Chapter 9 Managing Compensation Notes

Strategic Compensation Planning

Compensation of employees in ways that enhance motivation and growth, while aligning
their efforts with the objectives, philosophies and culture of the organization
Mesh monetary payments with specific functions of the HR program
A.) Linking Compensation to Organizational Objectives
1. Reward employees based on indiv competencies or wrk contributions to org success
2. Link pay strategy with org performance
3. Value-added compensation evaluating the individual components of the
compensation program to see whether they advance the needs of the employees
and the goals of the organization (pmts that fail to advance either employee or org r
removed from compensation program)

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B.) The Pay-for-Performance Standard

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Pay-for-performance standard standard by which mgrs tie compensation to

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employee effort and performance; raises productivity and lower labor costs

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seek to differentiate b/t pay of ave performer and outstanding ones
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1. Motivating Employees Through Compensation
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a) Pay constitutes a quantitative measure of an employees rel worth
b) Equitable in terms of (1) an employees contributions (2) what other
employees receive for their contributions
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2. Pay Equity
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a) Equity Theory distributive fairness motivation theory that describes

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how people respond to situations in which they feel they have received less
(or more) than they deserve; central 2 theory: role of percep n comparison
1. Ratio = Inputs/Outputs
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2. If inequitable relative to others creates tension and motivates them

to eliminate or reduce inequality (strength motivation propor to mag)
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b) Pay equity compensation received is perceived as equal to val of work perf

3. Expectancy Theory and Pay
a) Ones level of motivation depends on the attractiveness of rewards and the
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probability of obtaining those rewards

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b) Humans thinking, reasoning peop w/ beliefs n anticipations futr life events

4. Pay Secrecy
a) Can gen distrust in compen system, reduce motivation and inhibit org effctns
b) Gives mgrs grtr freedom in comp mgmt and covers up inequities existing
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w/in internal pay structure

c) Knowledge of base pay: (1) strongest predictor or pay satisfaction (2) more
strongly predicts than actual pay received
C.) The Basis for Compensation
1. Piecework work paid according to # of units produced
2. Hourly work paid in hourly basis; hourly employees or wage earners

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 3. Salaried employees basis of weekly, biweekly or monthly pay periods; paid the
same amt for each pay period regardless of hours worked; receive other benefits
4. Nonexempt employees those covered by overtime provisions of Fair Labor
Standards Act time and for excess of 40 hrs in one week
5. Exempt employees not covered; mgrs, supervisors, and white-collar employees

Determining Compensation The Wage Mix

Wage mix interaction/combination of internal and external factors that can influence,
directly or indirectly, the rates at which employees are paid
A.) Internal Factors
1. Employers Compensation Strategy set pay policies that reflect:
a) Internal wage relationship among jobs and skill levels
b) External competition or employers pay position relative to what competitors

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are paying (ex. industry pay leader or wage-competitive)

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c) Policy of rewarding employee performance

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d) Admin decisions concernin elements of pay system (like: premiums, periods)

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2. Worth of a Job

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a) Org w/o formal comp program worth based on subjective opinions; pay
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rates may be heavily influenced by labor mkt or collective bargaining
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b) Org with rely on a system of job evaluation
c) Compensation professionals believe: jobs value should be based on the total
value delivered to the org; price important jobs effectively
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3. Employees Relative Worth

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a) Employees perf recogn and rewarded thru promotion and incentive systems
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b) Also grant merit raises; determined by effective perf appraisal system

4. Employers Ability to Pay
a) Pay levels r limited by earned profits n other fin resources avail 2 employers
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b) Ability to pay determined by: (1) productivity of employees (2) amt capital
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invested in labor-saving equip (more I less employees higher wages) (3)

competition and econ conditions (competition and recession lower prices
reduced income reduce wages and/or layoffs)
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B.) External Factors

1. Labor Mkt Conditions
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a) Supply and demand for qualified labor in an area; infl wage rates
b) Counterforces (econ power of unions and gov regs) reduce full impact
2. Area Wage Rates
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a) Wage data surveys thru others or conduct own; provide external wage
equity; data must take into acct indirect wages paid in form of benefits
b) Cooperative exchange of wage info
3. Cost of Living
a) Bc of inflation, to maintain purchasing power, comp rates periodically adj ^

