Compensation 1Compensation 1

CompensationCompensation Pay is a statement of an employee’s Pay is a statement of an employee’s

worth by an employer.worth by an employer. Pay is a perception of worth by an Pay is a perception of worth by an

employee.employee.

Total CompensationTotal CompensationTotal CompensationTotal Compensation

DirectDirectDirectDirect IndirectIndirectIndirectIndirect

Bonuses/CommissionsBonuses/CommissionsBonuses/CommissionsBonuses/Commissions

Gainsharing/Stock PlansGainsharing/Stock PlansGainsharing/Stock PlansGainsharing/Stock PlansSecurity Plans• Pensions

Security Plans• Pensions

Employee Services• Educational assistance• Recreational programs

Employee Services• Educational assistance• Recreational programs

IncentivesIncentivesIncentivesIncentives

Wages / SalariesWages / SalariesWages / SalariesWages / Salaries

Insurance PlansInsurance Plans• MedicalMedical• DentalDental• LifeLife

Insurance PlansInsurance Plans• MedicalMedical• DentalDental• LifeLife

Time Not WorkedTime Not Worked• VacationsVacations• BreaksBreaks• HolidaysHolidays

Time Not WorkedTime Not Worked• VacationsVacations• BreaksBreaks• HolidaysHolidays

Strategic Compensation Strategic Compensation PlanningPlanning

Strategic Compensation PlanningStrategic Compensation Planning Links compensation to the mission, objectives, Links compensation to the mission, objectives,

philosophies, and culture of the organization.philosophies, and culture of the organization.

Serves to establish a pay-for-performance Serves to establish a pay-for-performance standard.standard.

Seeks to motivate employees through Seeks to motivate employees through compensation.compensation.

Why This Salary?Why This Salary?

Break into teams of 4 – 5 and discuss the Break into teams of 4 – 5 and discuss the exercise Why This Salary on page 446 and exercise Why This Salary on page 446 and answer the questions.answer the questions.

What Determines Pay?What Determines Pay? Company FactorsCompany Factors

StrategyStrategy Value of a jobValue of a job Employee’s relative worthEmployee’s relative worth Ability to payAbility to pay

External FactorsExternal Factors Labor market conditions (unemployment)Labor market conditions (unemployment) Cost of living and local wage ratesCost of living and local wage rates UnionsUnions Legal requirementsLegal requirements

Process to Determine Worth Process to Determine Worth of a Job of a Job

Job EvaluationJob Evaluation

Formal process used to create a job-worth Formal process used to create a job-worth hierarchy within an organizationhierarchy within an organization

Job ContentJob Content QuantitativeQuantitative NonquantitativeNonquantitative

Job Evaluation Systems - Job Evaluation Systems - NonquantitativeNonquantitative

Job Ranking SystemJob Ranking System Oldest system of job evaluation by which Oldest system of job evaluation by which

jobs are arrayed on the basis of their relative jobs are arrayed on the basis of their relative worth.worth.

Disadvantages Disadvantages Does not provide a precise measure of each job’s Does not provide a precise measure of each job’s

worth.worth.

Final job rankings indicate the relative importance Final job rankings indicate the relative importance of jobs, not the extent of differences between jobs.of jobs, not the extent of differences between jobs.

Method can used to consider only a reasonably Method can used to consider only a reasonably small number of jobs.small number of jobs.

Paired-Comparison Paired-Comparison

Directions: Place an X in the cell where the value of a row job is higher than that of a column job.

Paired-Comparison Paired-Comparison

Directions: Place an X in the cell where the value of a row job is higher than that of a column job.

Compensable FactorsCompensable Factors

Compensable factors are the key to Compensable factors are the key to quantitative methodsquantitative methods

The elements used to measure a job’s worthThe elements used to measure a job’s worth The elements in jobs that add value to the The elements in jobs that add value to the

organization and for which the organization organization and for which the organization wants to pay it’s employeeswants to pay it’s employees

Point SystemPoint System Point SystemPoint System

A quantitative job evaluation procedure that A quantitative job evaluation procedure that determines the relative value of a job by the total determines the relative value of a job by the total points assigned to it.points assigned to it.

