Managing

Compensation

Human Resource Management

Managing Human Resources
Snell • Bohlander
Bohlander • Snell 14th edition

© 2007 Thomson/South-Western. PowerPoint Presentation by Charlie Cook

All rights reserved. The University of West Alabama
 Objectives
After studying this chapter, you should be able to:

1. Explain employer concerns in developing a

strategic compensation program.
2. Indicate the various factors that influence the
setting of wages.
3. Differentiate the mechanics of each of the major
job evaluation systems.
4. Explain the purpose of a wage survey.
5. Define the wage curve, pay grades, and rate
ranges as parts of the compensation structure.

© 2007 Thomson/South-Western. All rights reserved. 9–2

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

6. Identify the major provisions of the federal laws

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

© 2007 Thomson/South-Western. All rights reserved. 9–3

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

© 2007 Thomson/South-Western. All rights reserved. 9–4

 Total
Total Compensation
Compensation

Direct
Direct Indirect
Indirect

Wages Time
TimeNot
NotWorked
Worked
Wages//Salaries
Salaries ••Vacations
Vacations
••Breaks
Breaks
••Holidays
Holidays
Commissions
Commissions
Insurance
InsurancePlans
Plans
Bonuses ••Medical
Medical
Bonuses ••Dental
Dental
••Life
Life
Gainsharing
Gainsharing Security
SecurityPlans
Plans
••Pensions
Pensions

Employee
EmployeeServices
Services
••Educational
Educationalassistance
assistance
••Recreational programs
Recreational programs

© 2007 Thomson/South-Western. All rights reserved. 9–5

 Compensation Management and
Other HRM Functions

Supply
Supplyofofapplicants
applicants
Aid
Aidor
orimpair
impairrecruitment
recruitment Recruitment
Recruitment affects
affects wagerates
wage rates

Selection
Selectionstandards
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affect
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Payrates
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Selection level of pay required
level of pay required

Training
Trainingand
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Low
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encourages Pay
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determined
unionization
Labor
LaborRelations
Relations through negotiation
unionization through negotiation

© 2007 Thomson/South-Western. All rights reserved. 9–6

 Strategic Compensation Planning
• Strategic Compensation Planning
 Links the compensation of employees to the mission,
objectives, philosophies, and culture of the
organization.
 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.

© 2007 Thomson/South-Western. All rights reserved. 9–7

 Linking Compensation to Organizational
Objectives
• Value-added Compensation
 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?”

© 2007 Thomson/South-Western. All rights reserved. 9–8

 Common Strategic Compensation Goals
1. To reward employees’ past performance
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

© 2007 Thomson/South-Western. All rights reserved. 9–9

 Strategic Compensation Policy Concerns
1. 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.

© 2007 Thomson/South-Western. All rights reserved. 9–10

 The Pay-for-Performance Standard
• Pay-for-Performance Standard
 The standard by which managers tie compensation to
employee effort and performance.
 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.

© 2007 Thomson/South-Western. All rights reserved. 9–11

 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?

© 2007 Thomson/South-Western. All rights reserved. 9–12

 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.

© 2007 Thomson/South-Western. All rights reserved. 9–13

 Figure 9–1 Relationship between Pay Equity and Motivation

Doing More and Receiving Less Doing the Same and Receiving the Same Doing Less and Receiving More

The greater the perceived disparity between my input/output ratio and

the comparison person’s input/output ratio, the greater the motivation
to reduce the inequity.

© 2007 Thomson/South-Western. All rights reserved. 9–14

 Expectancy Theory and Pay
• Expectancy Theory
 A theory of motivation that holds that 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.

© 2007 Thomson/South-Western. All rights reserved. 9–15

 Figure 9–2 Pay-for-Performance and Expectancy Theory

© 2007 Thomson/South-Western. All rights reserved. 9–16

 Motivating Employees through
Compensation
• Pay Secrecy
 An 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.

© 2007 Thomson/South-Western. All rights reserved. 9–17

 The Bases for Compensation
• Hourly Work
 Work paid on an hourly basis.
• Piecework
 Work paid according to the number of units produced.
• Salary Workers
 Employees whose compensation is computed on the
basis of weekly, biweekly, or monthly pay periods.

