MGT352 Chapter 9

Three components of pay equity

1. Internal equity 2. External equity 3. Individual equity

Job Evaluation Methods

1. Job Ranking 2. Job Classification 3. Point Method

Four Provisions of the Fair Labor Standards Act (FLSA; 1938)

1. Minimum wage provision 2. Overtime (OT) provision 3. Child labor provision 4. Equal Rights provision

Compa-ratio > 1

Managers paying more than the intended pay policy. Valid reasons may be... - Majority of ees with high seniority, high performance, low turnover, few new hires, low promotion rates

Wage inversion

A higher skill job is paid less than a lower skill job

Wage compression

A lower skill/level job is paid at a rate similar to a higher skill/level job

Consumer Price Index (CPI)

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

Pay Equity (Fairness)

An employee's perception that compensation received is equal to the value of the work performed.

Individual equity

Comparisons with others inside the organization in the same job

Pay Grades

Groups of jobs within a particular class that are paid the same rate.

Which factor will most likely be used to set the "floor" for wages?

Labor Market

Compa-ratio < 1

Managers paying less than the intended pay policy. Valid reasons may be... - 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

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

Primary Goals of Compensation

To motivate people to join the organization (attraction) To motivate people to stay with the organization (retention) To motivate people to perform at high levels (motivation)

Point System

- A quantitative job evaluation procedure that determines the relative value of a job by the total points assigned to it. - Permits jobs to be evaluated quantitatively on the basis of factors or elements—compensable factors—that constitute the job.

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) - Can be objectively measured

Pay Ranges

- Allow for variation in pay within grades (within max and min) - Differences such as tenure, education, performance, when learning the job, etc.

Equal Pay Act (1963)

- Amendment to the FLSA - This law is enforced by the EEOC -Law states that it is 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

The Wage Mix—Internal Factors

- Compensation Strategy of Organization - Worth of Job - Employee's Relative Worth - Employer's Ability to Pay

The Wage Mix—External Factors

- Conditions of the Labor Market - Area Wage Rates - Cost of Living - Collective Bargaining - Legal Requirements

Disadvantages of Job Ranking

- 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

Disadvantage of Job Classification

- 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

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

Advantages of Job Classification

- Relatively easy to develop - Inexpensive - Easier for people to slot jobs into grades than to rank order them

Job Classification

-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.

Ways to reduce wage compression

-Reward high performance and merit-worthy employees with large pay increases -Prepare high-performing employees for promotions to jobs with higher salary levels -Provide equity adjustments for employees hardest hit by pay compression

Point System Steps

1. Develop a Point Manual 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 the compensation for that job.

Compa-ratio Formula

Average rate of pay / Range midpoint

Job Ranking

Oldest system of job evaluation by which jobs are arrayed on the basis of their relative worth.

Internal equity

Pay comparisons with others inside the organization

External equity

Pay comparisons with others outside the organization

Which factor is most likely to be used to set the "ceiling" for the maximum wages an employer is willing to pay?

Product Price

"Real wages"

Real wages" are increases larger than rises in the consumer price index; that is, the real earning power of wages.

Compa-ratio

There are many measures to assess compensation systems, such as the compa-ratio: Compa-ratio - reflects how managers pay employees in relation to range mid-points