Permits jobs to be evaluated quantitatively on the Permits jobs to be evaluated quantitatively on the basis of factors or elements—basis of factors or elements—compensable factorscompensable factors—that constitute the job.—that constitute the job.

The Point ManualThe Point Manual A handbook that contains a description of the A handbook that contains a description of the

compensable factors and the degrees to which compensable factors and the degrees to which these factors may exist within the jobs.these factors may exist within the jobs.

The job evaluation technique that uses The job evaluation technique that uses compensable factors scaled according to compensable factors scaled according to the degree present in the job?the degree present in the job?

rankingranking classificationclassification point methodpoint method factor comparisonfactor comparison content validitycontent validity

Hay Point FactorHay Point Factor Know-how Know-how

TechnicalTechnical ManagerialManagerial Human relationsHuman relations

Problem SolvingProblem Solving Thinking environmentThinking environment Thinking challengeThinking challenge

AccountabilityAccountability Freedom to actFreedom to act MagnitudeMagnitude ImpactImpact

Compensable factors need to tie to the Compensable factors need to tie to the organizational strategyorganizational strategy

Job analysis can help in deciding Job analysis can help in deciding compensable factorscompensable factors

Determines what factors important for each work Determines what factors important for each work group group

Include enough factors to establish a value Include enough factors to establish a value difference, too few factors difficult to gauge difference, too few factors difficult to gauge different value of job, too many different value of job, too many administratively burdensomeadministratively burdensome

Compensable Factors as Compensable Factors as Defined by Equal Pay Act Defined by Equal Pay Act

19631963 Established generic factors as key criteria Established generic factors as key criteria

for determining whether jobs are for determining whether jobs are substantially equal and serve as generic substantially equal and serve as generic compensable factorscompensable factors

SkillSkill EffortEffort ResponsibilityResponsibility Working conditionsWorking conditions

Elements Included Under Elements Included Under Skill FactorSkill Factor

Experience – performance of jobExperience – performance of job Knowledge – education or minimum knowledge Knowledge – education or minimum knowledge

needed to perform jobneeded to perform job Manual dexterity – specific movements Manual dexterity – specific movements Analytical abilities – analyze, decipher or explore Analytical abilities – analyze, decipher or explore

other possibilitiesother possibilities Creativity Creativity Communications – Verbal or WrittenCommunications – Verbal or Written Complexity of job –overall use of specific skills to Complexity of job –overall use of specific skills to

perform the jobperform the job

Case Study 2Case Study 2

Read case study 2 on pages 448-449 and Read case study 2 on pages 448-449 and discuss the answers to the questions in discuss the answers to the questions in groups of 4 - 5.groups of 4 - 5.

Theory Behind Theory Behind CompensationCompensation

Equity TheoryEquity Theory Comparing inputs and outputs of a similar co-workerComparing inputs and outputs of a similar co-worker Perceived inequity affects employee effortPerceived inequity affects employee effort

Expectancy TheoryExpectancy Theory People are motivated by intrinsic and extrinsic People are motivated by intrinsic and extrinsic

outcomes they desire.outcomes they desire. People will only be motivated if outcome is possible.People will only be motivated if outcome is possible. People will only be motivated if outcome is People will only be motivated if outcome is

contingent.contingent.

Relationship between Pay Equity and Motivation

Relationship between Pay Equity and Motivation

Pay-for-Performance and Pay-for-Performance and Expectancy TheoryExpectancy Theory

Common Strategic Common Strategic Compensation GoalsCompensation Goals

Reward employees’ past performanceReward employees’ past performance

Remain competitive in the labor marketRemain competitive in the labor market

Maintain salary equity among employeesMaintain salary equity among employees

Mesh employees’ future performance with Mesh employees’ future performance with organizational goalsorganizational goals

Control compensation budgetControl compensation budget

Attract new employeesAttract new employees

Reduce unnecessary turnoverReduce unnecessary turnover

External Factors for Pricing External Factors for Pricing JobsJobs

What Determines Pay?What Determines Pay? Company FactorsCompany Factors

StrategyStrategy Value of a jobValue of a job Employee’s relative worthEmployee’s relative worth Ability to payAbility to pay

External FactorsExternal Factors Labor market conditions (unemployment)Labor market conditions (unemployment) Cost of living and local wage ratesCost of living and local wage rates UnionsUnions Legal requirementsLegal requirements

Foundation for defining your Foundation for defining your market and competitive position.market and competitive position.

