© 2009 South-Western Cengage. All rights reserved.

Chapter 7Compensation Strategies

and Practices

Chapter 7Compensation Strategies

and Practices

7–2

Types of CompensationTypes of Compensation

• Types of RewardsTypes of Rewards IntrinsicIntrinsic

Intangible, psychological and social effects of compensationIntangible, psychological and social effects of compensation

ExtrinsicExtrinsic Tangible, monetary and nonmonetary effects of Tangible, monetary and nonmonetary effects of

compensationcompensation

• Types of CompensationTypes of Compensation Direct compensationDirect compensation

The employer exchanges monetary rewards for work done.The employer exchanges monetary rewards for work done.

Indirect compensationIndirect compensation Employer-provided benefits—like health insurance—that are Employer-provided benefits—like health insurance—that are

provide employees for being a member of the organization.provide employees for being a member of the organization.

7–3

Types of CompensationTypes of Compensation

Base PayBase PayBase PayBase Pay

SalarySalarySalarySalary

WagesWagesWagesWages

The basic monetary compensation that an employee The basic monetary compensation that an employee receives, usually as a wage or salary.receives, usually as a wage or salary.

The basic monetary compensation that an employee The basic monetary compensation that an employee receives, usually as a wage or salary.receives, usually as a wage or salary.

Payments calculated on the amount of time worked.Payments calculated on the amount of time worked.Payments calculated on the amount of time worked.Payments calculated on the amount of time worked.

Consistent payments made each period regardless Consistent payments made each period regardless of the number of hours worked in the period.of the number of hours worked in the period.

Consistent payments made each period regardless Consistent payments made each period regardless of the number of hours worked in the period.of the number of hours worked in the period.

Variable Variable PayPay

Variable Variable PayPay

Compensation linked to individual, team, or Compensation linked to individual, team, or organizational performance.organizational performance.

Compensation linked to individual, team, or Compensation linked to individual, team, or organizational performance.organizational performance.

BenefitsBenefitsBenefitsBenefits Indirect reward: health insurance, life insurance, Indirect reward: health insurance, life insurance, vacation pay, pension, etc.vacation pay, pension, etc.

Indirect reward: health insurance, life insurance, Indirect reward: health insurance, life insurance, vacation pay, pension, etc.vacation pay, pension, etc.

7–4

Figure 7.Figure 7.1 1 Continuum of Continuum of Compensation PhilosophiesCompensation Philosophies

7–5

Compensation System Design IssuesCompensation System Design Issues

• Compensation fairness and equityCompensation fairness and equity EquityEquity External equityExternal equity Internal equityInternal equity

Procedural justiceProcedural justice Distributive justiceDistributive justice

• Market competitiveness and compensationMarket competitiveness and compensation Meet the market strategyMeet the market strategy Lag the market strategyLag the market strategy Lead the market strategyLead the market strategy Selecting a quartileSelecting a quartile

7–6

Compensation FairnessCompensation Fairness

EquityEquityEquityEquity

Distributive Distributive JusticeJustice

Distributive Distributive JusticeJustice

Procedural Procedural JusticeJustice

Procedural Procedural JusticeJustice

The perceived fairness between what a person The perceived fairness between what a person does (inputs) and what the person receives does (inputs) and what the person receives (outcomes).(outcomes).

The perceived fairness between what a person The perceived fairness between what a person does (inputs) and what the person receives does (inputs) and what the person receives (outcomes).(outcomes).

Perceived fairness of the process and proceduresPerceived fairness of the process and proceduresused to make decisions about employees.used to make decisions about employees.

Perceived fairness of the process and proceduresPerceived fairness of the process and proceduresused to make decisions about employees.used to make decisions about employees.

