Chapter 9Managing Compensation
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Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Learning Outcomes
Distinguish a strategic compensation program from one that is non-strategic
Determine how to design pay systems
Estimate whether or not a pay system is consistent within the firm as well as comparable to industry standards and government laws
Be able to design a compensation scorecard
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Compensation
Way to increase employee’s loyalty toward the organization
Directly linked to an employee’s livelihood
Strategic management ensures that costs are kept down keeping employees’ motivation and performance up
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Figure 9.1 – Compensation Components
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Figure 9.2 – Compensation Alignment
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Strategic Compensation
Compensation of employees in ways that enhance motivation and growth
Aligns employee’s efforts with the objectives of the organization
Links the compensation to the organization’s mission and general business objectives
Serves to mesh the monetary payments made to employees with HR initiatives
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Goals of Strategic Compensation Policy
To reward employees’ past performance
To remain competitive in the labor market
To maintain salary equity among employees
To mesh employees’ future performance with organizational goals
To control the compensation budget
To attract new employees
To reduce unnecessary turnover
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Linking Compensation to Organizational Objectives
Requires that managers be more strategic about their compensation decisions
Formalized compensation goals serve as guidelines for managers to ensure that wage and benefit policies achieve their intended purpose
Reward employees on the basis of their individual competencies or work contributions toward organizational objectives
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Pay-for-Performance Standard
Standard by which managers tie compensation to employee effort and performance
Refers to a wide range of compensation options
Includes merit-based pay, bonuses, salary commissions, job and pay banding, team/group incentives, and gainsharing programs
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Motivating Employees through Compensation
Pay equity: Employee’s perception that compensation received is equal to the value of the work performed
Distributive fairness – Motivation theory that explains how people respond to situations in which they feel they have received less/more than they deserve
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Figure 9.3 – Relationship between Pay Equity and Motivation
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Kinds of Pay Equity
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External equity
People in similar jobs compare themselves to what others are making in different organizations
Internal equity
People compare themselves to peers in different jobs in the same organization
Individual equity
People compare themselves to others in their organization with the same job
Expectancy Theory and Pay
Expectancy theory
Predicts that one’s level of motivation depends on the attractiveness of the rewards sought and the probability of obtaining those rewards
Employees must believe that good performance is valued by their employer and will result in their receiving the expected reward
Motivational value of compensation is determined by employees’ view of compensation
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Figure 9.4 – Pay-for-Performance and Expectancy Theory
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Pay Secrecy
Generates distrust in the compensation system
Reduces employee motivation
Inhibits organizational effectiveness
Cover up inequities existing within the internal pay structure
Justified on the grounds that most employees prefer to have their own pay kept secret
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Bases for Compensation
Hourly work: Work paid on an hourly basis
Piecework: Work paid according to the number of units produced
Hourly employees – Compensated on an hourly basis
Salaried employees – Compensation is computed on the basis of weekly, biweekly, or monthly pay periods
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Bases for Compensation
Nonexempt employees: Covered by the overtime provisions of the Fair Labor Standards Act (FLSA)
Paid at a rate of one and a half times their regular pay rate for time worked in excess of forty hours in their workweek
Exempt employees: Not covered by the overtime provisions of the FLSA
U.S. Department of Labor (DOL) imposes a narrow definition of exempt status
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Figure 9.6 – Factors Affecting the Pay Mix
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Important Terms in Pay Mix
Consumer price index (CPI)
Measure of the average change in prices over time in a fixed market basket of goods and services
Escalator clauses
Labor agreements clauses that provide for quarterly cost-of-living adjustments in wages, basing the adjustments on changes in the CPI
Real wages
Wage increases larger than rises in the CPI, that is, the real earning power of wages
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Job Evaluation
Systematic process of determining the relative worth of jobs in order to establish which jobs should be paid more than others within an organization
Methods of comparison
Rank the value of jobs from highest to lowest
Classify jobs so they can be benchmarked internally and externally
Award points to each job based on how much they are linked to organizational objectives
