Managing Compensation
The Challenges of Human Resources Management
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
1–1
Compensation Management and
Other HRM Functions
Aid or impair recruitment
Recruitment
Supply of applicants
affects wage rates
Pay rates affect selectivity
Selection
Selection standards affect
level of pay required
Pay can motivate training
Training and
Development
Increased knowledge leads
to higher pay
Training and development may
lead to higher pay
Compensation
Management
A basis for determining
employee’s rate of pay
Low pay encourages
unionization
Labor Relations
Pay rates determined
through negotiation
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36
Compensation
• Pay is a statement of an
employee’s worth by an
employer.
• Pay is a perception of worth by
an employee.
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36
What Determines Pay & Benefits?
4
Copyright ©2008 Cengage Learning. All rights reserved
Common Strategic Compensation Goals
1. To reward employees’ past performance
2. To remain competitive in the labor market
3. To maintain salary equity among employees
4. To mesh employees’ future performance with
organizational goals
5. To control the compensation budget
6. To attract new employees
7. To reduce unnecessary turnover
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36
Total Compensation
Direct
Wages / Salaries
Commissions
Indirect
Time Not Worked
• Vacations
• Breaks
• Holidays
Insurance Plans
Bonuses
Gainsharing
• Medical
• Dental
• Life
Security Plans
• Pensions
Employee Services
• Educational assistance
• Recreational programs
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36
Salary and Wage Web Sites
• NACE Salary Guide - Research salaries in your area of
interest
• NACE Salary Calculator - Research salaries for your area of
interest and location
• Career Guide to Industries – Provided by the U.S.
Department of Labor, Bureau of Labor Statistics
• Occupational Employment & Wage Estimates – From the
U.S. Department of Labor, Bureau of Labor Statistics
• Salary.com – Comprehensive site offering salary and
compensation information
• SalaryExpert.com – Offers salary information for a variety of
careers
• JobSearchIntelligence.com - Precise Salary Calculator and
Salary Comparison Program for Job Seekers
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Salary and Wage Web Sites
(cont’d)
• Payscale.com – Salary information based on
profession, location, education, etc.
• Indeed.com – Excellent job search engine with
integrated salary search engine
• Cbsalary.com – Salary search engine offered by
CareerBuilder
• GlassDoor.com – Great site offering information on
company salaries, employee reviews, and specific
interview information
• Economic Research Institute – Offering salary
information & cost of living comparisons
• Cost of Living Calculator – Beneficial if you’re planning
a move. Offers the cost of living in other cities around
the country
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36
Legal Considerations in Compensation
Davis-Bacon Act (1931)
Equal Pay Act (1963)
Walsh-Healey Public
Contract Act (1936)
Employee Retirement
Income Security Act of 1974
Title VII of the 1964
Civil Rights Act
Employee
Compensation
Age Discrimination in
Employment Act of 1967
Fair Labor Standards Act
(1938)
Americans with
Disabilities Act
The Family and Medical
Leave Act
The Social Security Act of
1935 (as amended)
National Labor Relations
Act of 1935 (Wagner Act)
Workers’ Compensation
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Government Regulation of Compensation
Davis-Bacon Act
(1931)
Required minimum wage, prevailing wage rates,
1½ overtime premium payments by federal
contractors.
Walsh-Healy Act
(1936)
Requires companies with federal supply contracts
> $10K to pay prevailing wages. Also, requires
overtime payments after 8 daily or 40 regular
work hours for federal contract workers.
Fair Labor
Standards Act
(FLSA) 1938
(as Amended)
The most significant law affecting compensation.
The purpose of the FLSA is to establish minimum
labor standards on a national basis and to
eliminate low wages and long working hours. It
established minimum wage and overtime pay.
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Government Regulation of Compensation
National Labor Relations
Act of 1935
(Wagner Act)
(cont’d)
Most important law enacted in U.S. history. It
made the federal government the arbiter of
employer-employee relations thru the NLRB.
Employee Retirement
Income Security Act of
1974 (ERISA)
Provides a comprehensive federal scheme for the
regulation of employee pension and welfare
benefit plans offered by private-sector employers.
Age Discrimination
in Employment Act
of 1967
The ADEA only forbids age discrimination against
people who are age 40 or older. It does not
protect workers under the age of 40, although
some states do have laws that protect younger
workers from age discrimination.
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Compliance Assistance - Wages and
the Fair Labor Standards Act (FLSA)
http://www.dol.gov/whd/flsa/
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11–12
12 of 51
36
The Bases for Compensation
(cont.)
• Nonexempt Employees

Employees covered by the overtime provisions of the
Fair Labor Standards Act.

They must be paid time and one-half their regular pay
for all work performed after forty regular hours of work
in a workweek.
• Exempt Employees

Employees who not covered in the overtime provisions
of the Fair Labor Standards Act.