Perceived fairness in the distribution of outcomesPerceived fairness in the distribution of outcomesPerceived fairness in the distribution of outcomesPerceived fairness in the distribution of outcomes

7–7

Market Competitiveness and Market Competitiveness and Compensation Compensation

Lead the Lead the MarketMarket

Lead the Lead the MarketMarket

Lag the Lag the MarketMarket

Lag the Lag the MarketMarket

Meet the Meet the MarketMarket

Meet the Meet the MarketMarket

Paying for higher qualified, more productive workers.Paying for higher qualified, more productive workers.Paying for higher qualified, more productive workers.Paying for higher qualified, more productive workers.

Attempting to balance employer costs and the need Attempting to balance employer costs and the need to attract and retain employees.to attract and retain employees.

Attempting to balance employer costs and the need Attempting to balance employer costs and the need to attract and retain employees.to attract and retain employees.

Paying all that the firm can afford. Taking advantage Paying all that the firm can afford. Taking advantage of the abundant supply of potential employees in a of the abundant supply of potential employees in a loose labor market.loose labor market.

Paying all that the firm can afford. Taking advantage Paying all that the firm can afford. Taking advantage of the abundant supply of potential employees in a of the abundant supply of potential employees in a loose labor market.loose labor market.

7–8

FLSA Employee ClassificationsFLSA Employee Classifications

• Exempt EmployeesExempt Employees Employees to whom employers are not required to Employees to whom employers are not required to

pay overtime under the Fair Labor Standards Act.pay overtime under the Fair Labor Standards Act.

• Non-exempt EmployeesNon-exempt Employees Employees who must be paid overtime under the Fair Employees who must be paid overtime under the Fair

Labor Standards Act.Labor Standards Act. HourlyHourly Salaried non-exemptSalaried non-exempt

7–9

Figure 7-2 Determining Exempt Status Figure 7-2 Determining Exempt Status Under the FLSAUnder the FLSA

7–10

Development of a Base Pay SystemDevelopment of a Base Pay System

• Pay StructuresPay Structures Pay surveysPay surveys Pay gradesPay grades Pay rangesPay ranges

7–11

Development of a Base Pay SystemDevelopment of a Base Pay System

• Valuing jobs with job evaluation methodsValuing jobs with job evaluation methods Job evaluation:Job evaluation: formal, systematic means to identify formal, systematic means to identify

the relative worth of jobs within an organization. the relative worth of jobs within an organization. Point methodPoint method

Breaks jobs down into various compensable factors and Breaks jobs down into various compensable factors and places weights, or points, on themplaces weights, or points, on them

Legal issues and job evaluationLegal issues and job evaluation

7–12

Development of a Base Pay SystemDevelopment of a Base Pay System

• Valuing jobs using market pricingValuing jobs using market pricing Advantages of market pricingAdvantages of market pricing

Closely ties organizational pay levels to what is actually occurring in the market

Allows an employer to communicate to employees that the compensation system is truly “market linked”

Disadvantages of market pricingDisadvantages of market pricing pay survey data are limited or may not be gathered in

methodologically sound ways tying pay levels to market data can lead to wide fluctuations

based on market conditions

7–13

Valuing Jobs Using Market PricingValuing Jobs Using Market Pricing

• Pay surveyPay survey Collection of data on compensation rates for workers Collection of data on compensation rates for workers

performing similar jobs in other organizationsperforming similar jobs in other organizations Benchmark JobBenchmark Job

Jobs found in many organizationsJobs found in many organizations

• Pay surveys and legal issuesPay surveys and legal issues Employers avoid charges that they are “price fixing” Employers avoid charges that they are “price fixing”

wageswages

7–14

Using Pay SurveysUsing Pay Surveys

MethodologyMethodologyMethodologyMethodology

ParticipantsParticipantsParticipantsParticipants Broad-basedBroad-basedBroad-basedBroad-based

TimelinessTimelinessTimelinessTimelinessSurvey Data Survey Data RelevanceRelevance

Survey Data Survey Data RelevanceRelevanceJob MatchesJob MatchesJob MatchesJob Matches

7–15

Pay StructuresPay Structures

• Job FamilyJob Family A group of jobs having common organizational A group of jobs having common organizational

characteristics.characteristics.

