PowerPoint Presentation by Charlie Cook The University of West Alabama 9 © 2010 South-Western, a part of Cengage Learning All rights reserved.

PowerPoint Presentation by Charlie CookThe University of West Alabama

PowerPoint Presentation by Charlie CookThe University of West Alabama

9

© 2010 South-Western, a part of Cengage LearningAll rights reserved.© 2010 South-Western, a part of Cengage LearningAll rights reserved.

© 2010 South-Western, a part of Cengage Learning. All rights reserved. 9–2

Explain employer concerns in developing a strategic compensation program.

Indicate the various factors that influence the setting of wages.

Differentiate the mechanics of each of the major job evaluation systems.

Explain the purpose of a wage survey.

Define the wage curve, pay grades, and rate ranges as parts of the compensation structure.

Chapter ObjectivesAfter studying this chapter, you should be able to

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Identify the major provisions of the federal laws affecting compensation.

Discuss the current issues of equal pay for comparable worth, pay compression, and low wage budgets.

Chapter Objectives (cont’d)After studying this chapter, you should be able to

X


Compensation

• Pay is a statement of an employee’s worth by an employer.

• Pay is a perception of worth by an employee.

Particularly at higher levels in the organization.

• Nonfinancial compensation included Employee recognition programs Rewarding jobs Work environment Flexible hours


Total Compensation

DirectDirect IndirectIndirect

Bonuses

GainsharingSecurity Plans• Pensions

Employee Services• Educational assistance• Recreational programs

Commissions

Wages / Salaries

Insurance Plans• Medical• Dental• Life

Time Not Worked• Vacations• Breaks• Holidays

Manager’s job is to make sure all employees know their Total Compensation.


Compensation Management and Other HRM Functions

Pay rates affect selectivityPay rates affect selectivity SelectionSelection Selection standards affect level of pay required

Selection standards affect level of pay required

Pay can motivate trainingPay can motivate training Training and Development

Training and Development

Increased knowledge leads to higher pay

Increased knowledge leads to higher pay

Training and development may lead to higher pay

Training and development may lead to higher pay

Compensation Management

Compensation Management

A basis for determining employee’s rate of pay

A basis for determining employee’s rate of pay

Aid or impair recruitmentAid or impair recruitment RecruitmentRecruitment Supply of applicants affects wage rates

Supply of applicants affects wage rates

Low pay encourages unionization

Low pay encourages unionization Labor RelationsLabor Relations Pay rates determined

through negotiation

Pay rates determined through negotiation

X


Strategic Compensation Planning

• Strategic Compensation PlanningLinks the compensation of employees to the

mission, objectives, philosophies, and culture of the organization. And Results!

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.


Linking Compensation to Organizational Objectives

• Value-added Compensation

Compensation philosophy is moving toward rewarding employees on the basis of competencies or contributions to the organization.

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?”


Common Strategic Compensation Goals

1. To reward employees’ past performance Bonus—otherwise you are paying forever, maybe even in

retirement, for something that is gone.

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


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.


The Pay-for-Performance Standard

• Pay-for-Performance Standard

The standard by which managers tie compensation to employee effort and performance (results).

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.


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?


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.

9–14

Equity Theory

Distributive Fairness

Perceived fairness of the amount and allocation of rewards among individuals.

Procedural Fairness

The perceived fairness of the process to determine the distribution of rewards.


FIGURE

9.1Relationship between Pay Equity and Motivation

X


Expectancy Theory and Pay

• Expectancy TheoryA theory of motivation that says 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.


FIGURE

9.2Pay-for-Performance and Expectancy Theory


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.


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.



• Nonexempt Employees (USA Concept)Employees 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.



• Exempt Employees

Employees 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.


FIGURE

9.3Factors Affecting the Wage Mix

X


The Wage Mix—Internal Factors

• Employer’s Compensation Strategy

Establishes the internal wage relationship among jobs and skill levels

Sets organization compensation policy to lead, lag, or match competitors’ pay.

Rewards employee performance

Guides administrative decisions concerning elements of the pay system such as overtime premiums, payment periods, and short-term or long-term incentives.


The Wage Mix—Internal Factors (cont’d)

• 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.


1Comparison of Compensation Strategies

X


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.



• 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.

Consumer Price Index (CPI) A Bureau of Labor Statistics measure of the average

change in prices over time in a fixed “market basket” of goods and services



• Collective Bargaining

Escalator clauses in labor agreements provide for quarterly upward cost-of-living (COLA) 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.


Job Evaluation Systems

• Job Evaluation

The systematic process of determining the relative worth of jobs in order to establish which jobs should be paid more than others within an organization.


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

X



• Job Ranking System

Oldest 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 the extent of differences between jobs.

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


Paired-Comparison Job Ranking Table

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



• 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.


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.


2Point Values for Job Factors of the American Association of Industrial Management


3Description of Education Factor and Degrees of the American Association of Industrial Management

1. EDUCATIONThis factor measures the basic trades training, knowledge or “scholastic contact” essential as background or training preliminary to learning the job duties. This job knowledge or background may have been acquired either by formal education or by training on jobs of lesser degree or by any combination of these approaches.

1st Degree 14 pointsRequires the use of simple writing, adding, subtracting, whole numbers and the carrying out of instructions; and the use of fixed gauges and direct reading instruments and devices in which interpretation is not required.