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Job Ranking System
Simplest and oldest system of job evaluation by which jobs are arrayed on the basis of their relative worth
Disadvantages
Does not provide a very precise measure of each job’s worth
Final ranking of jobs indicates the relative importance of the job and not the differences in the degree of importance
Effective only with a small number of jobs
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Job Classification System
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
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Point System
Quantitative job evaluation procedure that determines the relative value of a job by the total points assigned to it
Compensable factors – Used for evaluation of jobs quantitatively
Point manual
Handbook that contains a description of the compensable factors and the degrees to which these factors may exist within the jobs
Used for comparing job descriptions and job specifications
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Work Valuation
Job evaluation system that seeks to measure a job’s worth through its value to the organization
Work is measured through standards that come directly from business goals
Process ends with a work hierarchy that is an array of work by value to the organization
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Hay Profile Method
Job evaluation technique to evaluate executive and managerial positions which uses
Knowledge
Mental activity
Accountability
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Wage and Salary Surveys
Survey of the wages paid to employees of other employers in the surveying organization’s relevant labor market
Labor market – Area from which employers obtain certain types of workers
Collecting survey data
Bureau of Labor Statistics (BLS) publishes wage and salary data
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Wage and Salary Surveys
States conduct surveys on either a municipal or county basis and make them available to employers
Special surveys are conducted by the trade groups
Problems with published surveys
Not always compatible with the user’s jobs
User cannot specify what specific data to collect
HRIS and salary surveys
Survey Finder has a database of hundreds of compensation surveys offered by more than fifty independent vendors
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Wage and Salary Surveys
Employer-initiated surveys
Employers have to select the jobs to be used in the survey and identify the organizations with whom they actually compete for employees
Using key jobs, survey data are tabulated and the compensation structure is completed
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Wage Curve, Pay Grades, and Rate Ranges
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Wage curve
Curve in a scattergram representing the relationship between relative worth of jobs and pay rates
Pay grades
Groups of jobs within a particular class that are paid the same rate
Rate ranges
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
Figure 9.7 – Freehand Wage Curve
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Figure 9.8 – Single Rate Structure
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Figure 9.9 – Federal Wage Poster
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Competence-based Pay
Pay based on an employee’s skill level, variety of skills possessed, or increased job knowledge
Systems represent fundamental change in the attitude of management regarding:
How work should be organized
How employees should be paid for their work efforts
Encourages employees to acquire training when new or updated skills are needed by an organization
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Broadbanding
Collapses many traditional salary grades into a few wide salary bands
Help eliminate the obsession with grades
Encourage employees to move to jobs in which they can develop in their careers and add value to the organization
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Government Regulation of Compensation
Davis-Bacon Act of 1931
Walsh-Healy Act of 1936
Fair Labor Standards Act of 1938
Wage and hour provisions
Minimum wage and pay compression
Child labor provisions
Pay equity provisions
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Minimum Wage and Pay Compression
Pay rate compression: Compression of pay between new and experienced employees caused by the higher starting salaries of new employees
Differential between hourly workers and their managers
Reasons for pay compression are market based than government based
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Ideas for Minimizing Problems
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
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Child Labor Provisions and Pay Equity Provisions
Child labor provisions
Floor it imposes makes it difficult for high school students and young adults to find jobs
Pay equity provisions
The Equal Pay Act of 1963
Title VII of the Civil Rights Act of 1964
Age Discrimination Act of 1967
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Compensation Assessment
Assessing the effectiveness of compensation system is important to linking compensation with strategy
Measures
Help the company detect potential compensation problems
Make compensation decisions more transparent
Improve the alignment of compensation decisions with organizational objectives
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Compensation Assessment
Compensation scorecard: Displays the results for all the measures that a company uses to monitor and compare compensation among internal departments or units
Creates a comparative tool within the organization that can reinforce desired outcomes that are unique to the company’s strategy
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