© 2008 by Prentice Hall9-1 Human Resource Management 10 th Edition Chapter 9 DIRECT FINANCIAL COMPENSATION.

© 2008 by Prentice Hall 9-1

Human Resource Management 10th EditionChapter 9

DIRECT FINANCIAL COMPENSATION


HRM in Action: Are Top Executives Paid Too Much?

• Peter Drucker recommends 20-to-1 salary ratio between senior executives and rank-and-file white-collar workers

• Ratio of chief executives’ compensation to the pay of average production worker jumped to 431-to-1

• 90 percent of investors think that executives are overpaid


Compensation: An Overview

• Compensation - Total of all rewards provided employees in return for services

• Direct financial compensation - Pay received in form of wages, salaries, bonuses, and commissions

• Indirect financial compensation (benefits) - All financial rewards not included in direct compensation

• Nonfinancial compensation - Satisfaction person receives from job itself or from psychological and/or physical environment in which person works


Components of Total Compensation Program External EnvironmentInternal Environment

Compensation

Direct

Wages Salaries Commissions Bonuses

Indirect (Benefits)

Legally Required Benefits Social Security Unemployment Compensation Workers’ Compensation Family & Medical Leave

Voluntary Benefits Payment for Time Not Worked Health Care Life Insurance Retirement Plans Disability Protection Employee Stock Option Plans Supplemental Unemployment

Benefits (SUB) Employee ServicesPremium PayCustomized Benefit Plans

The Job

Skill Variety Task Identify Task Significance Autonomy Feedback

Job EnvironmentSound Policies Capable Managers Competent Employees Congenial Coworkers Suitable Status Symbols Working ConditionsWorkplace Flexibility Flextime Compressed Workweek Job Sharing Customized Benefit Plans Telecommuting Part-time WorkMore Work, Fewer Hours

Financial Nonfinancial


Equity Theory

• Motivation theory that people assess their performance and attitudes by comparing both their contribution to work and benefits they derive from it to contributions and benefits of comparison others whom they select—and who in reality may or may not be like them


Equity in Financial Compensation

• Financial equity - Perception of fair pay treatment for employees

• External equity - Employees are paid comparably to workers who perform similar jobs in other firms

• Internal equity - Employees are paid according to relative value of jobs within same organization


Equity in Financial Compensation (Cont.)

• Employee equity - Individuals performing similar jobs for same firm are paid according to factors unique to employee, such as performance level or seniority

• Team equity - More productive teams are rewarded more than less productive groups


Primary Determinants of Direct Financial Compensation Organization Compensation Policies Organizational Level Ability to Pay

Labor Market Compensation Surveys Expediency Cost of Living Labor Unions Economy Legislation

Employee Job Performance Skills Competencies Seniority Experience Organization Membership Potential Political Influence Luck

Job

Pricing

Direct Financial Compensation

Job Job Analysis Job Descriptions Job Evaluation


Organization as a Determinant of Direct Financial Compensation

• Compensation Policies

• Organizational Level

• Ability to Pay


Compensation Policies

• Pay leaders - Pay higher wages and salaries

• Market rate, or going rate - Pay what most employers pay for same job

• Pay followers - Pay below market rate because poor financial condition or believe do not require highly capable employees


Organizational Level

• Upper management often makes decisions to ensure consistency

• Extreme pressure to retain top performers may override desire to maintain consistency in pay structure


Ability to Pay

Organization’s assessment of ability to pay is important factor in determining pay levels


Labor Market as Determinant of Direct Financial Compensation

• Potential employees located within geographic area from which employees are recruited

• Pay for same jobs in different labor markets may vary considerably


Compensation Surveys

• What are other firms paying?

• Geographic area of survey

• Specific firms to contact

• Jobs to include


Expediency

• Managers in highly technical and specialized areas occasionally need to utilize nontraditional means to determine what constitutes competitive compensation for scarce talent and niche positions

• Need real-time information


Cost of Living

• When prices rise over a period of time and pay does not, real pay is actually lowered

• Some firms index pay increases to inflation rate


Labor Unions

• Mandatory collective bargaining between management and unions as “wages, hours, and other terms and conditions of employment.”

