© 2007 Thomson/South-Western.© 2007 Thomson/South-Western.All rights reserved.All rights reserved.
PowerPoint Presentation by Charlie CookPowerPoint Presentation by Charlie CookThe University of West AlabamaThe University of West Alabama
Managing Human ResourcesManaging Human ResourcesBohlander Bohlander •• SnellSnell 1414thth edition edition
Managing Managing CompensationCompensation
Human Resource Human Resource ManagementManagementSnell • BohlanderSnell • Bohlander
© 2007 Thomson/South-Western. All rights reserved. 9–2
ObjectivesAfter studying this chapter, you should be able to:
1. Explain employer concerns in developing a strategic compensation program.
2. Indicate the various factors that influence the setting of wages.
3. Differentiate the mechanics of each of the major job evaluation systems.
4. Explain the purpose of a wage survey.
5. Define the wage curve, pay grades, and rate ranges as parts of the compensation structure.
© 2007 Thomson/South-Western. All rights reserved. 9–3
Objectives (cont’d)After studying this chapter, you should be able to:
6. Identify the major provisions of the federal laws affecting compensation.
7. Discuss the current issues of equal pay for comparable worth, pay compression, and low wage budgets.
© 2007 Thomson/South-Western. All rights reserved. 9–4
Compensation
• Pay is a statement of an employee’s worth by an employer.
• Pay is a perception of worth by an employee.
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Total CompensationTotal CompensationTotal CompensationTotal Compensation
DirectDirectDirectDirect IndirectIndirectIndirectIndirect
BonusesBonusesBonusesBonuses
GainsharingGainsharingGainsharingGainsharingSecurity Plans• Pensions
Security Plans• Pensions
Employee Services• Educational assistance• Recreational programs
Employee Services• Educational assistance• Recreational programs
CommissionsCommissionsCommissionsCommissions
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
© 2007 Thomson/South-Western. All rights reserved. 9–6
Compensation Management and Other HRM Functions
Pay rates affect selectivityPay rates affect selectivityPay rates affect selectivityPay rates affect selectivity SelectionSelectionSelectionSelection Selection standards affect Selection standards affect level of pay requiredlevel of pay required
Selection standards affect Selection standards affect level of pay requiredlevel of pay required
Pay can motivate trainingPay can motivate trainingPay can motivate trainingPay can motivate training Training and Training and DevelopmentDevelopment
Training and Training and DevelopmentDevelopment
Increased knowledge leads Increased knowledge leads to higher payto higher pay
Increased knowledge leads Increased knowledge leads to higher payto higher pay
Training and development may Training and development may lead to higher paylead to higher pay
Training and development may Training and development may lead to higher paylead to higher pay
Compensation Compensation ManagementManagement
Compensation Compensation ManagementManagement
A basis for determining A basis for determining employee’s rate of payemployee’s rate of pay
A basis for determining A basis for determining employee’s rate of payemployee’s rate of pay
Aid or impair recruitmentAid or impair recruitmentAid or impair recruitmentAid or impair recruitment RecruitmentRecruitmentRecruitmentRecruitment Supply of applicants Supply of applicants affects wage ratesaffects wage rates
Supply of applicants Supply of applicants affects wage ratesaffects wage rates
Low pay encourages Low pay encourages unionizationunionization
Low pay encourages Low pay encourages unionizationunionization Labor RelationsLabor RelationsLabor RelationsLabor Relations Pay rates determined Pay rates determined
through negotiationthrough negotiation
Pay rates determined Pay rates determined through negotiationthrough negotiation
© 2007 Thomson/South-Western. All rights reserved. 9–7
Strategic Compensation Planning
• Strategic Compensation PlanningLinks the compensation of employees to the mission,
objectives, philosophies, and culture of the organization.
Serves to mesh the monetary payments made to employees with specific functions of the HR program in establishing a pay-for-performance standard.
Seeks to motivate employees through compensation.
© 2007 Thomson/South-Western. All rights reserved. 9–8
Linking Compensation to Organizational Objectives• Value-added Compensation
Evaluating the individual components of the compensation program (pay and benefits) to see if they advance the needs of employees and the goals of the organization. “How does this compensation practice benefit the
organization?” “Does the benefit offset the administrative cost?”