• Common Pay StructuresCommon Pay Structures Hourly and salariedHourly and salaried Office, plant, technical, professional, managerialOffice, plant, technical, professional, managerial Clerical, information technology, professional, Clerical, information technology, professional,

supervisory, management, and executivesupervisory, management, and executive

7–16

Figure 7-3 Establishing Pay StructuresFigure 7-3 Establishing Pay Structures

7–17

Figure 7-3 Establishing Pay Structures Figure 7-3 Establishing Pay Structures (cont.)(cont.)

7–18

Pay Structures Pay Structures

• Pay GradesPay Grades Groupings of individual jobs having approximately the Groupings of individual jobs having approximately the

same job worthsame job worth Using job evaluation pointsUsing job evaluation points Using market bandingUsing market banding

• Pay RangesPay Ranges Using the market line as a starting point, the employer Using the market line as a starting point, the employer

can determine minimum and maximum pay levels for can determine minimum and maximum pay levels for each pay gradeeach pay grade

BroadbandingBroadbanding

7–19

Individual PayIndividual Pay

• Pay for Specific IndividualsPay for Specific Individuals Setting a range for each pay grade gives flexibility by Setting a range for each pay grade gives flexibility by

allowing individuals to progress within a grade. allowing individuals to progress within a grade. A pay range allows managers to reward better A pay range allows managers to reward better

performing employees.performing employees. Red-circled employee: an incumbent who is paid Red-circled employee: an incumbent who is paid

above the rangeabove the range Green-circled employee: an individual who is paid Green-circled employee: an individual who is paid

below the rangebelow the range

• Pay CompressionPay Compression Occurs when pay differences among individuals with Occurs when pay differences among individuals with

different levels of experience and performance in the different levels of experience and performance in the organization becomes small.organization becomes small.

7–20

Figure 7-4 Example of Pay Grades and Figure 7-4 Example of Pay Grades and Pay RangesPay Ranges

7–21

Figure 7-4 Example of Pay Grades and Figure 7-4 Example of Pay Grades and Pay Ranges (continued)Pay Ranges (continued)

7–22

Determining Pay IncreasesDetermining Pay Increases

• Pay Adjustment MatrixPay Adjustment Matrix Compa-ratio: The pay level divided by the midpoint of Compa-ratio: The pay level divided by the midpoint of

the pay range.the pay range.

7–23

Standardized Pay AdjustmentsStandardized Pay Adjustments

• SenioritySeniority Time spent in an organization or on a particular job Time spent in an organization or on a particular job

that is used to determine eligibility for organizational that is used to determine eligibility for organizational rewards and benefits.rewards and benefits.

• Cost-of-Living Adjustments (COLA)Cost-of-Living Adjustments (COLA) Adjustments are tied to changes in an economic Adjustments are tied to changes in an economic

measure (e.g., the Consumer Price Index).measure (e.g., the Consumer Price Index).

• Across-the-Board IncreasesAcross-the-Board Increases All employees get the same percentage pay increaseAll employees get the same percentage pay increase

• Lump-Sum Increases (LSI)Lump-Sum Increases (LSI) A one-time payment of all or part of a yearly pay A one-time payment of all or part of a yearly pay

increase that does not increase base wages.increase that does not increase base wages.

7–24

Elements of Executive CompensationElements of Executive Compensation

Annual Executive Annual Executive Incentives and Incentives and

BonusesBonuses

Annual Executive Annual Executive Incentives and Incentives and

BonusesBonuses

Executive Executive SalariesSalaries

Executive Executive SalariesSalaries

Executive Executive Benefits Benefits

Executive Executive Benefits Benefits

Executive Executive Perquisites (Perks)Perquisites (Perks)

Executive Executive Perquisites (Perks)Perquisites (Perks)

Executive Executive CompensationCompensation

Executive Executive CompensationCompensation

Performance Performance Incentives: Incentives:

Long-Term versus Long-Term versus Short-TermShort-Term

Performance Performance Incentives: Incentives:

Long-Term versus Long-Term versus Short-TermShort-Term