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 b) Consumer Price Index (CPI) measure of ave change in prices over time in a
fixed mkt basket of G&Ss; based on prices of (1) food, clothing, shelter, and
fuels (2) trans fares (3) charges 4 med servs (4) prices day-to-day living G&Ss
c) Granting wage increases solely on CPI compress pay rates w/in pay structure,
creates inequities bc made on cents-per-hour not %age
d) Adjustments should be made periodically to base rates
e) Escalator clauses in labor agreements that provide for quarterly cost-of-
living adjmts in wages, based on changes in CPI (ex. $0.01 per hour for each
0.3- or 0.4-point change in CPI)
4. Collective Bargaining a primary function of labor unions
a) Goal achieve increases in real wages wage increases lrgr than incr in CPI
thereby improving purchasing power and standard of living of its members
b) Equal or exceed patterns est by other local unions

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c) Est rate patterns w/in the labor mkt

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d) union scale- rate must pay work performed under gov contract

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Job Evaluation Systems

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Job evaluation systematic process of determining the rel worth of jobs in order to est

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which should be paid more than others w/in the org; helps est internal equity
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Rel worth determined by comparing job with others within the org or with a scale
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constructed 4 this purpose; basis of jobs as a whole or parts that constitute the jobs
A.) Job Ranking System simplest and oldest
1. Job ranking system system of job eval, jobs are arrayed on basis of rel worth
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2. Can be done by single indiv or committee or mgmt and employee reps

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3. Paired-comparison method ranking table that lists jobs in both rows and columns.
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If row job ranked higher, an X is placed in cell. Total Xs for row jobs which est the
worth rel to other jobs; then wage rates assigned thru use of salary survey
4. Disadvantages: (1) doesnt provide precise measure of each jobs worth (2)indicates
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rel importance not differences in degree of importance (3) can be used only with
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small # (no more than 15)

B.) Job Classification System
1. Job classification system system of job eval, jobs classified n grouped according to
a series of predetermined wage grades (the scale for comparison); w/ increasing
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amts of responsibility & KSAs; slot job into appropriate grade

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2. Simple but less precise than pt system bc job eval as a whole

C.) Point System
Point system quantitative job evaluation procedure that determins the rel value of
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a job by the total point assigned to it

Used by lrg and small orgs; complicated to est but then simple to understand n use;
provides more defined basis; results more valid and less easy to manipulate
Jobs eval on basis of compensable factors skills, efforts, responsibilities and
working conditions that constitute a job; rank one job as more impt than another
(1) Compensable factors determined (2) assigned weights (according to rel
importance) (3) each factor divided into a # of degrees rep diff levels of difficulty

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 1. The Point Manual
a) Handbook contains: (1) description of factors (2) degrees to which they may
exist (3) # of pts allocated to each factor and degree
b) Point val assigned to a job reps the sum of num degree vals of each factor
that job possesses
2. Using the Point Manual
a) Relative worth determined by total point value assigned to a job
D.) Work Valuation relatively new; est to meet demands of dynamic bus environment
1. Work valuation seeks to measure jobs worth through its val to org
2. Work is measured through standards that come directly from bus goals
3. All forms of work, employee roles and ways of organization work are valued
4. Ends w/ wrk hierarchy array of wrk by val to org; later priced thru wage surveys
E.) Job Evaluation for Mgmt Positions

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1. Employ standardized (purchased) program or customize a pt method to fit part. Jobs

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2. Hay Profile Method job eval tech using 3 factors knowledge, mental activity and

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accountability to eval executive and managerial positions

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a) Profile for each position developed by determining %age value to b assigned

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to each factor (1) jobs then ranked on basis of each factor (2) points awarded
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based on %-val level at which job is ranked
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The Compensation Structure
A.) Wage and Salary Surveys maintain external equity
1. Wage and Salary Survey comp tool; survey of wages paid to employees of other
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employers in the surveying orgs rel labor mkt could be local, nation, or regional
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1. Collecting Survey Data

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a) Can conduct own or use preconducted pay survey

b) National Compensation Survey statistically valid and comprehensive
wage, salary and benefit info
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c) States - municipal or county basis, trade groups tailored to members

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needs, international surveys

2. HRIS and Salary Survey
a) Wage and benefit survey data found many websites for purchase or
participation
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3. Employer-Initiated Surveys
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a) Benchmark job characteristics:

i. Important to employees and org
ii. Contain large # of positions
iii. Rel stable job content
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iv. Same job content across orgs

v. Acceptable to empls, mgmt, and labor as appropriate 4 pay comparisons
b) Steps:
i. Select benchmark jobs to be used in survey
ii. Identify orgs w/ whom compete for employees (10-15; diverse)
iii. Decide what infor to gather on wages, benefit types and pay policies