• Cost-of-living allowance has been disappearing


The Economy

• Affects financial compensation decisions

• Depressed economy generally increases labor supply

• Cost of living often rises as economy expands


Compensation Legislation

• Davis-Bacon Act of 1931

• Walsh-Healy Act of 1936

• Fair Labor Standards Act of 1938, as Amended


Davis-Bacon Act of 1931• First national law to deal

with minimum wages• Federal construction

contractors with projects over $2000 to pay at least prevailing wages in area

• Secretary of Labor sets the prevailing wage at union wage, regardless of what average wage is in affected locality


Walsh-Healy Act of 1936

• Companies with federal supply contracts exceeding $10,000 pay prevailing wages

• Requires 1½ times regular pay rate for hours over 8 per day or 40 per week


Fair Labor Standards Act of 1938, as Amended

• Most significant law affecting compensation

• Establishes minimum wage

• Requires overtime pay and record keeping

• Provides standards for child labor


Exempt and Nonexempt Employees

• Exempt employees - Categorized as executive, administrative, professional employees and outside salespersons

• Nonexempt employees - Those in jobs not conforming to above definition

• Most employees who earn less than $23,660 will be considered nonexempt no matter what their duties are


Job as Determinant of Direct Financial Compensation

• Job itself continues to be factor, especially in firms that have internal pay equity as primary consideration

• Organizations pay for value they attach to certain duties, responsibilities, and other job-related factors such as working conditions


Job Analysis and Job Descriptions

• Before organization can determine relative difficulty or value of jobs, must first define content

• Done by job analysis/job descriptions


Job Evaluation

• Firm determines relative value of one job in relation to another

• Ranking

• Classification

• Factor comparison

• Point

• Hay guide chart-profile method


Ranking Method

• Simplest method

• Raters examine description of each job

• Jobs arranged in order according to value


Classification Method

• Define number of classes or grades to describe group of jobs

• Compare job description with class description

• Class description that most closely agrees with job description determines job classification


Factor Comparison Method

• Five universal job factors - Mental requirements, skills, physical requirements, responsibilities, and working conditions

• Raters need not keep entire job in mind as they evaluate; instead, they make decisions on separate aspects or factors of job


Point Method

• Numerical values assigned to specific job components

• Sum of values gives quantitative assessment of job’s relative worth

• Job factors selected according to nature of specific group of jobs


Procedure for Establishing Point Method of Job Evaluation

Select Job Cluster

Identify Compensable Factors

Determine Degrees and Define Each Compensable Factors

Determine Factor Weights

Determine Factor Point Values

Validate Point System


A Point Method Example

1. Select Job Cluster - Assume we are going to develop point system for the administrative job cluster

2. Identify Compensable Factors - Assume compensable factors identified are education, job knowledge, contacts, complexity of duties, and initiative


A Point Method Example (Cont.)

3. Determine Degrees and Define Each Compensable Factors - In administrative job cluster, Education, Job Knowledge, and Initiative have been determined to have five degrees; Contacts has four; and Complexity of Duties has three



FACTOR: CONTACTSLevel (Degrees)

PointsIV Usual purposes of contacts are to discuss problems and possible 90

solutions, to secure cooperation or coordination of efforts, and to get agreement and action; more than ordinary tact and persuasiveness required.

III Usual purposes of contacts are to exchange information and settle 66specific problems encountered in course of daily work.

II Contacts may be repetitive but usually are brief with little or no 42continuity.

I Contacts normally extend to persons in immediate work unit only.18



FACTOR: COMPLEXITY OF DUTIES

III Performs work where only general methods are available. Independent 85action and judgment are required regularly to analyze fact, evaluate situations, draw conclusions, make decision, and take or recommend action.

II Performs duties working from standard procedures or generally 51understood methods. Some independent action and judgment are required to decide what to do, determine permissible variations from standard procedures, review facts in situations, and determine action to be taken, within limits prescribed.

I Little or no independent action or judgment. Duties are so standardized 17 and simple as to involve little choice as to how to do them.



4. Determine Factor Weights - Assume the committee believes that education is quite important for administrative job cluster and sets the weight for education at 35%. The weights of other four factors were determined by the committee to be: Job Knowledge—25 Contacts—18 Complexity of Duties—17

Initiative—5 The percent total is 100%



5. Determine Factor Point Values - Committee determines total number of points for the plan. Number may vary, but 500 or 1,000 points may work well. Committee has determined that a 500 point system will work.