© 2007 Thomson/South-Western. All rights reserved. 9–18

 The Bases for Compensation (cont’d)
• Nonexempt Employees
 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.

© 2007 Thomson/South-Western. All rights reserved. 9–19

 The Bases for Compensation (cont’d)
• 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.

© 2007 Thomson/South-Western. All rights reserved. 9–20

 Figure 9–3 Factors Affecting the Wage Mix

© 2007 Thomson/South-Western. All rights reserved. 9–21

 The Wage Mix—Internal Factors
• Employer’s Compensation Strategy
 Setting organization compensation policy to lead, lag,
or match competitors’ pay.
• Worth of a Job
 Establishing the internal wage relationship among
jobs and skill levels.
• Employee’s Relative Worth
 Rewarding individual employee performance
• Employer’s Ability-to-Pay
 Having the resources and profits to pay employees.

© 2007 Thomson/South-Western. All rights reserved. 9–22

 Highlights in HRM 1

Comparison of Compensation Strategies

© 2007 Thomson/South-Western. All rights reserved. 9–23

 The Wage Mix—External Factors
• Labor Market Conditions
 Availability and quality of potential employees is
affected by economic conditions, government
regulations and policies, and the presence of unions.
• Area Wage Rates
 A firm’s formal wage structure of rates is influenced
by those being paid by other area employers for
comparable jobs.

© 2007 Thomson/South-Western. All rights reserved. 9–24

 The Wage Mix—External Factors
• Cost of Living
 Local 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.

© 2007 Thomson/South-Western. All rights reserved. 9–25

 The Wage Mix—External Factors
• Collective Bargaining
 Escalator clauses in labor agreements provide for
quarterly upward cost-of-living 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.

© 2007 Thomson/South-Western. All rights reserved. 9–26

 Consumer Price Index (CPI)
• A measure of the average change in prices over time in a
fixed “market basket” of goods and services

© 2007 Thomson/South-Western. All rights reserved. 9–27

 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.

© 2007 Thomson/South-Western. All rights reserved. 9–28

 Different Job Evaluation Systems

SCOPE OF COMPARISON

JOB AS JOB PARTS

BASIS FOR A WHOLE OR FACTORS
COMPARISON (NONQUANTITATIVE) (QUANTITATIVE)

Job vs. job Job ranking Factor comparison

system system

Job vs. scale Job classification Point

system system

© 2007 Thomson/South-Western. All rights reserved. 9–29

 Job Evaluation Systems
• 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 extent of differences between jobs.
 Method can used to consider only a reasonably small
number of jobs.

© 2007 Thomson/South-Western. All rights reserved. 9–30

 Figure 9–4 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.

© 2007 Thomson/South-Western. All rights reserved. 9–31

 Job Evaluation Systems
• Job Classification system
 A 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.

© 2007 Thomson/South-Western. All rights reserved. 9–32

 Point System
• Point System
 A 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 Manual
 A handbook that contains a description of the
compensable factors and the degrees to which these
factors may exist within the jobs.

© 2007 Thomson/South-Western. All rights reserved. 9–33

 Highlights in HRM 2

Point Values for Job Factors of the American Association

of Industrial Management
1ST 2ND 3RD 4TH 5TH
FACTORS DEGREE DEGREE DEGREE DEGREE DEGREE
Skill
1. Education 14 28 42 56 70
2. Experience 22 44 66 88 110
3. Initiative and ingenuity 14 28 42 56 70

Effort
4. Physical demand 10 20 30 40 50
5. Mental or visual demand 5 10 15 20 25

Responsibility
6. Equipment or process 5 10 15 20 25
7. Material or product 5 10 15 20 25
8. Safety of others 5 10 15 20 25
9. Work of others 5 10 15 20 25

Job Conditions
10. Working conditions 10 20 30 40 50
11. Hazards 5 10 15 20 25

Source: Reproduced with permission of the American Association of Industrial Management, Springfield, Mass.
© 2007 Thomson/South-Western. All rights reserved. 9–34
 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.

