Compensation Strategiesand Practices

Objectives of an Effective Compensation System:

- Legal compliance with all appropriate laws and regulations- Cost effectiveness for the organization- Internal, external, and individual equity for employees- Performance enhancement for the organization

Compensation Systems

Nature of Compensation

Types of Rewards

IntrinsicIntangible, psychological and social effects of compensation

ExtrinsicTangible, monetary and nonmonetary effects of compensation

Components of A Compensation Program

Direct Compensation

Compensation Type

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

Wages Payments calculated on the amount of time worked.

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

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

Benefit An indirect reward given to an employee or group of employees as a part of organizational membership.

Typical Division of HR Responsibilities: Compensation

Continuum of Compensation Philosophies

Compensation Approaches

Decisions About Compensation Levels

Compensation Strategies

Above-Market Paying for higher qualified, more productive workers.

Middle-Market Attempting to balance of employer costs and need to attract and retain employees.

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

Individual vs. Team Rewards

Distribute variable rewards at the team levelDistribute variable rewards at the team levelDistribute variable rewards at the team levelDistribute variable rewards at the team level

Make system simple and understandable.Make system simple and understandable.Make system simple and understandable.Make system simple and understandable.

Using Team-Based Reward SystemsUsing Team-Based Reward SystemsUsing Team-Based Reward SystemsUsing Team-Based Reward Systems

Use skill-based pay for the base.Use skill-based pay for the base.Use skill-based pay for the base.Use skill-based pay for the base.

Use variable pay based on business entity performanceUse variable pay based on business entity performanceUse variable pay based on business entity performanceUse variable pay based on business entity performance

Maintain a high degree of employee involvementMaintain a high degree of employee involvementMaintain a high degree of employee involvementMaintain a high degree of employee involvement

Perceptions of Pay Fairness

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

Procedural Justice The perceived fairness of the process and procedures use to make decisions about employees

Distributive Justice The perceived fairness in the distribution of outcomes.

Pay Openness The degree of openness or secrecy that an organization allows regarding its pay system.

External Equity The perception that the organization provides employees with compensation that comparable to the compensation of employees with similar jobs in other organizations.

Compensation Administration Process

Compensation Administration Process

Job Evaluation

Job EvaluationThe systematic determination of the

relative worth of jobs within an organization.

Benchmark JobA job found in many organizations and

performed by several individuals who have similar duties that are relatively stable and require similar KSAs.

Job Evaluation Techniques1. Two general typesa.Market-based evaluationsb. Job-content evaluations

2.Market-based evaluations a. Use market data to determine differences in job worthb. Allow companies to assign pay rates that are neither too low nor too

high relative to the marketc. Compensation professionals use compensation surveys to

determine the prevailing pay rates in the relevant job markets

3.Job-content evaluations a. Emphasize the company’s internal value system to establish a

hierarchy of internal job worth based on each job’s role in the company strategy

b. Compensation professionals review preliminary structures for consistency with market pay rates on a representative sample of jobs (benchmark jobs)

c. Must balance external market considerations with internal consistency objectives

Job Evaluation

FactorFactorComparisonComparison

FactorFactorComparisonComparison

RankingRankingRankingRanking ClassificationClassificationClassificationClassification

PointPointMethodMethod

PointPointMethodMethod

Job Job Evaluation Evaluation MethodsMethods

Job Job Evaluation Evaluation MethodsMethods

Ranking MethodSimplest methodRaters examine description of

each jobJobs arranged in order according

to valueMust first conduct job analysis

and write job description

Classification MethodDefine number of classes or grades to

describe group of jobsDescription of each class of job is writtenCompare job description with class

descriptionClass descriptions reflect differences of job

groups at various difficulty levelsEach job is put into a grade according to the

class description it best matchesClass description that most closely agrees

with job description determines job classification

The point methodA quantitative method that assigns numerical values to

compensable factors which are summed up to indicate the overall value of the job

The relative worth of the job is established by the magnitude of its overall numeric value

Factor Comparison Method

A quantitative and complicated methodCombination of ranking and pin point

methodDetermine benchmark job in an organizationSelect compensable factorsRank all benchmark job factors by factorsAssign monitory value to each factor by

comparing jobs to market rates for benchmark

Evaluate all other jobs in the organization by comparing with the benchmark jobs

Pay Surveys A pay survey is a collection of data on compensation rates for

workers performing similar jobs in other organizations. An employer may use surveys conducted by other

organizations, or it may decide to conduct its own survey.

USING PREPARED PAY SURVEYS When using surveys from other sources, it is important to use

them properly. Some questions to be addressed before using a survey are: Participants: Is the survey a realistic sample of those employers

with whom the organization competes for employees? Broad-based: Is the survey balanced so that organizations of

varying sizes, industries, and locales are included? Timeliness: How current is the data (determined by the date

when the survey was conducted)? Methodology: How established is the survey, and how qualified

are those who conducted it? Job matches: Does it contain job summaries so that appropriate

matches to organization job descriptions can be made?

Developing Pay Surveys

Select Employers with Comparable JobsSelect Employers with Comparable JobsSelect Employers with Comparable JobsSelect Employers with Comparable Jobs

Determine Jobs to be SurveyedDetermine Jobs to be SurveyedDetermine Jobs to be SurveyedDetermine Jobs to be Surveyed

Decide What Information Is NeededDecide What Information Is NeededDecide What Information Is NeededDecide What Information Is Needed

Conduct SurveyConduct SurveyConduct SurveyConduct Survey

Pay StructuresPay Structures

Market LineThe line on a graph showing the relationship between the job value, as determined by job evaluation points, and pay survey rates.

Common Pay StructuresHourly and salariedOffice, plant, technical, professional, managerialClerical, information technology, professional, supervisory, management, and executive

Establishing Pay Structures

Establishing Pay Structures

Pay Structures (cont’d)

Pay GradesA grouping of individual jobs having approximately the same job worth.

BroadbandingThe practice of using fewer pay grades having broader pay ranges that in traditional systems.

Benefits- Encourages horizontal movement of employees- Is consistent with trend towards flatter organizations- Creates a more flexible organization- Encourages competency development- Emphasizes career development

Traditional Pay Structure vs. Broadbanding

Pay Scattergram

Example of Pay Grades and Pay Ranges

Example of Pay Grades and Pay Ranges

Pay Rate IssuesRates Out of Range

◦ Red-Circled Employees An incumbent (current jobholder) who is

paid above the range set for the job.◦ Green-Circled Employees

An incumbent who is paid below the range set for the job.

Pay Compression◦ A situation in which pay differences among

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

Issues Involving Pay IncreasesSeniority

◦ Time spent in an organization or on a particular job.

◦ Used to determine eligibility for organizational rewards and benefits.

Maturity Curve◦ A curve that depicts the relationship

between experience and pay rates.◦ Assumption is that as experience increases,

proficiency and performance increase.

Issues Involving Pay IncreasesCost-of-Living Adjustments (COLA)

◦ A percentage increase in wages that allows employees to maintain the same real wages in a period of economic inflation.

◦ Adjustments are tied to changes in an economic measure (e.g., the Consumer Price Index).

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

pay increase.◦ Lump-sum payments do not increase base

wages

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