which one of these goals do you think organizations do the best at achieving?

• Attraction • Retention • Motivation 1. To motivate people to join the organization (attraction) 2. To motivate people to stay with the organization (retention) 3. To motivate people to perform at high levels (motivation) Which one of these goals do you think organizations do the best at achieving? Attraction; getting ppl to say yes to the job

Job Evaluation Methods For Maintaining Internal Equity >> 2. Job Classification

• Classifying jobs into categories so they can be benchmarked internally and externally • 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 • Relatively easy to develop, Inexpensive • Easier for people to slot jobs into grades than to rank order them • Grade descriptions must be broad enough to fit multiple jobs, yet they have to be specific enough that jobs don't appear to fit into more than one grade Federal Government - General Service (GS Levels) Example: Job grade 7 Min $12/hr Max $17/hr Job grade 8 Min $15/hr Max $20/hr

Pay Equity

• Fairness; • EE's perception that compensation received = to value of work performed. • Fairness is a relative concept, you don't know if you are being fairly compensated until you find someone to compare to

FLSA >> 3. Child labor provision: Why did Congress enact this provision?

• Forbids children under 16 to work except for parent among other issues

Job Evaluation Methods For Maintaining Internal Equity

• Job Ranking • Job Classification • Point Method

A) Compa-ratio < 1 Valid Reasons

• Majority of ees are new or recent hires • Most ees are poor performers • Ees are promoted so rapidly that few are in a range long enough to get to the high end

A) Compa-ratio < 1

• Managers paying less than the intended pay policy. • On avg, ees in a range are paid below midpoint.

B) Compa-ratio > 1

• Managers paying more than the intended pay policy.

FLSA >> 1. Minimum wage provision: A) What is the current Federal Minimum wage? B) When was the Minimum Wage most recently increased?

• Mandated a federal minimum wage A) current Federal Minimum wage? = $7.25 B) When was Min Wage most recently increased? = 2009

Pay Rate Ranges >> Range overlap?

• Maximum 50% overlap • Top of lower grade should be below midpoint of higher grade • Red circle jobs - jobs whose base wages exceed range and are frozen until ranges shift upward

B) Compa-ratio > 1 Valid Reasons

• On avg, ees in a range a paid above the midpoint • Majority of ees with high seniority • high performance • low turnover • few new hires • low promotion rates

Where can we get ideas for Compensable Factors?

• Organization's mission statement -"To exceed customer expectations of value, dependability, and convenience by focusing on innovation and teamwork." • Equal Pay Act of 1963 - Equal work = "equal skill, effort, responsibility, and working conditions"

FLSA >> 2. Overtime (OT) provision:

• Requires that employers pay their employees time and a half their regular pay for hours worked in excess of 40 per week • Labeled employees as being either "exempt" or "nonexempt" in terms of who is eligible for overtime pay

Ways to reduce wage compression (4)

• Reward high performance and merit-worthy EE's with large pay increases. • Design the pay structure to allow a wide spread between hourly and supervisory EE's • Prepare high-performing EE's for promotions to jobs with higher salary levels. • Provide equity adjustments for selected EE's hardest hit by pay compression.

Determining the Compensation Structure

• Wage Curve - A curve in a scatter gram representing the relationship between relative worth of jobs and wage rates. • Pay Grades - Groups of jobs within a particular class that are paid the same rate. • 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.

Job Evaluation Methods For Maintaining Internal Equity >> 3. Point Method

• awarding points to each job based on the job's contribution to organizational objectives (i.e., the more value the job has, the more points it is awarded) • quantitative job evaluation procedure that determines relative value of a job by total points assigned to it • Permits jobs to be evaluated quantitatively on basis of factors or elements—compensable factors—that constitute the job.

Equity Theory

• 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. • My input/outcome< = >Other's input/outcomes

Job Evaluation Methods For Maintaining Internal Equity >> 1. Job Ranking

• rank value of jobs from highest to lowest • Oldest system of job evaluation by which jobs are arrayed on basis of their relative worth. • 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 (#2 v. #5?); • Method can used to consider only a reasonably small number of jobs (<20) • Doesn't allow for jobs of equal worth, middle range jobs are difficult to differentiate