Developing an Approach to Total Compensation

1
Developing an Approach to Total Compensation
Chapter 9
2
Chapter Objectives

• Understand the strategic importance of total
  compensation
• Understand total compensation within the
  integrated hrm system
• Understand pay structures for base salary and
  wage rates establishing the internal value of
  jobs
• Understand using external market rates to set pay
  levels
• Understand designing the internal pay structure
• Understand balancing internal and external equity
• Understand how to communicating the pay structure
• Understand compensation in the context of
  globalization

3
The Strategic Importance of Total Compensation

• Three Important Objectives
• Attracting and retaining the talent required for
  sustainable competitive advantage
• Focusing the energy of employees on implementing
  the organizations competitive strategy
• Controlling costs

4
Attracting and Retaining Talent

• Pay Fairness
• What people believe they deserve to be paid in
  relation to what others deserve to be paid.
• Equity
• Perceptions based on comparisons between an
  individuals ratio of inputs and outcomes and the
  ratios of others doing similar work.
• Inputs What an employee gives to the job
• Outcomes What people get out of doing the job

5
Equity Perceptions
Other
Self
6
How Employees Reduce Inequity

• Increase inputs (time, effort) to justify higher
  rewards when they feel overrewarded
• Decrease inputs when feeling underrewarded
• Change the compensation they receive
• Form a union ? File a grievance ? Leave work
  early
• Choose a different comparison other
• Rationalize that inequities are justified
• Leave the situation by quitting

7
Low Pay

• Companies choose to lead, lag, or match market
  pay rates
• External equity
• Fairness relative to the external market (outside
  the organization)
• Difficult to make comparisons when companies mix
  forms of pay (e.g. salary, bonus, benefits)
• Dissatisfied employees may
• Leave the company
• Perform poorly
• Steal from the company

8
Pay Secrecy

• Secrecy is the normmanagers get fewer questions
  about inequitable pay
• Employees may have inaccurate information or
  misperceptions about pay.
• Companies can benefit from
• Involving employees in pay system design.
• Implement pay systems fairly and provide due
  process.

9
Executive Compensation

• During the past 20 years, CEOs have seen their
  pay increase 514, or 12 times the rate of
  inflation.
• During the same period, the federal minimum wage
  has increased only 36 and median household
  income has increased 43.

10
Implementing the Business Strategy
Changes in Strategy
Changing Structure
Effective Compensation System
Mergers and Acquisitions
Productivity Improvements
11
Integrating Compensation Systems Following
Mergers and Acquisitions
EX 9.2
12
Elements of Total Compensation within the
Integrated HRM System
EX 9.3
13
Monetary and NonMonetary Compensation

• Monetary Compensation
• Direct payments such as salary, wages, and
  bonuses, and indirect payments such as payments
  to cover the costs of private and public
  insurance plans.
• Nonmonetary Compensation
• Forms of social and psychological
  rewardsrecognition and respect from others,
  enjoyment from doing the job itself,
  opportunities for self development, and so on.

14
Your Money or Your Life?
EX 9.4
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Other HRM Practices

• Recruitment and Retention
• Number and quality of job applications received
  during recruitment.
• Employees decisions to stay with their
  employers.
• Training and Development
• Value of tuition reimbursements, management
  development programs offered by employers
• Performance Measurement
• Alignment between the pay system and performance
  measurement affects employees motivation

16
The External Environment
Labor Market Conditions

• Pay level (external)
• Pay mix (internal)

Legal and Social Considerations

• Legislation
• Comparable worth

LaborUnions

• Union ContractWage clauses

17
Comparing the Pay Mix for Different Categories
of Employees
EX 9.5
18
Potential Pay Mixes for Different Stages of the
Industry Life Cycle
EX 9.6
19
Legal Constraints

• Davis-Bacon (1931) and Walsh-Healy (1936) Acts
• Federal construction contractors required to pay
  prevailing wages to laborers and mechanics
• Fair Labor Standards Act (1938)
• Set minimum wage
• Requires overtime for nonexempt workers
• Establishes child labor standards

