10-1 Copyright ©2010 Pearson Education, Inc. publishing as Prentice Hall Managing Compensation Chapter 10.

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Copyright ©2010 Pearson Education, Inc. publishing

as Prentice Hall

Managing Compensatio

n

Chapter 10

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What is compensation? Defined Components

Designing a Compensation System Compensation tools

Job-Based Compensation Skill-Based Compensation

Legal Environment and Pay System Governance

Chapter 10 OverviewChapter 10 Overview

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Total Compensation Sum total of quantifiable rewards Received for an employee’s labor

What Is Compensation?What Is Compensation?

Pay Mix—proportion of each of: Base compensation Pay incentives Indirect compensation (benefits)

o Perquisites— “perks”

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Compensation System—want design that: Enables firm to achieve its strategic objectives Is molded to unique characteristics of firm Nine features in compensation systems

Compensation System DesignCompensation System Design

Equity—perceived fairness of the design Internal—pay structure within a firm External—what other employers are paying Individual—of individual pay decisions

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Compensation Systems: EquityCompensation Systems: Equity

Distributive Justice Model Perceptions of fairness within the firm Compare themselves to other employees

o What they bring and what they receive

Labor Market Model Wage rate

determined by supply and demand

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Balancing Equity To improve external equity Use alternate forms of

compensation E.g. bonuses, add-ons,

counteroffers

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Fixed vs. Variable Pay Performance vs. Membership

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Job versus Individual PayJob versus Individual Pay

Job-Based Pay—best when: Jobs and technology are stable Much training required to learn a given job Turnover is relatively low

Individual-Based Pay—best when: Company and environment is dynamic Workforce is relatively educated And willing and ability to learn different

jobs Participation and teamwork are

encouraged Are opportunities to learn new skills

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Egalitarian pay system—same pay system For most employees Reduces barriers between workers Easier to deploy workers to other jobs

Egalitarianism vs. ElitismEgalitarianism vs. Elitism

Elitist pay system—different pay systems For employees or groups at different

organizational levels Result in more stable workforce

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Above vs. Below-market Above-market—minimizes turnover Below-market—save money


Monetary vs. Nonmonetary rewards Monetary—emphasis on achievement Nonmonetary—reinforce organization

commitment

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Open vs. Secret pay Open—fosters trust and commitment

o Forces managers to be fair administering Secret—leads to dissatisfaction with pay


Centralized vs. Decentralized pay Decisions Centralized—maximizes internal equity

o But doesn’t handle external equity issues well

Decentralized—better for large, diverse organizations

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Job-based compensation plans—three parts: Achieving internal equity Achieving external equity Achieving individual equity

Compensation Tools: Job-Based Compensation Tools: Job-Based PlansPlans

Job evaluation—to achieve internal equity Six steps Provide rational, orderly judgment of

importance of each job to the firm

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Step 1: Conduct job analysis

Steps to Achieving Internal EquitySteps to Achieving Internal Equity

Step 2: Write job description Step 3: Determine job specifications

Characteristics needed to perform job Step 4: Rate worth of all jobs

Point Factor System most commonly used

Uses Compensable Factors to rate jobs

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Step 5: Create a job hierarchy Job listing by relative value

Steps to Achieving Internal EquitySteps to Achieving Internal Equity

Step 6: Classify jobs by grade levels

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Achieving External EquityAchieving External Equity

Step 1: Identify benchmark or key jobs Check salary surveys

Step 2: Establish pay policy Lead, lag, or pay market

rate

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Market Salary Data for Selected Market Salary Data for Selected Benchmark Office JobsBenchmark Office Jobs

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Individual assigned pay within a range

Achieving Individual EquityAchieving Individual Equity

Within-pay-range positioning criteria: Previous experience Seniority Performance appraisal ratings

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Compensation Tools: Job-Based Compensation Tools: Job-Based PlansPlans

Advantages: Rational, objective, systematic Relatively easy to administer

Drawbacks: Do not account for nature of business Job descriptions often too general Wage and salary data not definitive Job-based plans tend to be

bureaucratic, mechanistic and inflexible

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Compensation Tools: Skill-Based Compensation Tools: Skill-Based PlansPlans

Skill mastery increases pay Three types of skills:

Depth skills—specialized area Breadth Skills—jobs/tasks in firm Vertical skills—self-management

Workforce is more flexible Higher training costs Skills can become “rusty”

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The Fair Labor Standards Act (1938) Exempt/Non-exempt employees Minimum wage and Overtime

The Legal Environment andThe Legal Environment andPay Systems GovernancePay Systems Governance

The Equal Pay Act (1963) Exemptions: seniority, job performance,

or other factors (e.g. shift differential) Comparable worth Office of Federal Contract Compliance

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Compensation: base, incentives, and benefits

Summary and ConclusionsSummary and Conclusions

Effective compensation systems: Help firm to achieve strategic objectives Suited to organization’s unique

characteristics Fits organization’s environment

Don’t forget: Employee input in job evaluation process Legal environment

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