Compensation Philosophy

Compensation philosophy:We use an external market-referenced approach to attracting and retaining top candidates in Southeast Michigan. We pursue all avenues to get what we want; no company is safe from our recruiting efforts. We strive to lead the market and pay more than the going rate to our employees based on demonstrated skill and performance– our money grows on trees.

•What is the hiring and retention strategy?• What is the labor market?• What is the market position?

Market-PricingMarket-Pricing

Market Pricing – the process of analyzing Market Pricing – the process of analyzing external salary survey data to establish external salary survey data to establish the worth of jobs as represented by the the worth of jobs as represented by the data.data.

Some form of market pricing is used by Some form of market pricing is used by more than 80 percent of companiesmore than 80 percent of companies

How do you Learn Market How do you Learn Market Price?Price?

Outside Sources of DataOutside Sources of Data Bureau of Labor Statistics (BLS)Bureau of Labor Statistics (BLS)

National Compensation SurveyNational Compensation Survey State and local wage surveysState and local wage surveys Online survey dataOnline survey data Purchase dataPurchase data

Problems with SurveysProblems with Surveys They are not always compatible They are not always compatible

with the user’s jobswith the user’s jobs The user cannot specify what The user cannot specify what

specific data to collect.specific data to collect.

Collecting Survey Data Collecting Survey Data Conducting Employer-initiated SurveysConducting Employer-initiated Surveys

Select key jobs.Select key jobs.

Determine relevant labor market.Determine relevant labor market.

Select organizations.Select organizations.

Decide on information to collect: wages/ Decide on information to collect: wages/ benefits/ pay policies.benefits/ pay policies.

Compile data received.Compile data received.

Determine wage structure and benefits to pay.Determine wage structure and benefits to pay.

Characteristics of Key JobsCharacteristics of Key JobsKey (Benchmark) JobsKey (Benchmark) Jobs

Jobs that are important for wage-setting Jobs that are important for wage-setting purposes and are widely known in the labor purposes and are widely known in the labor market. market.

Characteristics of Key JobsCharacteristics of Key Jobs

Characteristics of Key JobsCharacteristics of Key JobsKey (Benchmark) JobsKey (Benchmark) Jobs

Jobs that are important for wage-setting purposes Jobs that are important for wage-setting purposes and are widely known in the labor market. and are widely known in the labor market.

Characteristics of Key JobsCharacteristics of Key Jobs1.1. They are important to both the employees They are important to both the employees

and the organization.and the organization.

2.2. They contain a large number of positions.They contain a large number of positions.

3.3. They have relatively stable job content.They have relatively stable job content.

4.4. They have the same job content across many They have the same job content across many organizations.organizations.

5.5. They are acceptable to employees, management, They are acceptable to employees, management, and labor as appropriate for pay comparisons.and labor as appropriate for pay comparisons.

Taking accurate measurements Taking accurate measurements based on the foundation createdbased on the foundation created

Data Analysis

•Target - Pay more than the going rate

The Median or 50th percentile is generally considered to be the going rate of pay for the position

•Paying more than the going rate might could mean using the 75th percentile for competitive positioning

Salary Ranges/BandsSalary Ranges/Bands Some BasicsSome Basics

Salary ranges have a minimum, midpoint, and Salary ranges have a minimum, midpoint, and maximum (some companies use quartiles or thirds)maximum (some companies use quartiles or thirds)

Difference between minimum and the maximum is Difference between minimum and the maximum is the “spread”the “spread”

Minimum often reflects starting salaryMinimum often reflects starting salary Reviewed and updated annuallyReviewed and updated annually Typically midpoint is geared to the marketTypically midpoint is geared to the market Employees above maximum “overpaid”, below Employees above maximum “overpaid”, below

minimum “underpaid”minimum “underpaid” Decide on Ranges versus Bands (broader)Decide on Ranges versus Bands (broader)