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Exempt Employees Under FLSA

• Persons not covered by overtime and minimum wage
  provisions
• Includes executives, managers, professionals, and
  administrators
• Must be paid fixed salary and meet criteria for
  job content by
• Undertaking management duties
• Directing the work of two or more employees
• Controlling or greatly influencing hiring,
  firing, and promotion decisions
• Exercising discretion

21
Legal Constraints (contd)

• Living Wage Laws
• Enacted by some local governments to ensure pay
  reflects cost of living
• Equal Pay Act (1963)
• Amendment to FLSA that prohibits gender-based
  wage discrimination for substantially equal
  jobs
• Pay Equity (Comparable Worth) Policies
• Based on race/gender differences in true worth
  of nonidentical jobs
• Implemented by some state and local governments
  and some unions

22
The Organization Environment
Strategy
Size
Approach to Compensation
Corporate Culture
23
Pay for Engineers in Companies of Various
Sizes(Annual Salary in U.S. Dollars)
EX 9.7
24
Comparison of Compensation at Costco and Wal-Mart
EX 9.8
25
The HR Triad Roles and Responsibilities for
Total Compensation
26
How Much Managers Know versus What They Should
Know
EX 9.9
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Pay Structures for Base Salary and Wage Rates

• Pay Structure
• Combining job evaluation information and
  information about market pay rates to establish a
  policy that governs the base pay received by
  employees.
• Base Pay
• The wage or salary, exclusive of incentive pay or
  benefits that an employee receives.

28
Establishing the Internal Value of
JobsObjectives of Job Evaluation

• Job Evaluation
• The procedure for gathering information about a
  job and its relative value within the
  organizationa consideration for internal equity
  in the job-based pay structure of an
  organization.
• Salary Surveys
• Market information gathered about what other
  employers payvalidation of external equity in
  valuing jobs in an organization.

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Common Job Evaluation Practices
EX 9.10
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Job Evaluation Methods

• Job Ranking Method
• Places jobs into a rank order according to the
  perceived overall value or importance of the job.
• Is convenient when only a few jobs need to be
  evaluated and one person is familiar with them.
• Job Classification Method
• Groups jobs into a set of classifications based
  on the job descriptions, and then ranks the jobs
  that are found within each classification.
• Jobs classified as being similar are usually
  referred to as being in the same job grade.

31
Job Evaluation Methods (contd)

• Point Factor Rating Method
• Uses a sophisticated system of points to assign
  values to jobs.
• Compensable factors
• The dimensions of work that an organization
  chooses to use when establishing the relative
  value of jobs.
• Standardized factors (Hay Guide Chart-Profile)
• Problem solving, know-how, accountability
• Custom-designed factors
• Factors developed by an organization to align its
  pay system with its strategic objectives.

32
Job Evaluation Methods (contd)

• Point Factor Rating Method
• STEP 1 Select Compensable Factors
• STEP 2 Assign Factor Weights
• STEP 3 Define Factor Degrees
• STEP 4 Establish the Degree of Each Factor
  Present in Each Job
• STEP 5 Calculate Job Values

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Example of a Compensable Factor and Related
Degree Statements
PART B EXAMPLE OF A COMPENSABLE FACTOR AND
RELATED DEGREE STATEMENTS PROBLEM SOLVING This
factor examines the types of problems dealt with
in your job. Indicate the one level that is most
representative of most of your job
responsibilities. Degree 1 Actions are performed
in a set order according to written or verbal
instructions. Problems are referred to a
supervisor. Degree 2 Routine problems are solved
and various choices are made regarding the order
in which the work is performed, within standard
practices. Information may be obtained from
various sources. Degree 3 Various problems are
solved that require general knowledge of company
policies and procedures applicable within own
area of responsibility. Decisions are made based
on a choice from established alternatives.
Actions are expected to be within standards and
established procedures. Degree 4 Analytical
judgment, initiative, or innovation is required
in dealing with complex problems or situations.
Evaluation is not easy because there is little
precedent or information may be
incomplete. Degree 5 Complex tasks involving new
or constantly changing problems or situations are
planned, delegated, coordinated, or implemented,
or any combination of these. Tasks involve the
development of new technologies, programs, or
projects. Actions are limited only by company
policies and budgets.
EX 9.11
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Job Evaluation Methods (contd)

• Competency-Based Job Evaluation
• Emphasizes competencies needed to perform job
  rather than job duties
• Often used with broadbanding approach
• Promotes individual development and growth
  through lateral moves
• Hierarchical, bureaucratic and rule-driven
  corporate cultures may make implementation
  difficult.

