Chapter 9
Determining Pay and Benefits
Chapter 9 Objectives
• Explain how effective compensation systems enhance competitive
advantage
• Understand how people form perceptions about a pay system's
equity
• Describe how organizations can build an equitable pay system
• Define the legal constraints imposed on organizational pay practices
• Understand the various benefit options and their administration
Linking Pay and Benefits to Competitive
Advantage
• If effective, a firm’s
compensation system can:
• Improve cost efficiency.
• Ensure legal compliance.
• Enhance the success of
recruitment efforts.
• Reduce morale and turnover
problems.
Influences of Compensation on
Attitudes and Behavior – Equity Theory
• People form equity beliefs based on two factors:
• Inputs (I): The perceptions that people have concerning what
they contribute to the job (e.g., skill and effort).
• Outputs (O): The perceptions that people have regarding the
returns they get (e.g., pay) for the work they perform.
• People judge the equity of their pay by comparing their
outcome-to-input ratio (O/I) with another person’s ratio,
who is referred to as one’s “referent other.”
Influences of Compensation on
Attitudes and Behavior – Equity Theory
• Equity: O/I ratios of the individual and his or
her referent other are perceived as being
equal.
• Inequity: O/I ratios of the individual and his or
her referent other are perceived as being
unequal.
• When employees’ O/I ratios are less than that
of their referent others, they feel they are being
underpaid.
• When employees’ O/I ratios are greater, they
feel they are being overpaid.
Influences of Compensation on
Attitudes and Behavior – Equity Theory
• When underpaid, employees tend to
decrease inputs or escape the
situation.
• Overpaid employees consider
overpayment just as satisfying as
equity or somewhat dissatisfying, but
not nearly as dissatisfying as
underpayment.
Establishing Pay Rates Within an
Organization
• Employees believe their pay is equitable
when they perceive these circumstances:
Internal consistency: Pay is fair relative to the pay coworkers in
the same organization receive.
External competitiveness: Pay is fair relative to the pay received
by workers in other organizations who hold similar positions.
Employee contributions: Pay fairly reflects their input to the
organization.
Establishing Pay Rates Within an
Organization
• Achieving internal consistency
• Determine the overall importance or worth of each
job.
• Job evaluation is the systematic process for
determining the worth of a job.
• Standards for job evaluation
•
•
•
•
•
Consistency
Freedom from bias
Correctability
Representativeness
Accuracy of information
Establishing Pay Rates Within an
Organization
Achieving Internal Consistency (Cont.)
• How job evaluation is conducted: Point-Factor Method:
• Step 1: Select and define the compensable factors used to determine
job worth.
• Step 2: Determine the number of levels or degrees for each factor.
• Step 3: Carefully define each degree level.
• Step 4: Weigh each compensable factor in terms of its relative
importance.
• Step 5: Assign point values to the degrees associated with each
compensable factor.
• Step 6: Calculate the total point value for a job by summing the points
earned on each compensable factor.
Establishing Pay Rates Within an
Organization
Achieving Internal Consistency (Cont.)
• Assigning jobs to pay grades
• Jobs are grouped into pay grades based on
the total number of points received.
• Pay grades: Job groupings in which all jobs
assigned to the same group are subject to
the same range of pay.
• Companies must decide how many pay
grades to establish.
Establishing Pay Rates Within an
Organization
Achieving external competitiveness
• Collecting salary survey information
• Provides information on pay rates
offered by a firm’s competitors for
certain benchmark jobs.
• Establishing a pay policy
• A pay policy stipulates how well a
company will pay its employees
relative to the market.
• Majority of firms pay at the market
rate.
• When setting its pay policy, a
company must consider its strategic
plan.
Establishing Pay Rates Within an
Organization
Achieving external competitiveness
• Establishing pay rates
• Market rates identified by salary surveys are used for
benchmark jobs.
• For non-benchmark jobs, pay rates are set based on the pay
policy line.
• Pay policy line: A regression line that shows the statistical
relationship between job evaluation points and prevailing
market rates.
Establishing Pay Rates Within an
Organization
Recognizing employee contributions
• An organization must establish a pay
range for each pay grade.