Broad BandsBroad Bands

Designed with wide range spreads (some Designed with wide range spreads (some even more than 100%)even more than 100%)

Midpoint differentials of 20-25 percentMidpoint differentials of 20-25 percent Provides flexibility to place group of jobs Provides flexibility to place group of jobs

within same band and eliminate the focus within same band and eliminate the focus of the job grade to promote lateral of the job grade to promote lateral movement – focus of career movement on movement – focus of career movement on development and skill breadth not job development and skill breadth not job gradegrade

Narrow Pay Ranges versus Broader Pay Grades/Bands

0 20,000 40,000 60,000 80,000 100,000 120,000

Salary

Junior

Mid

Journey

Senior

• Narrow pay ranges and more grades allow for more frequent promotions-and a greater perception of growth and advancement-than wider ranges and fewer grades. (WorldatWork)

Narrow Pay Ranges versus Broader Pay Grades/Bands

Junior

Mid

Journey

Senior

0 20,000 40,000 60,000 80,000 100,000 120,000

Salary

GS-1

GS-2

GS-3

GS-4

Junior

GS-5

GS-6

GS-7

GS-8

Mid

GS-9

GS-10

GS-11

GS12

Journey

GS-13

GS-14

GS-15

Senior

• Narrow pay ranges and more grades allow for more frequent promotions-and a greater perception of growth and advancement-than wider ranges and fewer grades. (WorldatWork)

Skill Based PaySkill Based Pay

Skill breadth – learning all the different Skill breadth – learning all the different positions in a teampositions in a team

Skill depth – increasing expertise as in an Skill depth – increasing expertise as in an apprenticeship ladderapprenticeship ladder

Vertical skills – management skills and Vertical skills – management skills and knowledge of the businessknowledge of the business

Common ApplicationsCommon Applications

Base-pay systemsBase-pay systems Non-exempt employeesNon-exempt employees Manufacturing sectorManufacturing sector Enhances employee involvement (such as Enhances employee involvement (such as

self-managed teams)self-managed teams)

Results Skill Based Pay Results Skill Based Pay Plans Plans

Study of 97 skill based pay plans found 66% were Study of 97 skill based pay plans found 66% were successful successful

Increased workforce flexibilityIncreased workforce flexibility Reduced staffing requirementsReduced staffing requirements Increased productivity (58% improvement in productivity in Increased productivity (58% improvement in productivity in

one plant)one plant)

Longitudinal study 61% firms continued using SBPLongitudinal study 61% firms continued using SBP Impressive results when using SBP but other factors Impressive results when using SBP but other factors

play a part:play a part: extensive trainingextensive training engagement of employees in business engagement of employees in business high level of communicationhigh level of communication

Example of Career ProgressionExample of Career Progression

Additional InformationAdditional Information

The Bases for CompensationThe Bases for Compensation

Hourly WorkHourly Work Work paid on an hourly basis.Work paid on an hourly basis.

PieceworkPiecework Work paid according to the number of units Work paid according to the number of units

produced.produced. Salary WorkersSalary Workers

Employees whose compensation is computed Employees whose compensation is computed on the basis of weekly, biweekly, or monthly on the basis of weekly, biweekly, or monthly pay periods.pay periods.

Legal IssuesLegal Issues

Fair Labor Standards Act (FLSA) of 1939Fair Labor Standards Act (FLSA) of 1939 Exempt vs. non-exemptExempt vs. non-exempt Minimum wageMinimum wage OvertimeOvertime

Legal Issues Legal Issues

Nonexempt EmployeesNonexempt Employees Employees covered by the overtime provisions Employees covered by the overtime provisions

of the Fair Labor Standards Act.of the Fair Labor Standards Act. They must be paid time and one-half their They must be paid time and one-half their

regular pay for all work performed after forty regular pay for all work performed after forty regular hours of work in a workweek.regular hours of work in a workweek.