Job Evaluation Worksheet (500-Point System)

Degree of Factor

Job Factor Weight 1 2 3 4 5

Education 35% 35 70 105 140 175

Job Knowledge 25% 25 50 75 100 125

Contacts 18% 18 42 66 90

Complexity of Duties 17% 17 51 85

Initiative 5% 5 10 15 20 25



6. Validate Point System - Each committee member should take a random sample of jobs within chosen job cluster and calculate weights for each job selected

Point total for Administrative 2 job is determined to be 239 points


Job Evaluation Worksheet for Administrative 2 Position

Degree of Factor

Job Factor Weight 1 2 3 4 5

Education 35% 35 70 105 140 175

Job Knowledge 25% 25 50 75 100 125

Contacts 18% 18 42 66 90

Complexity of Duties 17% 17 51 85

Initiative 5% 5 10 15 20 25

Total Job Value 239


Illustration of Arithmetic and Geometric Progression

Job Factor 1 2 3 4

Experience Required 1 year 3 years 5 years 7 years

Degree of Factor

(-------------------- Arithmetic Progression---------------------)

Degree of Factor

Job Factor 1 2 3 4 Experience Required 1 year 2 years 4 years 8 years (-------------------- Geometric Progression---------------------)


The Hay Guide Chart-Profile Method

• Refined version of the point method

• Know-how

• Problem Solving

• Accountability

• Additional compensable elements, such as working conditions


Job Pricing

• Placing dollar value on worth of job • Pay grades - Grouping of similar jobs to

simplify pricing jobs• Wage curve - Fitting of plotted points to

create smooth progression between pay grades

• Pay ranges - Minimum and maximum pay rate with enough variance between to allow for significant pay difference


Job Pricing (Cont.)

• Broadbanding - Collapses many pay grades into few wide bands to improve effectiveness

• Single rate system - Pay ranges not appropriate for some workplace conditions such as some assembly lines

• Adjusting pay rates - Overpaid and underpaid jobs


Scatter Diagram of Evaluated Jobs Illustrating Wage Curve, Pay Grades, and Pay Ranges

100 200 300 400 500

17.20

$19.80

18.50

15.90

14.60 14.00 13.30 12.90

12.00

Average Pay per Hour (Current Rates or Market Rates)

Wage Curve

Evaluated Points1 2 3 4 5

Pay Grades

1

2

3

4

5

Pay Ranges for Pay Grades

0- 99 1 $12.00 $13.30 $14.60 100-199 2 13.30 14.60 15.90 200-299 3 14.60 15.90 17.20 300-399 4 17.20

5 17.20 18.50 19.80

Evaluated Points Pay Grade Minimum Midpoint MaximumSummary


Broadbanding• Technique that collapses many pay

grades (salary grades) into few wide bands to improve organizational effectiveness

• Lateral employee development• Develop employee skills and

encourage team focus• Employee attention directed away

from vertical promotional opportunities


Broadbanding and Its Relationship to Traditional Pay Grades and Ranges

Ave

rage

Pay

Per

Hou

r Grade 5

Grade 4

Grade 1

Grade 2

Grade 3

Job WorthLow High

Band A

Band B


Employee as Determinant of Direct Financial Compensation

• Performance—Performance-based Pay• Skills—Skilled-based Pay

• Competencies—Competency-based Pay• Seniority

• Experience• Membership in the organization

• Potential• Political Influence

• Luck


Performance-Based Pay

• Merit pay - Pay increase given to employees based on level of performance as indicated in appraisal

• Variable Pay - Compensation based on performance• Bonus - Most common type of variable pay for

performance. One-time financial award based on productivity

• Spot bonuses - Relatively small, gifts to employees for outstanding work or effort

• Piecework - Employees paid for each unit they produce


Skill-Based Pay

Compensates on basis of job-related skills and knowledge

• Employees and departments benefit when employees obtain additional skills

• Appropriate where work tends to be routine and less varied

• Must provide adequate training opportunities or system becomes demotivator


Competency-Based Pay

• Rewards employees for capabilities they attain

• Competencies include skills but also involve other factors such as motives, values, attitudes, and self-concepts


Seniority

• Length of time employee has been associated with company, division, department, or job

• Labor unions tend to favor seniority


Experience

• Regardless of nature of job, very few factors have a more significant impact on performance than experience

• Dot-com world has changed attitude with regard to experience


Membership in Organization

• Components of individual financial compensation are given to employees regardless of particular job they perform or level of productivity

• Maintains high degree of stability in workforce and recognizes loyalty


Potential

• Organizations do pay some individuals based on potential

• Many young employees are paid well because of their potential


Political Influence

• Should not be used to determine financial compensation

• To deny its existence would be unrealistic

• Person's pull or political influence may sway pay and promotion decisions


Luck

“It certainly helps to be in the right place at the right time.”