• Each employee must then be placed
within that range based on their
contribution to the organization.
• Pay range specifies the minimum and
maximum pay rates for all jobs within a
grade.
Establishing Pay Rates Within an
Organization
Recognizing Employee Contributions
• Establishing a pay range
• Most employers set market rate as the
midpoint of the range.
• The spread from the midpoint usually varies,
becoming larger as one progresses to higher
pay grades.
• The mechanism for placing each employee
within a pay range differs for new and existing
employees.
• New employees are usually paid at the
bottom of the pay range unless their
qualifications exceed the minimum.
Establishing Pay Rates Within an
Organization
Recognizing Employee Contributions
• Skill-based pay
• A compensation approach that grants employees pay increases for
acquiring new, job-related skills.
• Usually implemented as follows:
• Identify tasks that need to be performed.
• Determine what skills are needed to perform the tasks.
• Develop tests or measures to determine whether an individual has
learned the skills.
• Price each skill based on its value to the organization.
• Communicate to employees the skills they can learn and how much
they will be paid for learning them.
Establishing Pay Rates Within an
Organization
Recognizing Employee Contributions
Skill-based pay
•
Strengths
•
•
•
Financial incentive to improve
skills.
Effective communication and
problem solving skills.
Commitment to the
organization.
•
Weaknesses
•
•
•
•
•
•
Additional labor costs.
May lead to inequity perceptions.
Not cost-effective if company does
not use the new skills.
Problems determining the skill
levels of different employees.
Administrative burden.
Least effective in bureaucratic
organizations.
Legal Constraints on Pay Practices
• The law imposes constraints on
organizational pay practices in two
major areas:
• Minimum wage and overtime
• Pay discrimination
Legal Constraints on Pay Practices
• Minimum wage and overtime
• The Fair Labor Standards Act (FLSA) primarily
regulates minimum wage and overtime pay
practices.
• The act exempts small organizations and certain
types of employees from its minimum wage and
overtime requirements.
• Job categories exempted include executive,
administrative, professional, and outside sales
employees.
Christmas Vacation
Questions:
1. What are Clark’s issues in this scene?
2. Is Clark legitimate in his expectations of a
Christmas bonus?
3. What are some strategies that Clark’s company
could have employed to avoid any potential
backlash to cutting Christmas bonuses?
4. Was Clark’s psychological contract violated?
How might this impact his future work?
5. Is performance truly tied to compensation at
Clark’s company?
6. If the company was concerned with increasing
cash flow, what are some low-cost alternatives to
monetary compensation that might have been
alternatively employed?
Legal Constraints on Pay Practices
• Minimum wage and overtime (cont.)
• Minimum wage provisions: If a state’s minimum wage
level differs from the federal minimum wage level, the
employer must pay the higher of the two rates.
• Overtime provisions: All nonexempt employees who
work in excess of 40 hours/week, must be paid for
overtime worked, no less than one-half times the
employee’s regular pay rate.
Legal Constraints on Pay Practices
• Pay and discrimination
• The Equal Pay Act (EPA)
• The gender pay gap
• Comparable worth and the law
Legal Constraints on Pay Practices
Pay and Discrimination
• The Equal Pay Act
– Prohibits sex discrimination in pay.
– The ‘‘equal pay for equal work’’
standard requires that jobs
requiring an equal level of skill,
effort, and responsibility and
performed under similar working
conditions must be paid equally.
– Unequal pay for equal work is
allowed if differences are based on
seniority, productivity, merit, or any
factor other than sex.
Legal Constraints on Pay Practices
Pay and Discrimination
• The gender pay gap
• Despite the existence of EPA, pay
gap still exists between the sexes.
• This pay gap has been attributed to
women working part-time, staying
for a shorter period in the
workforce, and being less effective
in negotiating starting salaries.
• The ‘‘equal pay for equal worth’’
standard is called comparable
worth.
Legal Constraints on Pay Practices
Pay and Discrimination
• Comparable worth and the
law
– To win a comparable worth
case, plaintiffs must prove
disparate impact caused by
intentional discrimination.
– Employers can win the case if
they can prove that pay
differences are not the result of
intentional discrimination.

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