© 2007 Thomson/South-Western. All rights reserved. 9–9
Common Strategic Compensation Goals1. 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
© 2007 Thomson/South-Western. All rights reserved. 9–10
Strategic Compensation Policy Concerns1. The rate of pay within the organization and whether it is to be
above, below, or at the prevailing community rate.
2. The ability of the pay program to gain employee acceptance while motivating employees to perform to the best of their abilities.
3. The pay level at which employees may be recruited and the pay differential between new and more senior employees.
4. The intervals at which pay raises are to be granted and the extent to which merit and/or seniority will influence the raises.
5. The pay levels needed to facilitate the achievement of a sound financial position in relation to the products or services offered.
© 2007 Thomson/South-Western. All rights reserved. 9–11
The Pay-for-Performance Standard
• Pay-for-Performance StandardThe standard by which managers tie compensation to
employee effort and performance.Refers to a wide range of compensation options,
including merit-based pay, bonuses, salary commissions, job and pay banding, team/ group incentives, and various gainsharing programs.
© 2007 Thomson/South-Western. All rights reserved. 9–12
Designing a Pay-for-Performance System• How will performance be measured?• How will monies to be allocated for
compensation increases.• Which employees will be eligible?• How will payouts be made?• How often will payouts occur?• How large will the payouts be?• Will employees perceive the rewards as valued?
© 2007 Thomson/South-Western. All rights reserved. 9–13
Motivating Employees through Compensation• Pay Equity (also Distributive Fairness)
An employee’s perception that compensation received is equal to the value of the work performed.
A motivation theory that explains how people respond to situations in which they feel they have received less (or more) than they deserve. Individuals form a ratio of their inputs to outcomes in
their job and then compare the value of that ratio with the value of the ratio for other individuals in similar jobs.
© 2007 Thomson/South-Western. All rights reserved. 9–14
Expectancy Theory and Pay
• Expectancy TheoryA theory of motivation that holds that employees
should exert greater work effort if they have reason to expect that it will result in a reward that they value.
Employees also must believe that good performance is valued by their employer and will result in their receiving the expected reward.
© 2007 Thomson/South-Western. All rights reserved. 9–15
Motivating Employees through Compensation
• Pay SecrecyAn organizational policy prohibiting employees from
revealing their compensation information to anyone. Creates misperceptions and distrust of compensation
fairness and pay-for-performance standards.
Arguments against secrecy: Knowledge of base pay is the strongest predictor of pay
satisfaction, which is highly associated with work engagement
Knowledge of base pay more strongly predicts pay satisfaction than does the actual amount of pay received by employees.
© 2007 Thomson/South-Western. All rights reserved. 9–16
The Bases for Compensation
• Hourly WorkWork paid on an hourly basis.
• PieceworkWork paid according to the number of units produced.
• Salary WorkersEmployees whose compensation is computed on the
basis of weekly, biweekly, or monthly pay periods.
© 2007 Thomson/South-Western. All rights reserved. 9–17
The Bases for Compensation (cont’d)
• Nonexempt EmployeesEmployees covered by the overtime provisions of the
Fair Labor Standards Act.They must be paid time and one-half their regular pay
for all work performed after forty regular hours of work in a workweek.
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The Bases for Compensation (cont’d)
• Exempt employeesEmployees who not covered in the overtime
provisions of the Fair Labor Standards Act.Managers, supervisors, and white-collar professional
employees are exempted on the basis of their exercise of independent judgment and other criteria.
© 2007 Thomson/South-Western. All rights reserved. 9–19
The Wage Mix—Internal Factors
• Employer’s Compensation StrategySetting organization compensation policy to lead, lag,
or match competitors’ pay.
• Worth of a JobEstablishing the internal wage relationship among
jobs and skill levels.
• Employee’s Relative WorthRewarding individual employee performance
• Employer’s Ability-to-Pay Having the resources and profits to pay employees.
© 2007 Thomson/South-Western. All rights reserved. 9–20
The Wage Mix—External Factors
• Labor Market ConditionsAvailability and quality of potential employees is
affected by economic conditions, government regulations and policies, and the presence of unions.
