Human Resource Management

COMPENSATION

2008 by Prentice Hall

9-1

Compensation: An Overview
Compensation - Total of all rewards provided employees in return for services Direct financial compensation - Pay received in form of wages, salaries, bonuses, and commissions Indirect financial compensation (benefits) - All financial rewards not included in direct compensation Nonfinancial compensation - Satisfaction person receives from job itself or from psychological and/or physical environment in which person works
2008 by Prentice Hall 9-2

Components of Total Compensation Program

External Environment Internal Environment

Compensation
Financial
Direct Indirect (Benefits)

Nonfinancial
The Job

Job Environment Sound Policies Wages Legally Required Benefits Skill Variety Task Capable Managers Salaries Social Security Identify Task Competent Employees Commissions Unemployment Compensation Significance Congenial Coworkers Bonuses Workers Compensation Autonomy Suitable Status Symbols Family & Medical Leave Feedback Working Conditions Voluntary Benefits Workplace Flexibility Payment for Time Not Worked Flextime Health Care Compressed Workweek Life Insurance Job Sharing Retirement Plans Customized Benefit Plans Disability Protection Telecommuting Employee Stock Option Plans Part-time Work Customized Benefit Plans More Work, Fewer Hours

2008 by Prentice Hall

9-3

Equity Theory
Motivation theory that people assess their performance and attitudes by comparing both their contribution to work and benefits they derive from it to contributions and benefits of comparison others whom they selectand who in reality may or may not be like them

2008 by Prentice Hall

9-4

Equity in Financial Compensation

Financial equity - Perception of 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 jobs within same organization
2008 by Prentice Hall 9-5

Equity in Financial Compensation (Cont.)

Employee equity - Individuals performing similar jobs for same firm are paid according to factors unique to employee, such as performance level or seniority Team equity - More productive teams are rewarded more than less productive groups

2008 by Prentice Hall

9-6

Primary Determinants of Direct Financial Compensation

Organization
Compensation Policies Organizational Level Ability to Pay

Employee
Job Performance Skills Competencies Seniority Experience Organization Membership Potential Political Influence Luck

Job Direct Financial Compensation

Labor Market
Compensation Surveys Expediency Cost of Living Labor Unions Economy Legislation

Pricing

Job
Job Analysis Job Descriptions Job Evaluation
2008 by Prentice Hall 9-7

Organization as a Determinant of Direct Financial Compensation

Compensation Policies Organizational Level Ability to Pay

2008 by Prentice Hall

9-8

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 do not require highly capable employees

2008 by Prentice Hall

9-9

Organizational Level
Upper management often makes decisions to ensure consistency Extreme pressure to retain top performers may override desire to maintain consistency in pay structure

2008 by Prentice Hall

9-10

Ability to Pay
Organizations assessment of ability to pay is important factor in determining pay levels

2008 by Prentice Hall

9-11

Labor Market as Determinant of Direct Financial Compensation

Potential employees located within geographic area from which employees are recruited Pay for same jobs in different labor markets may vary considerably
2008 by Prentice Hall 9-12

Compensation Surveys
What are other firms paying? Geographic area of survey Specific firms to contact Jobs to include
2008 by Prentice Hall 9-13

Expediency
Managers in highly technical and specialized areas occasionally need to utilize nontraditional means to determine what constitutes competitive compensation for scarce talent and niche positions Need real-time information

2008 by Prentice Hall

9-14

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 inflation rate
2008 by Prentice Hall 9-15

Labor Unions
Mandatory collective bargaining between management and unions as wages, hours, and other terms and conditions of employment. Cost-of-living allowance has been disappearing

2008 by Prentice Hall

9-16

The Economy
Affects financial compensation decisions Depressed economy generally increases labor supply Cost of living often rises as economy expands
2008 by Prentice Hall 9-17

Employee as Determinant of Direct Financial Compensation

PerformancePerformance-based Pay SkillsSkilled-based Pay CompetenciesCompetency-based Pay Seniority Experience Membership in the organization Potential Political Influence Luck
2008 by Prentice Hall 9-18

Performance-Based Pay
Merit pay - Pay increase given to employees based on level of performance as indicated in appraisal Variable Pay -: Bonus - Most common type of variable pay for performance. One-time financial award based on productivity Spot bonuses - Relatively small, gifts to employees for outstanding work or effort Piecework - Employees paid for each unit they produce

2008 by Prentice Hall

9-19

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 demotivator
2008 by Prentice Hall 9-20

Competency-Based Pay
Rewards employees for capabilities they attain Competencies include skills but also involve other factors such as motives, values, attitudes, and selfconcepts

2008 by Prentice Hall

9-21

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

2008 by Prentice Hall

9-22

Experience
Regardless of nature of job, very few factors have a more significant impact on performance than experience Dot-com world has changed attitude with regard to experience

2008 by Prentice Hall

9-23

Membership in Organization
Components of individual financial compensation are given to employees regardless of particular job they perform or level of productivity Maintains high degree of stability in workforce and recognizes loyalty

2008 by Prentice Hall

9-24

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

2008 by Prentice Hall

9-25

Political Influence
Should not be used to determine financial compensation To deny its existence would be unrealistic Person's pull or political influence may sway pay and promotion decisions
2008 by Prentice Hall 9-26