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 iv. Precisely define compensation data that is needed for new hires or sr
employees increases accuracy and # of purposes data can be used
B.) The Wage Curve
1. Wage curve curve in a scattergram representing the relationship b/t relative worth
of jobs n wage rates
2. Current rates, new rates from job eval, rates for similar jobs in other orgs
3. Series of dots, curve drawn through middle of dots (can be straight or curved)
C.) Pay Grades
1. Pay grades groups of jobs w/in a particular class that are paid the same rate; group
jobs in2 pay grades n pay all jobs w/in a particular grade the same rate or rate range
2. Job classification jobs are already grouped
3. Point system they must be est at selected intervals that rep either the pt or
evaluated monetary value of these jobs

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4. # of grades w/in a wage structure varies depending on:

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a) Slope of the wage curve

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b) # and distribution of jobs w/in the structure

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c) Orgs wage admin and promotion policies

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D.) Rate Ranges for each pay grade
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1. Range maybe same for each grade or
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2. proportionally greater 4 each successive grade
a) creates greater incentive to accept promos to higher pay grades
3. generally divided into series of steps with a min and max employees receive
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increase in wage based on merit, seniority or combo of both

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4. ranges of adjoining pay grades can overlap to equate experience, wage and grade
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5. red circle rates pmt rates about the max of a pay range employees with high
seniority or lack of promotional ops employers often freeze these rates until all
ranges are shifted ^ thru mkt wage adjustments
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E.) Competence-Based Pay skill-based pay or knowledge-based pay

1. Competence-based pay pay based on employees skill level, variety of skills
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possessed, or increased job knowledge

2. Earn higher wages by learning and performing a wider variety of skills or displaying
an array of competencies
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3. Benefits:
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a) Greater productivity
b) Increased employee learning and commitment to work
c) Improved staffing flex to meet production or service demands
d) Reduced effects of absenteeism and turnover
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4. Long-term difficulties:
a) Limit amt of comp that can be earned; reduced motivation after achieving
top wage
b) Challenge in developing appropriate measures
5. Broadbanding
a) Used to structure compensation pmts
b) Collapses many traditional salary grades into a few wide salary bands

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 c) May have midpoints and quartiles or have extr wide ranges or no ranges
d) Encourages lateral skill building; emplys to move to jobs aid in dev their
careers and add val to the org
e) Org consider: (1) job responsibilities (2) indiv skills and competencies (3)
career mobility patterns in assigning employees to bands

Government Regulation of Compensation

States have min wage laws or fix min wage rates on industry to industry basis
Employee subject to both state and fed min wage laws get the higher of the 2
A.) Davis-Bacon Act of 1931 Prevailing Wage Law
1. For people employed on fed public wrk projects worth more than $2000
2. Min wage rates prevailing rates (usually union rates)
3. Overtime = time and 1/2

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B.) Walsh-Healy Act of 1936 Public Contracts Act

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1. Workers employees on gov contract work for supplies, equip and materials worth

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more than $10,000

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2. Paid prevailing wage rates est by local secretary of labor;

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3. 1 overtime; excess 8 hrs per day or 40 per week
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C.) Fair Labor Standards Act of 1938 (as Amended) Wage and Hour Act
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Covers employees in production of goods for interstate and foreign commerce, who
work is closely related to or essential to production, ag workers, employees of
certain retail and service est (whos sales vol exceeds prescribed amount)
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1. Wage and Hour Provisions

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a) Min rate actual earnings b4 overtime premiums are added

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b) Time and for overtime; excess 40 hrs per week

c) Base wage rate for computation of overtime includes incentive pmt and
bonuses received during a period
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d) Comp time 1 x # overtime hours

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e) Doesnt cover severance pay, sick leave, vacation or holidays

2. Child Labor Provisions
a) Forbids employment of minors 16-18 in hazardous occupations
b) Under 16 cant employed work destined for interstate commerce except
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nonhaz occupation for parent, guardian, or employer under temp wrk permit
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3. Exemption from Overtime Provisions

a) Excluded: exec, admin, professional, computer and outside sales people;
other employees if wkly or annual earnings exceed certain limits
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b) Fair Pay Rules strngthn ovrtime protectns n redefine job req for exempt gps
1. Overtime to employees earning less than $455/wk or $26,660/yr
2. New standards test $26,660 - $100,00 excluded?
3. Admin personnel exempt if duties incl discretion n indpdt judgment
4. Equal Rights Provisions
a) Seniority, merit, and indiv incentive plans are not affected

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 Significant Compensation Issues
Rest in notes

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