HR
SPRING
Managing
Compensation
10-1
Objectives:
 Identify the compensation policies and practices that are
most appropriate for a particular firm.
 Weigh the strategic advantages and disadvantages of the
different compensation options.
 Establish a job-based compensation scheme that is
internally consistent and linked to the labor market.
 Understand the difference between a compensation
system in which employees are paid for the skills they use
and one in which they are paid of the job they hold.
 Make compensation decisions that comply with the legal
framework.
10-2
Total Compensation
The package of quantifiable
rewards an employee receives for
his or her labors. Includes three
components: base compensation,
pay incentives, and indirect
compensation/benefits
10-3
The Elements of Total
Compensation
Total
Compensation
Base
Compensation
Pay
Incentives
Indirect
Compensation/
Benefits
10-4
TOTAL
COMPENSATION
Direct
financial
compensation
Wages
Salaries
Bonuses
Commissi
Indirect
financial
compensation
Benefit
s
Service
s
Nonfinancial
compensation
Praise
Selfesteem
Recogni
10-5
Compensation Policies:
Criteria for Effectiveness
Adequate
Equitable
Balanced
Cost-effective
Secure
Incentive-providing
Acceptable to the
employee
10-6
External Influences on Compensation:
Government Influences
(Wage and Hour Regulations)
Fair Labor Standards Act (FLSA) of
1938
PROVISIONS INCLUDE:
Minimum wage
Child
Labor
Overtime (Exhibit 10-3) Equal Pay Act of 1963
Salaried or exempt (from
overtime pay) employees
Hourly or nonexempt
employees
10-7
External Influences on Compensation:
Government Influences
EQUAL PAY ACT OF 1963
An effort to close the earnings gap between men
and women. Four exceptions:
Merit
Seniority
Quality
or quantity of production
Or any other fact other than sex
Earnings gap reduction
Nearly
3/4ths of reduction due to men’s
earnings decline
Comparable worth (pay equity)
10-8
External Influences on Compensation:
Labor Markets
DOMESTIC LABOR FORCE ISSUES
Supply
& demand conditions create
differential
pay levels
Increasing labor force diversity
INTERNATIONAL LABOR FORCE
ISSUES
Global
supply and demand conditions
Global wage differentials
American employees working abroad
10-9
The Nine Criteria for Developing a
Compensation Plan
1. Internal versus External Equity Will the compensation plan
be perceived as fair within the company, or will it be
perceived as fair relative to what other employers are paying
for the same type of labor?
2. Fixed versus Variable Pay Will compensation be paid
monthly on a fixed basis —through base salaries —or will it
fluctuate depending on such preestablished criteria as
performance and company profits?
3. Performance versus Membership Will compensation
emphasize performance and tie pay to individual or group
contributions, or will it emphasize membership in the
organization —logging in a prescribed number of hours
each week and progressing up the organizational ladder?
10-10
The Nine Criteria for Developing a
Compensation Plan (cont.)
4. Job versus Individual Pay Will compensation be based on
how the company values a particular job, or will it be based
on how much skill and knowledge an employee brings to
that job?
5. Egalitarianism versus Elitism Will the compensation plan
place most employees under the same compensation
system (egalitarianism), or will it establish different plans by
organizational level and/or employee group (elitism)?
6. Below-Market versus Above-Market Compensation Will
employees be compensated at below-market levels, at
market levels, or at above-market levels?
10-11
The Nine Criteria for Developing a
Compensation Plan (cont.)
7. Monetary versus Nonmonetary Awards Will the
compensation plan emphasize motivating employees
through monetary rewards like pay and stock options, or
will it stress nonmonetary rewards such as interesting work
and job security?
8. Open versus Secret Pay Will employees have access to
information about other workers’ compensation levels and
how compensation decisions are made (open pay) or will
this knowledge be withheld from employees (secret pay)?
9. Centralization versus Decentralization of Pay Decisions Will
compensation decisions be made in a tightly controlled
central location, or will they be delegated to managers of the
firm’s units?
