COMPENSATION Part I

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COMPENSATIONPart I
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Chapter Objectives

• Describe the various forms of compensation.
• Explain the concept of equity in financial
  compensation.
• Identify the determinants of financial
  compensation.
• Discuss compensation legislations
• Describe factors that should be considered when
  the labor market is a determinant of financial
  compensation.

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Compensation An Overview

• Compensation - Total of all rewards provided
  employees in return for services
• Direct financial compensation - Pay received in
  the form of wages, salaries, bonuses, and
  commissions
• Indirect financial compensation - All financial
  rewards not included in direct compensation
• Nonfinancial compensation - Satisfaction a person
  receives from job itself or from work environment

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Components of a Total Compensation Program
External EnvironmentInternal Environment
Compensation
Financial
Non-Financial
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 Employee Stock Option
Plans Supplemental Unemployment Benefits
Employee Services Premium Pay
Unique
Benefits
The Job Skill Variety Task Identify Task
Significance Autonomy Feedback
Job Environment Sound Policies
Competent Employees Congenial Coworkers
Suitable Status Symbols Working
Conditions Workplace Flexibility Flextime
Compressed Work Week Job Sharing
Flexible Compensation
Telecommuting Part-time Work
Modified Retirement
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Equity in Financial Compensation

• Equity - 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 their jobs within same
  organization

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Equity in Financial Compensation (Continued)

• Employee equity - Paid according to factors
  unique to employee, such as performance level or
  seniority
• Team equity Reward based on teams productivity

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Primary Determinants of Individual Financial
Compensation
The Organization Compensation Policies
Organizational Politics Ability to Pay
The Employee Job Performance Merit
Pay Variable Pay Competency-Based Pay
Seniority Experience
Organization Membership Potential
Political Influence Luck
The Labor Market Compensation Surveys
Expediency Cost of Living
Labor Unions Society
The Economy Legislation
Job Pricing
Individual Financial Compensation
The Job Job Analysis
Job Descriptions Job Evaluation
Collective Bargaining
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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 they do not
  require highly capable employees

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The Labor Market as a Determinant of Financial
Compensation

• Compensation surveys
• Expediency
• Cost of living
• Labor unions
• Society
• Economy
• Legislation

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Compensation Surveys

• What are other firms paying?
• Geographic area of survey
• Specific firms to contact
• Jobs to include

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Expediency

• There are times when compensation survey data is
  ignored
• High tech environment
• In some labor markets where managers must at
  times be left to their own devices

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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 the inflation
  rate

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Labor Unions

• Mandatory collective bargaining between
  management and unions as wages, hours, and other
  terms and conditions of employment.
• Cost-of-living allowance
• Unions may attempt to create, preserve, or even
  destroy pay differentials.

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Society

• Compensation often affects firms pricing of it
  goods and/or services
• Consumers may be interested in compensation
  decisions

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The Economy

• Affects financial compensation decisions
• Depressed economy generally increases the labor
  supply
• Cost of living often rises as the economy expands

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Compensation Legislation

• Fair Labor Standards Act of 1938, as Amended
• Equal Pay Act of 1963

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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

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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

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Equal Pay Act of 1963

• Prohibits employer from paying employee of one
  gender less than employee of opposite gender
• Both employees must do work that is the same or
  substantially the same

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The Job as a Determinant of Financial Compensation

• Job itself continues to be a factor, especially
  in those firms that have internal pay equity as a
  primary consideration
• Organizations pay for value they attach to
  certain duties, responsibilities, and other
  job-related factors such as working conditions

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Job Evaluation

• Firm determines the relative value of one job in
  relation to another
• Ranking
• Classification
• Factor comparison

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Ranking Method

• Simplest method
• Raters examine description of each job
• Jobs arranged in order according to value

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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

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Factor Comparison Method

• Mental requirements
• Skills
• Physical requirements
• Responsibilities
• Working conditions

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Job Pricing

• Placing a dollar value on worth of a job
• Pay grades - Grouping of similar jobs to simplify
  pricing jobs
• Pay ranges - Minimum and maximum pay rate with
  enough variance between the two to allow for a
  significant pay difference
• Broadbanding Collapses many pay grades into a
  few wide bands or improve effectiveness
• Adjusting pay rates - Overpaid and underpaid jobs

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Scatter Diagram of Evaluated Jobs Illustrating
the Wage Curve, Pay Grades, and Pay Ranges
Average Pay per Hour (Current Rates or Market
Rates)
19.80
5
18.50
4
17.20
3
15.90
Wage Curve
Pay Ranges for Pay Grades
2
14.60
14.00
1
13.30
12.90
12.00
100
200
300
400
500
Evaluated Points
1
2
3
4
5
Pay Grades
Summary
Evaluated Points Pay Grade
Minimum
Midpoint Maximum
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 15.90 17.20 18.50
400-500 5 17.20 18.50 19.80
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Broadbanding

• Technique that collapses many pay grades (salary
  grades) into a 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

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Broadbanding and Its Relationship to Traditional
Pay Grades and Ranges
Grade 5
Grade 4
Grade 3
Average Pay Per Hour
Grade 2
Band B
Grade 1
Band A
Low
High
Job Worth
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Employee as a Determinant of Financial
Compensation

• Performance-based Pay
• Skilled-based Pay
• Competency-based Pay
• Seniority
• Experience
• Potential
• Political Influence
• Luck

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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 a demotivator

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Performance-Based Pay

• Merit pay - Pay increase given to employees based
  on their level of performance as indicated in the
  appraisal
• Variable pay - Compensation based on performance
  (bonus)
• Piecework Employees paid for each unit they
  produce

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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 a demotivator

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Competency-Based Pay

• Compensates on basis of demonstrated expertise

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Seniority

• Length of time an employee has been associated
  with the company, division, department, or job
• Labor unions tend to favor seniority

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Experience

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

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Potential

• Organizations do pay some individuals based on
  their potential
• Many young employees are paid well because of
  their potential

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Political Influence

• Should not be used to determine financial
  compensation
• To deny its existence would be unrealistic
• A person's pull or political influence may sway
  pay and promotion decisions

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Luck

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