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10ManagingCompensation

2001 by Prentice Hall 10-1

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Goals of Compensation System

Internal Equityassure that jobs are objectivelyand consistently valued in relation to oneanother

External Equityassure that the company is

able to attract and retain the knowledge andskills needed to meet its objectives

Individual Equityassure that individualemployees are compensated in a manner that isfair in relation to the work they do and value

they bring to the organization Strategic impactmaximize productivity and

effectiveness in achieving organizationsstrategic goals

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Challenges

Identifythe compensation policies and practices that aremost appropriate for a particular firm.

Weigh the strategic advantages and disadvantages of the

different compensation options. Establish a job-based compensation scheme that is

internally consistent and linked to the labor market.

Understand the difference between a compensationsystem in which employees are paid for the skills they use

and one in which they are paid of the job they hold. Make compensation decisions that comply with the legal

framework.

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Total Compensation

The package of quantifiable

rewards an employee receives forhis or her labors. Includes threecomponents: base compensation,

pay incentives, and indirectcompensation/benefits

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The Elements of Total

Compensation

Total

Compensation

PayIncentives

Indirect

Compensation/Benefits

BaseCompensation

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The Nine Criteria for Developing aCompensation Plan

1. Internal versus External Equity Will the compensation planbe perceived as fair within the company, or will it beperceived as fair relative to what other employers are paying

for the same type of labor?2. Fixed versus Variable Pay Will compensation be paid

monthly on a fixed basis through base salaries or will itfluctuate depending on such preestablished criteria asperformance and company profits?

3. Performance versus Membership Will compensationemphasize performance and tie pay to individual or groupcontributions, or will it emphasize membership in theorganization logging in a prescribed number of hourseach week and progressing up the organizational ladder?

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The Nine Criteria for Developing aCompensation Plan (cont.)

4. Job versus Individual Pay Will compensation be based onhow the company values a particular job, or will it be basedon how much skill and knowledge an employee brings to

that job?5. Egalitarianism versus Elitism Will the compensation plan

place most employees under the same compensationsystem (egalitarianism), or will it establish different plans byorganizational level and/or employee group (elitism)?

6. Below-Market versus Above-Market Compensation Willemployees be compensated at below-market levels, atmarket levels, or at above-market levels?

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The Nine Criteria for Developing aCompensation Plan (cont.)

7. Monetary versus Nonmonetary Awards Will thecompensation plan emphasize motivating employeesthrough monetary rewards like pay and stock options, or

will it stress nonmonetary rewards such as interesting workand job security?

8. Open versus Secret Pay Will employees have access toinformation about other workers compensation levels and

how compensation decisions are made (open pay) or will

this knowledge be withheld from employees (secret pay)?9. Centralization versus Decentralization of Pay Decisions Will

compensation decisions be made in a tightly controlledcentral location, or will they be delegated to managers of thefirms units?

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The Key Steps in Creating Job-BasedCompensation Plans

1998 by Prentice Hall

1. Job AnalysisJob Evaluation forInternal Equity

2. Job Descriptions

Identify

Compensable Factors

3. Job Specifications

4. Rate Worth of All Jobs

Using a PredeterminedSystem

5. Job Hierarchy

7. Establish Final PayPolicy

Individual PayAssignment

6. Classify Jobs by

Grade Levels

1. Check Market Value

Using Benchmark or KeyJobsMarket Surveys forExternal Equity

Within-Pay-RangePositioning Criteriafor Individual Equity

Criteria for PayPositioning WithinRange for Each Job Experience

Seniority Performance 2001 by Prentice Hall 10-9

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Hierarchy of Clerical Jobs, Pay Grades, and WeeklyPay Range for a Hypothetical Office

1Points

2Grade

3Weekly Pay Range

300298290230

225220175170165160

125120120115958080

60

5

4

3

2

1

$500-$650

$450-$550

$425-$475

$390-$430

$350-$400

Customer Service Rep.Executive Secretary/Admin. Asst.Senior SecretarySecretary

Senior General ClerkCredit and CollectionAccounting ClerkGeneral ClerkLegal Secretary/AssistantSenior Word Processing Operator

Work Processing OperatorPurchasing ClerkPayroll ClerkClerk-TypistFile ClerkMail ClerkPersonnel Clerk

Receptionist

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Market Salary Data for SelectedBenchmark Office Jobs

Weekly Pay Percentile

1. Customer Service Rep.2. Credit and Collection Clerk3. Accounting Clerk4. Word Processing Operator5. Clerk-Typist

25thWeekly Pay

Average

$400$400$370$380$330

50th 75th

$500$450$425$390$350

$650$550$475$430$400

$495$455$423$394$343

Benchmark Jobs

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Pay Structure of a Large RestaurantDeveloped Using a Job-Based Approach

Jobs

Number ofPositions Pay

GRADE 6GRADE 5

GRADE 4

GRADE 3

GRADE 2

GRADE 1

ChefManagerSous-ChefAssistant Manager

Lead CookOffice ManagerGeneral CookShort Order CookAssistant to Lead CookClerkServer

HostessCashierKitchen HelperDishwasherJanitorBusserSecurity Guard

2112

215221

45

4423262

$20.00-$31.00/hr.$11.50-$21/hr.

$7.50-$12.00/hr.

$6.50-$8.00/hr.

$6.00-$7.00/hr.

$5.50-$6.25/hr.

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Pay Schedule of a Large Restaurant DesignedUsing a Skill-Based Approach

Skills

5

4

3

Create new items for menu Find different uses for leftovers

(e.g., hot dishes, buffets)

Coordinate and control work of all employeesupon managers absence Cook existing menu items following recipe Supervise kitchen help Prepare payroll Ensure quality of food and adherence to

standards Schedule servers and assign workstations Conduct inventory Organize work flow on restaurant floor

$23.00/hr.

$17.00/hr

$10.50/hr

PaySkill Block

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Pay Schedule of a Large RestaurantDesigned Using a Skill-Based Approach (cont.)

Skills2

1

Greet customers and organize tables Take orders from customers Bring food to tables

Assist in kitchen with food preparations Perform security checks Help with delivery Use dishwashing equipment Use chemicals/disinfectants to clean

premises

Use vacuum cleaner, mop, waxer, and othercleaning equipment

Clean and set up tables Perform routine kitchen chores

(e.g., making coffee)

$7.50/hr.

$6.00/hr.

PaySkill Block

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Suggestions for ImplementingJob-based Compensation Plans

Think strategically in making policy decisionsconcerning pay.

Secure employee input.

Increase each jobs range of pay while expandingits scope of responsibility.

Expand the proportion of employees pay that isvariable (bonuses, stock plans, and so forth).

Establish dual-career ladders for different types ofemployees so that moving into management ranksor up the organizational hierarchy is not the onlyway to receive a substantial increase in pay.

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Example of a Dual-Career LadderManagerial Individual ContributorBand

PresidentExecutiveVice PresidentVice PresidentAssistant

Vice PresidentDirectorSenior ManagerManager

1312

1110

98765

43

2

1

Nurse Anesthetist

Clinical Nurse Specialist

Senior Staff NurseStaff NurseLPN

CNA

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