10-12
The Labor Market Model
Wage
Supply of
Qualified
Employees
W1
Demand for
Employees
0
N1
Number of Qualified Workers
10-13
External Influences on Compensation:
Labor Unions
Pacesetters in demands for
pay and benefits
Can help determine wages
even for non-unionized
employees
Collective bargaining
agreements can set wage
and benefit levels
Tend to support seniority over
10-14
Percent of Base Salary
Percent of Salary in the Form of Bonus and
Long-term Income for Various Pay Salary
Brackets
90 88
80
70
65
60
60
55
50
50
45
40
40
32
30
25
20
16
10
0
7
Over $550- $450- $350- $250- $200- $165- $135- $105- $65- $25$750 $750 $550 $450 $350 $250 $200 $165 $135 $105 $65
10-15
When to Use a Job-based Pay
Policy
 A job-based pay policy tends to work best in
situations where:
 Technology
is stable
 Jobs do not change often
 Employees do not need to cover for one another
frequently
 Much training is required to learn a given job
 Turnover is relatively low
 Employees are expected to move up through the
ranks over time
 Jobs are fairly standardized within the industry
10-16
Individual-based
Compensation
 Individual-based compensation programs are
more suitable when:
 The
firm has a relatively educated workforce with
both the ability and the willingness to learn different
jobs
 The company’s technology and organizational
structure change frequently
 Employee participation and teamwork are
encouraged throughout the organization
 Opportunities for upward mobility are limited
 Opportunities to learn new skills are present
 The costs of employee turnover and absenteeism in
terms of lost production are high
10-17
Compensation Decisions:
Relative to Three Groups
Similar jobs in other
organizations
(Pay-level)
Different jobs within the
organization
(Pay-structure)
Same or similar jobs within the
organization
(Individual pay determination)
10-18
Compensation Decisions:
Pay Surveys
Techniques used to collect local,
regional, national or international
compensation data
Sources for competitive data range from
existing surveys to conducting your own
Pay survey issues include:
Usefulness of surveys
Who will be surveyed
The method used
10-19
Compensation Decisions:
Job Evaluation
Formal process for determining the relative
worth of various jobs
Essential steps include
Involving employees
Selecting and weighing criteria (compensable
factors)
Frequently used methods include
Job ranking
Classification or grading systems (See exhibit
10-7)
10-20
Compensation Decisions:
Job Evaluation
Formal process for determining the relative
worth of various jobs
Essential steps include
Involving employees
Selecting and weighing criteria (compensable
factors)
Frequently used methods include
Job ranking
Classification or grading systems (See exhibit
10-7)
10-21
Contemporary Pay
Classifications
DELAYERING
Reduction of the
number of job
levels
Can result in fewer
pay grades and
greater worker
flexibility
BROADBANDING
Reduction in the
number of salary
ranges
Creates a smaller
number of broad
salary ranges
More emphasis on
basing salary
10-22
Pay Structure of a Large Restaurant
Developed Using a Job-Based Approach
Jobs
GRADE 6
GRADE 5
GRADE 4
GRADE 3
GRADE 2
GRADE 1
Chef
Manager
Sous-Chef
Assistant Manager
Lead Cook
Office Manager
General Cook
Short Order Cook
Assistant to Lead Cook
Clerk
Server
Hostess
Cashier
Kitchen Helper
Dishwasher
Janitor
Busser
Security Guard
Number of
Positions
2
1
1
2
2
1
5
2
2
1
45
4
4
2
3
2
6
2
Pay
$20.00-$31.00/hr.
$11.50-$21/hr.
$7.50-$12.00/hr.
$6.50-$8.00/hr.
$6.00-$7.00/hr.
$5.50-$6.25/hr.
10-23
Pay Schedule of a Large Restaurant Designed
Using a Skill-Based Approach
Skill Block
5
4
3
Skill
• Create newsitems for menu
Pay
$23.00/hr.
• Find different uses for leftovers
(e.g., hot dishes, buffets)
• Coordinate and control work of all employees
upon manager’s absence
• Cook existing menu items following recipe
$17.00/hr
• Supervise kitchen help
• Prepare payroll
• Ensure quality of food and adherence to
standards
• Schedule servers and assign workstations
$10.50/hr
• Conduct inventory
• Organize work flow on restaurant floor
10-24
Pay Schedule of a Large Restaurant
Designed Using a Skill-Based Approach (cont.)
Skill Block
2
1
Skill
s
• Greet customers
and organize tables
• Take orders from customers
• Bring food to tables
• Assist in kitchen with food preparations
• Perform security checks
• Help with delivery
• Use dishwashing equipment
• Use chemicals/disinfectants to clean
premises
• Use vacuum cleaner, mop, waxer, and other
cleaning equipment
• Clean and set up tables
• Perform routine kitchen chores
(e.g., making coffee)
Pay
$7.50/hr.
$6.00/hr.