35
Job Evaluation Methods (contd)

• Multiple Plans
• Required if job vary in terms of compensable
  factors
• Working conditions
• Physical efforts
• Skills
• Knowledge

• Single Plan
• Partial solution to sex-based pay inequities for
  specific families of jobs
• Communicates a coherent message about
  organization values

Developing a core set of values to evaluate all
jobs supplemented with a unique set of factors
for particular jobs appears to pay off.
36
Skill-Based Pay

• Rewards employees for the range, depth, and types
  of skills theyre capable of using, regardless of
  whether the job they currently hold requires the
  use of those skills.

37
Using External Market Rates to Set Pay Levels

• External Equity
• Exists when employees feel they are being paid
  fairly relative to what people in similar jobs
  (or with similar competencies) are paid by other
  employers.
• Achieving external equity involves three steps
• Determining external market rates
• Establishing the market pay policy
• Setting the organization pay policy.

38
Conducting Survey to Assess External Market
Rates

• Define relevant labor market
• Identify benchmark jobs
• Jobs that are similar across a range of
  organizations
• Obtain market data

39
Geographic Pay Differentials within the United
States
EX 9.12
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Market Pay Rates for Selected Jobs in Several
Industries
EX 9.13
41
Market Pay Policy Line Based on Market Survey
Results for Benchmark Jobs
EX 9.14
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Set the Organization Pay Policy

• Organization Pay Policy
• Specifies the pay rates that will be used for the
  jobs in a particular organization.
• Options
• A lead policy indicates that the organization
  intends to pay somewhat above the market rate in
  valuing employees as a competitive advantage.
• A match policy sets the organizations policy
  line at the middle of the market.
• A lag policy is where the organization
  intentionally pays below the market.

43
Organizational Pay Policies
Note Based on a survey of 1,180 large private
employers. Values indicate the percentage of
employers reporting each pay policy.A lag policy
is defined as paying at or below the markets
40th percentile.A match policy is defined as
paying at the 40th to 60th percentile. A lead
policy is defined as paying above the markets
60th percentile.
EX 9.15
44
Designing the Internal Pay Structure

• Job-Based Pay Grades and Ranges
• Pay line is midpoint
• Range maximum and minimum pay
• Common ranges
• Nonexempt
• Laborers Up to 25
• Clerical, technical, paraprofessional 15-50
• Exempt
• First-level managers. and professionals 30-50
• Middle and senior managers 40-100

45
Conventional Job-Based Pay Structure
EX 9.16
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Designing the Internal Pay Structure (contd)

• Competency-Based
• Points assigned to jobs based on competencies
  required
• Skill-Based
• Base pay equal regardless of job assignment
• Additional pay earned by increasing skills

47
Balancing Internal and External Equity
Pay Equity
Pay Differentials Market Shift
Pay Compression
Internal
External
48
Communicating the Pay Structure
Involve Employees
Focus on the Big Picture
Effective Communication
Follow-up
49
Compensation in the Context of Globalization

• Keeping the expatriate whole
• Balance sheet approach
• Provides a level of net spendable income in the
  new destination similar to that received in the
  previous (usually home) location.

50
Expenses Incurred by Expatriates and Often Paid
by Employers
Goods and Services Items such as food, personal
care, clothing, household furnishings,
recreation, transportation, and medical
care. Housing The major costs associated with the
employees principal residences. Income
Taxes Payments to federal and local governments
for personal income taxes. For U.S. employees,
tax liabilities usually increase when they go
abroad, so most U.S. employers adopt a tax
equalization policy for assignment-related
income. Reserve Contributions to savings,
payments for benefits, pension contributions,
investments, education expenses, Social Security
taxes, and so forth. Shipment and Storage The
major costs associated with shipping and storing
personal and household effects.
EX 9.17