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.