• Area Wage RatesA firm’s formal wage structure of rates is influenced
by those being paid by other area employers for comparable jobs.
© 2007 Thomson/South-Western. All rights reserved. 9–21
The Wage Mix—External Factors
• Cost of LivingLocal housing and environmental conditions can
cause wide variations in the cost of living for employees.
Inflation can require that compensation rates be adjusted upward periodically to help employees maintain their purchasing power.
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The Wage Mix—External Factors
• Collective BargainingEscalator clauses in labor agreements provide for
quarterly upward cost-of-living wage adjustments for inflation to protect employees’ purchasing power.
Unions bargain for real wage increases that raise the standard of living for their members.
Real wages are increases larger than rises in the consumer price index; that is, the real earning power of wages.
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Consumer Price Index (CPI)• A measure of the average change in prices over time in a
fixed “market basket” of goods and services
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Job Evaluation Systems
• Job EvaluationThe systematic process of determining the relative
worth of jobs in order to establish which jobs should be paid more than others within an organization.
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Different Job Evaluation Systems
JOB AS JOB PARTSBASIS FOR A WHOLE OR FACTORSCOMPARISON (NONQUANTITATIVE) (QUANTITATIVE)
Job vs. job Job ranking Factor comparison system system
Job vs. scale Job classification Point system system
SCOPE OF COMPARISON
© 2007 Thomson/South-Western. All rights reserved. 9–26
Job Evaluation Systems
• Job Ranking SystemOldest system of job evaluation by which jobs are
arrayed on the basis of their relative worth.Disadvantages
Does not provide a precise measure of each job’s worth.
Final job rankings indicate the relative importance of jobs, not extent of differences between jobs.
Method can used to consider only a reasonably small number of jobs.
© 2007 Thomson/South-Western. All rights reserved. 9–27
Job Evaluation Systems
• Job Classification systemA system of job evaluation in which jobs are classified
and grouped according to a series of predetermined wage grades.
Successive grades require increasing amounts of job responsibility, skill, knowledge, ability, or other factors selected to compare jobs.
© 2007 Thomson/South-Western. All rights reserved. 9–28
Point System
• Point SystemA quantitative job evaluation procedure that
determines the relative value of a job by the total points assigned to it.
Permits jobs to be evaluated quantitatively on the basis of factors or elements—compensable factors—that constitute the job.
• The Point ManualA handbook that contains a description of the
compensable factors and the degrees to which these factors may exist within the jobs.
© 2007 Thomson/South-Western. All rights reserved. 9–29
Work Valuation Methods
• Work Valuation
A job evaluation system that seeks to measure a job’s worth through its value to the organization.
Jobs are be valued relative to financial, operational, or customer service objectives of the organization. Considers that work should be valued relative to the
business goals of the organization rather than by an internally applied point-factor job evaluation system.
Work valuation serves to direct compensation dollars to the type of work pivotal to organizational goals.
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Job Evaluation for Management Positions• Hay Profile Method
Job evaluation technique using three factors—knowledge, mental activity, and accountability—to evaluate executive and managerial positions.
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The Compensation Structure
• Wage and Salary surveyA survey of the wages paid to employees of other
employers in the surveying organization’s relevant labor market.
Helps maintain internal and external pay equity for employees.
• Labor MarketThe area from which employers obtain certain types
of workers.
© 2007 Thomson/South-Western. All rights reserved. 9–32
Collecting Survey Data
• Outside Sources of DataBureau of Labor Statistics (BLS)
National Compensation Survey
State and local wage surveysOnline survey data
• Problems with SurveysThey are not always compatible
with the user’s jobsThe user cannot specify what
specific data to collect.
© 2007 Thomson/South-Western. All rights reserved. 9–33
Collecting Survey Data (cont’d)
• Conducting Employer-initiated Surveys
Select key jobs.
Determine relevant labor market.
Select organizations.
Decide on information to collect: wages/ benefits/ pay policies.
Compile data received.
Determine wage structure and benefits to pay.
© 2007 Thomson/South-Western. All rights reserved. 9–34
Characteristics of Key Jobs
• Key Jobs Jobs that are important for wage-setting purposes
and are widely known in the labor market.