Team-Based Pay

If team is to function effectively, firms should provide reward based on overall team performance


Company-Wide Pay

• Profit sharing - Distribution of predetermined percentage of firm’s profits to employees

• Gainsharing - Bind employees to firm’s productivity and provide incentive payment based on improved company performance

• Scanlon plan - Reward to employees for savings in labor costs resulting from employees’ suggestions


Professionals Compensation

• Initially compensated for knowledge they bring to organization

• Maturity curves reflect relationship between professional compensation and years of experience


Sales Representative Compensation

• Straight salary• Straight

commission• Endless variety of

part-salary, part-commission combinations


Contingent Workers Compensation

• In most cases, contingency workers earn less pay than permanent counterparts

• Far less likely to receive health or retirement benefits


Executive Compensation

Critical factor in attracting and retaining best managers


Determining Executive Compensation

Firms typically prefer to relate salary growth for the highest-level managers to overall corporate performance


Types of Executive Compensation

• Base salary

• Short-Term Incentives or Bonuses

• Stock option plans

• Performance-Based Pay

• Executive benefits (Perks)

• Golden parachutes


Base Salary

• Factor in determining the executive’s standard of living

• Salary provides basis for other forms of compensation; it may determine amount of bonuses and certain benefits

• U.S. tax law does not allow companies to deduct more than $1 million of an executive’s salary


Short-Term Incentives or Bonuses

• Payment of bonuses reflects a managerial belief in their incentive value

• 90% of executives receive bonuses


Stock Option Plans

• Gives manager option to buy a specified amount of stock in the future at or below current market price

• Some boards of directors require their top executives to hold some of firm’s stock

• Financial Accounting Standards Boards requires companies to expense stock options thereby making them not as attractive


Performance-Based Pay

• Trend toward more performance-based compensation packages for executives

• Shareholders become increasingly disenchanted with high levels of executive compensation - performance-based pay may gain in popularity


Executive Benefits (Perks)

• Any special benefits provided by a firm to small group of key executives and designed to give executives something extra

• Conveys status

• Personal use of corporate jet is soaring among Corporate America’s elite as an executive perk


Golden Parachutes

• Perquisite that protects executives in event another company acquires firm or executive is forced to leave firm for other reasons

• Attempts to rein in obscene golden parachute plans


Trends & Innovations: Outrageous Severance Pay Examples?

• Philip Purcell, Morgan Stanley, $113 million• Stephen Crawford, Morgan Stanley, $32 million• Harry Stonecipher, Boeing $600,000/year• Carly Fiorina, Hewlett-Packard, $21 million • Franklin Raines, Fannie Mae, $1.4 million/year • Scott Livengood, Krispy Kreme, $46,000/month • James Kilts, Gillette, $100 million • Jack Welch, GE corporate $9 million annual pension plan

payout, plus perks such as lifetime use of GE’s $80,000-per-month Manhattan apartment with free food and free maid service; lifetime use of GE fleet of corporate jets, including Boeing 737 jet; new Mercedes plus limousine and driver; and assorted free sports and opera box tickets

http://web20.epnet.com/citation.asp?tb=1&_ug=sid+4A484D1B%2D1C54%2D4930%2D9EDA%2D9CEC801DD8AB%40sessionmgr5+dbs+f5h+cp+1+D6E8&_us=hs+True+cst+0%3B1%3B2%3B7+or+Date+fh+False+ss+SO+sm+KS+sl+0+ri+KAAACB3B00015941+dstb+KS+mh+1+frn+11+77D0&_uso=tg%5B0+%2D+db%5B0+%2Df5h+hd+False+clv%5B1+%2DY+clv%5B0+%2D20050100%2D20051000+op%5B0+%2D+cli%5B1+%2DFT+cli%5B0+%2DDT1+st%5B0+%2DSeverance++pay+mdb%5B0+%2Dimh+2E85&fn=11&rn=19#toc%23toc




A Global Perspective: Costs of Expatriates

• Employers today know that it is more expensive to send workers abroad

• Tokyo ranks as most expensive city for expatriates, followed by London, Moscow and Osaka, Japan

© 2008 by Prentice Hall9-1 Human Resource Management 10 th Edition Chapter 9 DIRECT FINANCIAL COMPENSATION.

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