Luck

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

2008 by Prentice Hall

9-27

Team-Based Pay
If team is to function effectively, firms should provide reward based on overall team performance
2008 by Prentice Hall 9-28

Company-Wide Pay
Profit sharing - Distribution of predetermined percentage of firms profits to employees Gainsharing - Bind employees to firms productivity and provide incentive payment based on improved company performance Scanlon plan - Reward to employees for savings in labor costs resulting from employees suggestions
2008 by Prentice Hall 9-29

Professionals Compensation
Initially compensated for knowledge they bring to organization Maturity curves reflect relationship between professional compensation and years of experience

2008 by Prentice Hall

9-30

Sales Representative Compensation

Straight salary Straight commission Endless variety of part-salary, partcommission combinations
2008 by Prentice Hall 9-31

Contingent Workers Compensation

In most cases, contingency workers earn less pay than permanent counterparts Far less likely to receive health or retirement benefits

2008 by Prentice Hall

9-32

Executive Compensation

Critical factor in attracting and retaining best managers

2008 by Prentice Hall

9-33

Types of Executive Compensation

Base salary Short-Term Incentives or Bonuses Stock option plans Performance-Based Pay Executive benefits (Perks) Golden parachutes
2008 by Prentice Hall 9-34

Executive Benefits (Perks)

Any special benefits provided by a firm to small group of key executives and designed to give executives something extra Conveys status

2008 by Prentice Hall

9-35

Golden Parachutes
Perquisite that protects executives in event another company acquires firm or executive is forced to leave firm for other reasons

2008 by Prentice Hall

9-36

Job as Determinant of Direct Financial Compensation

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

2008 by Prentice Hall

9-37

Job Analysis and Job Descriptions

Before organization can determine relative difficulty or value of jobs, must first define content Done by job analysis/job descriptions
2008 by Prentice Hall 9-38

Job Evaluation
Firm determines relative value of one job in relation to another Ranking Classification Factor comparison Point Hay guide chart-profile method
2008 by Prentice Hall 9-39

Ranking Method
Simplest method Raters examine description of each job Jobs arranged in order according to value
2008 by Prentice Hall 9-40

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
2008 by Prentice Hall 9-41

Factor Comparison Method

Five universal job factors Mental requirements, skills, physical requirements, responsibilities, and working conditions Raters need not keep entire job in mind as they evaluate; instead, they make decisions on separate aspects or factors of job
2008 by Prentice Hall 9-42

Point Method
Numerical values assigned to specific job components Sum of values gives quantitative assessment of jobs relative worth Job factors selected according to nature of specific group of jobs

2008 by Prentice Hall

9-43

Procedure for Establishing Point Method of Job Evaluation

Select Job Cluster Identify Compensable Factors Determine Degrees and Define Each Compensable Factors Determine Factor Weights Determine Factor Point Values Validate Point System
2008 by Prentice Hall 9-44

A Point Method Example

FACTOR: COMPLEXITY OF DUTIES III Performs work where only general methods are available. Independent 85 action and judgment are required regularly to analyze fact, evaluate situations, draw conclusions, make decision, and take or recommend action. II Performs duties working from standard procedures or generally 51 understood methods. Some independent action and judgment are required to decide what to do, determine permissible variations from standard procedures, review facts in situations, and determine action to be taken, within limits prescribed. I Little or no independent action or judgment. Duties are so standardized 17 and simple as to involve little choice as to how to do them.

2008 by Prentice Hall

9-45

Job Evaluation Worksheet (500-Point System)

Degree of Factor Job Factor
Education Job Knowledge Contacts Complexity of Duties Initiative

Weight
35% 25% 18% 17% 5%

1
35 25 18 17 5

70 105 140 175 50 42 51 10 75 100 125 66 85 15 20 25 90

2008 by Prentice Hall

9-46

The Hay Guide Chart-Profile Method

Refined version of the point method Know-how Problem Solving Accountability Additional compensable elements, such as working conditions
2008 by Prentice Hall 9-47

Job Pricing
Placing dollar value on worth of job Pay grades - Grouping of similar jobs to simplify pricing jobs Wage curve - Fitting of plotted points to create smooth progression between pay grades Pay ranges - Minimum and maximum pay rate with enough variance between to allow for significant pay difference
2008 by Prentice Hall 9-48

Job Pricing (Cont.)

Broadbanding - Collapses many pay grades into few wide bands to improve effectiveness Single rate system - Pay ranges not appropriate for some workplace conditions such as some assembly lines Adjusting pay rates - Overpaid and underpaid jobs
2008 by Prentice Hall 9-49

Broadbanding
Technique that collapses many pay grades (salary grades) into 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

2008 by Prentice Hall

9-50

Broadbanding and Its Relationship to Traditional Pay Grades and Ranges

Average Pay Per Hour

Grade 5
Grade 4 Grade 3 Grade 2 Grade 1 Band A

Band B

Low Job Worth

2008 by Prentice Hall

High
9-51

Employee Assistance Programme ESOP Flexitime Golden Handshake Overtime Flexible benefits Day Care Tuition Reimbursement Perquisites
2008 by Prentice Hall

Non-Traditional Benefits

9-52