2nd Degree 28 pointsRequires the use of commercial English, grammar and arithmetic such as addition, subtraction, multiplication and division, including decimals and fractions; simple use of formulas, charts, tables, drawings, specifications, schedules, wiring diagrams, together with the use of adjustable measuring instruments, graduates and the like requiring interpretation in their various applications; or the posting, preparation, interpretation, use and checking of reports, forms, records and comparable data.

3rd Degree 42 pointsRequires the use of shop mathematics together with the use of complicated drawings, specifications, charts, tables, various types of adjustable measuring instruments and the training generally applicable in a particular or specialized occupation. Equivalent to 1 to 3 years applied trades training.

4th Degree 56 pointsRequires the use of advanced shop mathematics, together with the use of complicated drawings, specifications, charts, tables, handbook formulas, all varieties of adjustable measuring instruments and the uses of broad training in a recognized trade or craft. Equivalent to complete, accredited, indentured apprenticeship or equivalent to high school plus a 2-year technical college education.

5th Degree 70 pointsRequires the use of higher mathematics involved in the application of engineering principles and the performance of related, practical operations, together with a comprehensive knowledge of the theories and practices of mechanical, electrical, chemical, civil or like engineering field. Equivalent to complete 4 years of technical college or university education.


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.


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.

X


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.


Collecting Survey Data

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

National Compensation Survey

State and local wage surveys Online survey data

• Problems with Surveys They are not always compatible

with the user’s jobs The user cannot specify what

specific data to collect.

X


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.

X


4Bureau of Labor Statistics National Compensation Survey

NCS data are used by managers and compensation specialists in large and small organizations to answer such questions as the following:

How much must I pay accountants in Atlanta, Georgia?

Is a 3 percent benefits increase comparable to that of other employers in the manufacturing industry?

Is vision coverage a prevalent benefit among large employers in the Northeast?

How have wage costs changed over the past year?

X


Characteristics of Key Jobs

• Key (Benchmark) 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 both the 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.

X


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.

X


FIGURE

9.4Freehand Wage Curve

X


FIGURE

9.5Single Rate Structure

X


FIGURE

9.6Wage Structure with Increasing Rate Ranges

X


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,

• Broadbanding Collapses many traditional salary grades into a few wide

salary bands.

X


Davis-Bacon Act(1931)Davis-Bacon Act(1931)

Required minimum wage, prevailing wage rates, 1½ overtime premium payments by federal contractors.

Required minimum wage, prevailing wage rates, 1½ overtime premium payments by federal contractors.

Walsh-Healy Act(1936)Walsh-Healy Act(1936)

Required overtime payments after 8 daily or 40 regular work hours for workers on federal contracts.

Required overtime payments after 8 daily or 40 regular work hours for workers on federal contracts.

Fair Labor Standards Act (FLSA) 1938(as Amended)

Fair Labor Standards Act (FLSA) 1938(as Amended)

Interstate commerce clause used to cover workers except agricultural and exempted (managerial) employees, child labor (under 16) is prohibited.

Interstate commerce clause used to cover workers except agricultural and exempted (managerial) employees, child labor (under 16) is prohibited.

Government Regulation of Compensation(U.S.A. Federal Wage Laws)

X


5Minimum Wage Laws in the States

Note: Where Federal and state law have different minimum wage rates, the higher standard applies

X


6The Federal Wage Poster

X


Exemption from FLSA Overtime Provisions

• Fair Pay RulesWere 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.

X


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.

• Low-Salary BudgetsCurrent wage budgets reflect the general

trend toward tight compensation cost controls.


FIGURE

9.7The Equal Pay Act: The Jury’s Still Out

Has the Equal Pay Act been effective in raising the wages of women relative to the wages of men? That depends on whom you ask and the importance you place on government statistics. “Fifty-nine cents on the dollar” was the rallying cry of the women’s movement more than thirty years ago to illustrate the large gap between the wages of women and men. That is, for every dollar that a man made, a woman earned fifty-nine cents. Currently, government wage figures based on the usual weekly earnings of full-time wage and salary workers peg women’s average pay at 79.3 percent of men’s compensation. Unfortunately, the gain in women’s wages relative to men’s wages has not changed significantly in recent years, as the following figures show.

X


FIGURE

9.8Salary Budgets by Type of Employee, 1998–2009

X


The Issue of Wage Rate Compression

• Wage-Rate Compression Compression of pay differentials between job classes,

particularly the pay differentials between hourly workers and their managers.

• Reducing Wage-Rate Compression Reward high performance and merit-worthy employees with

large pay increases. Design the pay structure to allow a wide spread between hourly

and supervisory employees. Prepare high-performing employees for promotions to jobs with

higher salary levels. Provide equity adjustments for selected employees hardest hit by

pay compression.


comparable worth

competence-based pay

consumer price index (CPI)

escalator clauses

exempt employees

Hay profile method

hourly work

job classification system

job evaluation

job ranking system

nonexempt employees

pay equity

pay-for-performance standard

pay grades

piecework

point system

real wages

red circle rates

wage and salary survey

wage curve

wage rate compression

work valuation

Discussion Questions (page 445)

•#2 Should we pay a different wage for each individual based on what they contribute?

•#4 How do you conduct a wage and salary survey?


Case Study

•Page 448 #2, Competency Based Compensation


Team Assignment (page 446)

•Why This Salary?


PowerPoint Presentation by Charlie Cook The University of West Alabama 9 © 2010 South-Western, a part of Cengage Learning All rights reserved.

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