Exempt EmployeesExempt Employees Employees who not covered in the overtime Employees who not covered in the overtime

provisions of the Fair Labor Standards Act.provisions of the Fair Labor Standards Act. Managers, supervisors, and white-collar Managers, supervisors, and white-collar

professional employees are exempted on the professional employees are exempted on the basis of their exercise of independent basis of their exercise of independent judgment and other criteria.judgment and other criteria.

Fair Labor Standards Act Fair Labor Standards Act (FSLA)(FSLA)

Passed in 1938 and amended many times

Nonexempt workers earn a minimum wage of not less than $5.85 an hour, effective July 24, 2007. ($6.55 per hour effective July 24, 2008; and $7.25 per hour effective July 24, 2009)

Overtime pay at not less than one and one-half times regular pay is required after 40 hours a workweek.

An employee must be at least 16 years old to work in most non-farm jobs and at least 18 to work in non-farm jobs declared hazardous by the Secretary of Labor.

Youths 14 and 15 years old may work outside school hours in various non-manufacturing, non-mining, non-hazardous jobs under certain conditions

FSLA – Special CasesFSLA – Special Cases Tipped employeesTipped employees Domestic service workers Domestic service workers Teachers and administrative personnel in elementary and secondary Teachers and administrative personnel in elementary and secondary

schoolsschools Outside sales employeesOutside sales employees Employees in certain computer-related occupations Employees in certain computer-related occupations Employees of certain seasonal amusement or recreational Employees of certain seasonal amusement or recreational

establishmentsestablishments Employees engaged in fishing operationsEmployees engaged in fishing operations Employees engaged in newspaper deliveryEmployees engaged in newspaper delivery Farm workers Farm workers Casual babysitters Casual babysitters Certain commissioned employees of retail or service establishmentsCertain commissioned employees of retail or service establishments Employees of railroads and air carriersEmployees of railroads and air carriers Taxi drivers Taxi drivers NursesNurses Announcers of certain non-metropolitan broadcasting stationsAnnouncers of certain non-metropolitan broadcasting stations Employees of motion picture theaters Employees of motion picture theaters Employees of certain bulk petroleum distributorsEmployees of certain bulk petroleum distributors Many others….Many others….

To be exempt from FLSA:To be exempt from FLSA: Salary Basis Test Salary Basis Test

Be paid a salaryBe paid a salary Salary Level TestSalary Level Test

Earn a minimum of $23,660/yr (old $8060/yr)Earn a minimum of $23,660/yr (old $8060/yr) White collar workers who earn more than $100k are White collar workers who earn more than $100k are

exemptexempt Blue collar workers “skilled trades” Blue collar workers “skilled trades”

““Duties” TestDuties” Test ““Administrative” Administrative” ““Professional” Professional” ““Executive”Executive” ““Outside Sales” Outside Sales” ““An employee who leads a team of other employees An employee who leads a team of other employees

assigned to complete major projects”assigned to complete major projects”

““Administrative Duties”Administrative Duties”

Whose Whose primary dutyprimary duty (50%) is the performance of (50%) is the performance of office or non-manual work directly related to theoffice or non-manual work directly related to the management or general business operationsmanagement or general business operations of of the employer or the the employer or the employer’s customersemployer’s customers; and; and

Whose primary duty includes the exercise of Whose primary duty includes the exercise of discretion and independent judgmentdiscretion and independent judgment with with respect to matters of significance.respect to matters of significance.

The Federal Wage Poster

Legal IssuesLegal Issues

Equal Pay Act of 1963Equal Pay Act of 1963 Men and women paid the same for equal jobs.Men and women paid the same for equal jobs. Exceptions: Seniority, performance, higher Exceptions: Seniority, performance, higher

production, shift or other qualitative production, shift or other qualitative differences.differences.

The Equal Pay Act: The The Equal Pay Act: The Jury’s Still OutJury’s Still Out

North America Salary Increase Survey North America Salary Increase Survey HighlightsHighlights

Average Increase

Top Exe

c

Mid Mgmt

Prof/Sup

Admin

United States

2009 1.4% 1.8% 1.8% 1.9%

United States

2010 proj. 2.6% 2.7% 2.7% 2.6%

Hewitt and Associates