© 2007 Thomson/South-Western. All rights reserved. 9–35

 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.

© 2007 Thomson/South-Western. All rights reserved. 9–36

 The Compensation Structure
• Wage and Salary survey
 A 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 Market
 The area from which employers obtain certain types
of workers.

© 2007 Thomson/South-Western. All rights reserved. 9–37

 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.

© 2007 Thomson/South-Western. All rights reserved. 9–38

 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.

© 2007 Thomson/South-Western. All rights reserved. 9–39

 Characteristics of Key Jobs
• Key Jobs
 Jobs that are important for wage-setting purposes
and are widely known in the labor market.
• Characteristics of Key Jobs
1. They are important to 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.

© 2007 Thomson/South-Western. All rights reserved. 9–40

 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.

© 2007 Thomson/South-Western. All rights reserved. 9–41

 Figure 9–5 Freehand Wage Curve

© 2007 Thomson/South-Western. All rights reserved. 9–42

 Figure 9–6 Single Rate Structure

© 2007 Thomson/South-Western. All rights reserved. 9–43

 Figure 9–7 Wage Structure with Increasing Rate Ranges

© 2007 Thomson/South-Western. All rights reserved. 9–44

 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.

© 2007 Thomson/South-Western. All rights reserved. 9–45

 Government Regulation of Compensation
(Federal Wage Laws)
Required
Requiredminimum
minimumwage,
wage,prevailing
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© 2007 Thomson/South-Western. All rights reserved. 9–46

 Highlights in HRM 5

The Federal
Minimum Wage
Poster

© 2007 Thomson/South-Western. All rights reserved. 9–47

 Exemption from FLSA Overtime Provisions
• Fair Pay Rules (2004)
Were 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.

© 2007 Thomson/South-Western. All rights reserved. 9–48

 Significant Compensation Issues
• Equal Pay for Comparable Worth
 The 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.
• Wage-Rate Compression
 Compression of pay differentials between job classes,
particularly the pay differentials between hourly
workers and their managers.
• Low-Salary Budgets
 Current wage budgets reflect the general trend
toward tight compensation cost controls.

© 2007 Thomson/South-Western. All rights reserved. 9–49

 Figure 9–8 The 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 80.1 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.

Source: Median usual weekly earnings of full-time wage and salary workers by sex, age, race, and Hispanic or Latino ethnicity, current
dollars 1979–2004. Unpublished tabulations from Current Population Survey, Bureau of Labor Statistics, 2004. Data at www.bls.gov.
© 2007 Thomson/South-Western. All rights reserved. 9–50
 Reducing Wage-Rate Compression
• Give larger compensation increases to more-senior
employees.
• Emphasize pay-for-performance and reward meritworthy
employees.
• Limit the hiring of new applicants seeking exorbitant
salaries.
• Design the pay structure to allow a wide spread between
hourly and supervisory jobs or between new hires and
senior employees.
• Provide equity adjustments for selected employees
hardest hit by pay compression.

© 2007 Thomson/South-Western. All rights reserved. 9–51

 Figure 9–9 Salary Budgets by Type of Employee, 1994–2005

Source: Reprinted from 2004–2005 Total Salary Increase Budget Survey with permission from WorldatWork, 14040 N.
Northsight Blvd., Scottsdale, AZ 85260; phone (877) 951-9191; fax (480) 483-8352; http://www.worldatwork.org. ©
2002 WorldatWork. Unauthorized reproduction or distribution is strictly prohibited.
© 2007 Thomson/South-Western. All rights reserved. 9–52
 Key Terms
• comparable worth • pay equity
• competence-based pay • pay-for-performance standard
• consumer price index (CPI) • pay grades
• escalator clauses • piecework
• exempt employees • point system
• Hay profile method • real wages
• hourly work • red circle rates
• job classification system • value-added compensation
• job evaluation • wage and salary survey
• job ranking system • wage curve
• nonexempt employees • wage-rate compression
• work valuation

© 2007 Thomson/South-Western. All rights reserved. 9–53