• Characteristics of Key Jobs1. They are important to employees and the organization.
2. They contain a large number of positions.
3. They have relatively stable job content.
4. They have the same job content across many organizations.
5. They are acceptable to employees, management, and labor as appropriate for pay comparisons.
© 2007 Thomson/South-Western. All rights reserved. 9–35
The Wage Curve
• Wage Curve A curve in a scattergram representing the relationship
between relative worth of jobs and wage rates.
• Pay Grades Groups of jobs within a particular class that are paid the
same rate.
• Rate Ranges A range of rates for each pay grade that may be the same
for each grade or proportionately greater for each successive grade.
• Red Circle Rates Payment rates above the maximum of the pay range.
© 2007 Thomson/South-Western. All rights reserved. 9–36
The Wage Curve (cont’d)
• Competence-based Pay, (also skill-based pay or knowledge-based pay)Compensation for the different skills or increased
knowledge employees possess rather than for the job they hold in a designated job category. Greater productivity, increased employee learning and
commitment to work, improved staffing flexibility to meet production or service demands, and the reduced effects of absenteeism and turnover,
• BroadbandingCollapses many traditional salary grades into a few
wide salary bands.
© 2007 Thomson/South-Western. All rights reserved. 9–37
Davis-Bacon Act1931Davis-Bacon Act1931
Required minimum wage, prevailing wage Required minimum wage, prevailing wage rates, 1rates, 1½½ overtime premium payments by overtime premium payments by federal contractors.federal contractors.
Required minimum wage, prevailing wage Required minimum wage, prevailing wage rates, 1rates, 1½½ overtime premium payments by overtime premium payments by federal contractors.federal contractors.
Walsh-Healy Act1936Walsh-Healy Act1936
Required overtime payments after 8 daily Required overtime payments after 8 daily or 40 regular work hours for workers on or 40 regular work hours for workers on federal contracts.federal contracts.
Required overtime payments after 8 daily Required overtime payments after 8 daily or 40 regular work hours for workers on or 40 regular work hours for workers on federal contracts.federal contracts.
Fair Labor Standards Act (FLSA) 1938(as Amended)
Fair Labor Standards Act (FLSA) 1938(as Amended)
Interstate commerce clause used to Interstate commerce clause used to cover workers except agricultural and cover workers except agricultural and exempted (managerial) employees, child exempted (managerial) employees, child labor (under 16) is prohibited.labor (under 16) is prohibited.
Interstate commerce clause used to Interstate commerce clause used to cover workers except agricultural and cover workers except agricultural and exempted (managerial) employees, child exempted (managerial) employees, child labor (under 16) is prohibited.labor (under 16) is prohibited.
Government Regulation of Compensation(Federal Wage Laws)
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Highlights in HRM 5
The Federal Minimum Wage Poster
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Exemption from FLSA Overtime Provisions• Fair Pay Rules (2004)
Were implemented to strengthen overtime protections and redefine the job requirements for exempt groups of employees.
Overtime must be paid to employees earning less than $455 a week, or $26,660 annually.
A new “standards test” is used to determine whether employees who earn between $26,660 and $100,000 annually are excluded from overtime requirements.
Administrative personnel to be exempt must have primary duties that include the exercise of discretion and independent judgment with respect to matters of significance.
© 2007 Thomson/South-Western. All rights reserved. 9–40
Significant Compensation Issues
• Equal Pay for Comparable WorthThe concept that male and female jobs that are
dissimilar, but equal in terms of value or worth to the employer, should be paid the same.
• Wage-Rate CompressionCompression of pay differentials between job classes,
particularly the pay differentials between hourly workers and their managers.
• Low-Salary BudgetsCurrent wage budgets reflect the general trend
toward tight compensation cost controls.
© 2007 Thomson/South-Western. All rights reserved. 9–41
Reducing Wage-Rate Compression
• Give larger compensation increases to more-senior employees.
• Emphasize pay-for-performance and reward meritworthy employees.
• Limit the hiring of new applicants seeking exorbitant salaries.
• Design the pay structure to allow a wide spread between hourly and supervisory jobs or between new hires and senior employees.
• Provide equity adjustments for selected employees hardest hit by pay compression.