10-25
The Key Steps in Creating Job-Based
Compensation Plans
Job Evaluation for
Internal Equity
1. Job Analysis
2. Job Descriptions
Identify
Compensable Factors
3. Job Specifications
4. Rate Worth of All Jobs
Using a Predetermined
System
5. Job Hierarchy
Market Surveys for
External Equity
Within-Pay-Range
Positioning Criteria
for Individual Equity
© 2001 by Prentice Hall
6. Classify Jobs by
Grade Levels
1. Check Market Value
Using Benchmark or Key
Jobs
7. Establish Final Pay
Policy
Criteria for Pay
Positioning Within
Range for Each Job
• Experience
• Seniority
• Performance
© 1998 by Prentice Hall
Individual Pay
Assignment
10-26
MAA National Position Evaluation Plan
Points Assigned to Factor Degrees
Factor
1st
2nd
3rd
4th
5th
Degree Degree Degree Degree Degree
Skill
1. Knowledge
2. Experience
3. Initiative and Ingenuity
Effort
4. Physical Demand
5. Mental or Visual Demand
Responsibility
6. Equipment or Process
7. Material or Product
8. Safety of Others
9. Work of Others
Job Conditions
10. Working Conditions
11. Hazards
14
22
14
28
44
28
42
66
42
56
88
56
70
110
70
10
5
20
10
30
15
40
20
50
25
5
5
5
5
10
10
10
10
15
15
15
15
20
20
20
20
25
25
25
25
10
5
20
10
30
15
40
20
50
25
10-27
Hierarchy of Clerical Jobs, Pay Grades, and Weekly
Pay Range for a Hypothetical Office
1
Points
Customer Service Rep.
Executive Secretary/Admin. Asst.
Senior Secretary
Secretary
Senior General Clerk
Credit and Collection
Accounting Clerk
General Clerk
Legal Secretary/Assistant
Senior Word Processing Operator
Work Processing Operator
Purchasing Clerk
Payroll Clerk
Clerk-Typist
File Clerk
Mail Clerk
Personnel Clerk
Receptionist
300
298
290
230
225
220
175
170
165
160
125
120
120
115
95
80
80
60
2
Grade
3
Weekly Pay Range
5
$500-$650
4
$450-$550
3
$425-$475
2
$390-$430
1
$350-$400
10-28
Market Salary Data for Selected
Benchmark Office Jobs
Benchmark Jobs
1. Customer Service Rep.
2. Credit and Collection Clerk
3. Accounting Clerk
4. Word Processing Operator
5. Clerk-Typist
Weekly Pay Percentile
25th
50th 75th
$400
$400
$370
$380
$330
$500
$450
$425
$390
$350
$650
$550
$475
$430
$400
Weekly Pay
Average
$495
$455
$423
$394
$343
10-29
Drawbacks of Job-based
Compensation Programs








Job-based compensation plans do not take into account the nature of the
business and its unique problems.
The process of establishing job-based compensation plans is much more
subjective and arbitrary than its proponents suggest.
Job-based systems are less appropriate at higher levels of an
organization.
As the economy has become more service oriented and the
manufacturing sector has continued to shrink, jobs have become more
broadly defined.
Job-based compensation plans tend to be bureaucratic, mechanistic, and
inflexible.
The job-evaluation process is biased against those occupations
traditionally filled by women.
Wage and salary data obtained from market surveys are not definitive.
In determining internal and external equity, it is the employees’
perceptions of equity that count, not the assessments of job-evaluation
committees.
10-30
Suggestions for Implementing
Job-based Compensation Plans
 Think strategically in making policy decisions
concerning pay.
 Secure employee input.
 Increase each job’s range of pay while expanding
its scope of responsibility.
 Expand the proportion of employees’ pay that is
variable (bonuses, stock plans, and so forth).
 Establish dual-career ladders for different types of
employees so that moving into management ranks
or up the organizational hierarchy is not the only
way to receive a substantial increase in pay.
10-31
Example of a Dual-Career Ladder
Band
13
12
11
10
9
8
7
6
5
4
3
2
1
Managerial
President
Executive
Vice President
Vice President
Assistant
Vice President
Director
Senior Manager
Manager
Individual Contributor
Executive Consultant
Senior Consultant
Consultant
Senior Adviser
Adviser
Senior Specialist
Specialist
Senior Technician
Senior Administrative Support,
Technician
Administrative Support,
Senior Manufacturing Associate
Clerical Support, Manufacturing
Associate
10-32