Managing Human Resources Chapter 9 Managing Compensation

common goals of a strategic compensation policy

1. To reward employees' past performance 2. To remain competitive in the labor market 3. To maintain salary equity among employees 4. To mesh employees' future performance with organizational goals 5. To control the compensation budget 6. To attract new employees 7. To reduce unnecessary turnover

kinds of pay equity

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.

work valuation

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

broadbanding

Broad-banding simply collapses many traditional salary grades into a few wide salary bands. Broadbands may have midpoints and quartiles, or they may have extremely wide salary ranges or no ranges at all. Banding encourages lateral skill building while ad-dressing the need to pay employees performing multiple jobs with different skill level requirements. Additionally, broadbands help eliminate the obsession with grades and, instead, encourage employees to move to jobs in which they can develop in their careers and add value to the organization. Paying employees through broadbands enables organizations to consider job responsibilities, individual skills and competen-cies, and career mobility patterns in assigning employees to bands. 52 In all, such pay tools help to more effectively implement a compensation strategy.

Compensation

Compensation consists of three main components. Direct compensation encompasses employee wages and salaries, incentives, bonuses, and commissions. Indirect compen-sation comprises the many benefits supplied by employers, and nonfinancial compensa-tion includes employee recognition programs, rewarding jobs, organizational support, work environment, and flexible work hours to accommodate personal needs.

hay profile method

The three broad factors that constitute the evalu-ation in the "profile" are knowledge (or know-how), mental activity (or problem-solving), and accountability. The Hay method uses only three factors because it is assumed that these factors represent the most important aspects of all executive and managerial positions. The profile for each position is developed by determin-ing the percentage value to be assigned to each of the three factors. Jobs are then ranked on the basis of each factor, and point values that make up the profile are assigned to each job on the basis of the percentage-value level at which the job is ranked.

point manual

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—usually by means of a table—the number of points allocated to each factor and to each of the de-grees into which these factors are divided. The point value assigned to a job represents the sum of the numerical degree values of each compensable factor that the job possesses.

pay equity

aka 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 the theory makes is that individuals make comparisons with people both inside and outside their organization, and that these comparisons influence their motivation. pay equity is achieved when the compensation received is equal to the value of the work performed.

Davis-Bacon Act of 1931

aka s the Prevailing Wage Law, was passed in 1931 and is 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. The act is criticized because the prevailing rates are often the union rates for jobs in the area and are often higher than the average (nonunion) rates.

Walsh-Healy Act of 1936

aka the Public Contracts Act, was passed in 1936 and covers workers employed on government contract work for supplies, equipment, and materials worth in excess of $10,000. The act requires contractors to pay employees at least the prevailing wage rates established for the area by the Sec-retary 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 forty hours in one week, depending on which basis provides the larger premium.

competence-based pay

also referred to as skill-based pay or knowledge-based pay, compensates employees for the different skills or increased knowledge they pos-sess rather than for the job they hold in a designated job category. 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 re-duced effects of absenteeism and turnover, because managers can assign employees where and when needed. Competence-based pay also encourages employees to ac-quire training when new or updated skills are needed by an organization.

Fair Labor Standards Act of 1938 Amended

commonly referred to as the Wage and Hour Act, was passed in 1938 and since then has been amended many times. It cov-ers 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 pro-duction. The act also covers agricultural workers, as well as employees of certain re-tail and service establishments whose sales volume exceeds a prescribed amount. The major provisions of the FLSA are concerned with minimum wage rates and overtime payments, child labor, and equal rights.

internal factors affecting compensation

compensation strategy of company, worth of job, employee's relative worth, employer's ability to pay

external factors affecting compensation

conditions of the labor market, area pay rates, cost of living, collective bargaining, legal requirements

first step for developing a formal compensation program

develop compensation strategy that is linked to organization's objectives

pay grades

generally preferable to group jobs into pay grades and to pay all jobs within a particular grade the same rate or rate range. When the classification system of job evaluation is used, jobs are grouped into grades as part of the evaluation process. When the point system is used, however, pay grades must be established at selected intervals that represent either the point or the evalu-ated monetary value of these jobs.

job evaluation

helpful in determining pay

point system

is a quantitative job evaluation procedure that determines a job's relative value by calculating the total points assigned to it. The principal advantage of the point system is that it provides a more refined basis for making judgments than either the ranking or classification systems and thereby can produce results that are more valid and less easy to manipulate.The point system permits jobs to be evaluated quantitatively on the basis of fac-tors or elements—commonly called compensable factors —that constitute the job. 42 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. More contemporary factors might include fiscal ac-countability, leadership, teamwork, and project accountability. The number of com-pensable factors an organization uses depends on the nature of the organization and the jobs to be evaluated. Once selected, compensable factors will be assigned weights according to their relative importance to the organization. For example, if responsibility is considered extremely important to the organization's objectives, it could be assigned a weight of 40 percent. Next, each factor will be divided into a number of degrees. Degrees represent different levels of difficulty associated with each factor

wage and salary survey

is a survey of the wages paid by employers in an organization's relevant labor market—local, regional, or national, depend-ing on the job. The labor market is frequently defined as the area from which employers obtain certain types of workers. The labor market for of-fice personnel would be local, whereas the labor market for engineers would be national and even global. It is the wage and salary survey that permits an organization to maintain external equity—that is, to pay its employees wages equivalent to the wages similar employees earn in other establishments.

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 has redefined the role and perceived contribution of compensation. No longer merely a "cost of do-ing business," when used strategically compensation becomes a tool to secure a com-petitive advantage.

job classification system

jobs are classified and grouped according to a se-ries of predetermined grades. Successive grades require increasing amounts of job responsibility, skill, knowledge, ability, or other factors selected to compare jobs.

pay rate compression

means that differences between low- and high-paying jobs de-crease. It occurs when less experienced, often junior employees, earn as much or more than experienced employees due to high starting salaries for new employees. It also occurs when the minimum wage requirements push up salaries for lower tier salaries but not for higher tier.

nonexempt

overtime not paid, for managers, execs, etcs.

exempt

overtime paid

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. 23 The theory has developed from the work of psychologists who consider humans as thinking, reasoning people who have beliefs and anticipations concern-ing future life events. Expectancy theory therefore holds that employees should exert greater work effort if they have reason to expect that it will result in a reward that is valued. 24 To motivate this effort, the value of any monetary reward should be attrac-tive. Employees also must believe that good performance is valued by their employer and will result in their receiving the expected reward.

job-based system

predominant approach to employee compensation is still the job-based system. Unfortunately, such a system often fails to reward employees for their skills or the knowledge they possess or to encourage them to learn a new job-related skill. Addition-ally, job-based pay systems may not reinforce an organizational culture stressing em-ployee involvement or provide increased employee flexibility to meet overall production or service requirements.

job ranking system

simplest and oldest system of job evaluation. arrays jobs on the basis of their relative worth. One technique used to rank jobs con-sists of having the raters arrange cards listing the duties and responsibilities of each job in order of the importance of the jobs. Job ranking can be done by a single indi-vidual knowledgeable about all jobs or by a committee comprised of management and employee representatives. 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 fifteen. Its simplicity, however, makes it ideal for use by small businesses.

wage curve

then be used to determine the relationship between the value of a job and its pay rate at any given point on the line.