Managers, supervisors, and white-collar professional
employees are exempted on the basis of their exercise
of independent judgment and other criteria.
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Minimum Wage Laws in the States - January 1, 2013
http://www.dol.gov/whd/minwage/america.htm
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Family and Medical Leave Act (FMLA)
• The FMLA entitles eligible employees
of covered employers to take unpaid,
job-protected leave for specified family
and medical reasons with continuation
of group health insurance coverage
under the same terms and conditions
as if the employee had not taken leave.
• http://www.dol.gov/whd/fmla/
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Intermittent FMLA Leave
• Handling the tricky questions in FMLA
intermittent leave
• When FMLA Intermittent Leave Leads to
Suspicious Attendance Patterns
• Curbing Abuse Of "Intermittent" FMLA Leave
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Some Considerations for
Developing a Compensation Plan
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Factors Affecting the Pay Mix
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The Traditional Approach to Compensation
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How Employers Establish Pay Rates
1. Conduct the salary survey (external)
2. Determine the worth of each job (job evaluation;
internal)
1.
2.
3.
Ranking
Classification
Point method
3. Group similar jobs into pay grades
4. Price each pay grade (wage curves)
5. Develop rate ranges
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Step1: The Salary Survey
Uses for Salary Surveys
To price
benchmark jobs
To market-price
wages for jobs
To make
decisions about
benefits
Conducting a Wage/Salary Survey
Personal
interviews
Telephone
interviews
Mailed
questionnaires
Internet
13-22
Conducting a Wage/Salary Survey
• Personal interview
 Most reliable and most expensive method
• Mailed questionnaires
 Probably used most frequently
 Used only to survey jobs having uniform meaning all over
industry
 Can be answered by someone not fully familiar with wage
structure
13-23
Conducting a Wage/Salary Survey (cont’d)
• Telephone method
 Quick but yields incomplete information
 May be used to clarify responses to mailed questionnaires
• Internet
 Inexpensive and quick
 All companies are not reachable on Internet
13-24
Sources of Pay Surveys
11–25
Possible Topics in a Wage Survey
13-26
Step 2: Job Evaluation
• Job Evaluation


The systematic process of determining
the relative worth of jobs in order to
establish which jobs should be paid more
than others within an organization.
It is the part of the process in which the
organization finally decides the relative
internal worth relationships of jobs.
How to Evaluate Jobs
Methods for Evaluating Jobs
Ranking
Job
classification
Point method
Factor
comparison
Job Evaluation Methods: Ranking
• Ranking each job relative to all other jobs, usually
based on some overall factor.
• Steps in job ranking:
1. Obtain job information.
2. Select and group jobs.
3. Select compensable factors.
4. Rank jobs.
5. Combine ratings.
Job Ranking by Olympia Health Care
Ranking Order
1. Office manager
Annual Pay Scale
$43,000
2. Chief nurse
42,500
3. Bookkeeper
34,000
4. Nurse
32,500
5. Cook
31,000
6. Nurse’s aide
28,500
7. Orderly
25,500
Job Evaluation Systems
(cont.)
• Job Ranking System

Oldest system of job evaluation by which jobs are
arrayed on the basis of their relative worth.

Disadvantages
–
Does not provide a precise measure of each job’s worth.
–
Final job rankings indicate the relative importance of
jobs, not the extent of differences between jobs.
–
Method can used to consider only a reasonably small
number of jobs.
Job Evaluation Methods: Job Classification
• Raters categorize jobs into groups or
classes of jobs that are of roughly the
same value for pay purposes.
 Classes contain similar jobs.
 Administrative assistants
 Grades are jobs similar in difficulty but
otherwise different.

Mechanics, welders, electricians, and machinists
 Jobs are classed by the amount or level of
compensable factors they contain.
Job Evaluation Systems
(cont.)
• Job Classification system

A system of job evaluation in which jobs are classified
and grouped according to a series of predetermined
wage grades.

Successive grades require increasing amounts of job
responsibility, skill, knowledge, ability, or other factors
selected to compare jobs.
Job Classification System
Example of a Grade Level Definition
This is a summary chart of the key grade level criteria for the GS-7 level of clerical and assistance
work. Do not use this chart alone for classification purposes; additional grade level criteria are in the
Web-based chart.
Federal Government Pay Tables
• Salary Table 2013-GS
• Other pay tables




General Schedule (GS; white collar)
Federal Wage System (WS; blue collar)
Law Enforcement Officer (LEO)
Executive and Senior Level Employees
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Job Evaluation Methods: Point Method
• A quantitative technique that involves:
 Identifying the degree to which each compensable factor is
present in the job.
 Awarding points for each degree of each factor.
 Calculating a total point value for the job by adding up the
corresponding points for each factor.
Point System
• Point System


A quantitative job evaluation procedure that determines
the relative value of a job by the total points assigned to
it.
Permits jobs to be evaluated quantitatively on the basis
of factors or elements—compensable factors—that
constitute the job.
• The Point Manual

A handbook that contains a description of the
compensable factors and the degrees to which
these factors may exist within the jobs.
Job Evaluation: Point System
Identifying Compensable Factors
Skills
Effort
Responsibility
Working
conditions
Compensable Factors
Paid-for, measurable qualities,
features, requirements, and/or
constructs that are common to
many different kinds of jobs.
40
Compensable Factors
The Universal Compensable Factors
identified In the Equal Pay Act and
subsequently adopted by the
government are:
 SKILL - The experience, training,
education, etc, required to perform the job
under consideration.
 EFFORT - measure of the physical and
mental exertion needed to perform the job.
41
Compensable Factors (cont’d)
 RESPONSIBILITY - The extent to which the
employer depends on the employee to
perform the job as expected.
 WORKING CONDITIONS - The physical
surroundings and hazards of a job.
42
Degrees Of Compensable Factors
•Degrees Or Levels
Provide a yardstick, or
measurement scale, that assist in
identifying the specific amount of
the factor required to perform the
job.
43
Compensable Factor
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Sample Point Values (1000 point system)
13-45
A Typical Point Plan (500 point)
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Prairie View A&M University
• Has 8 compensable factors
• Different numbers of levels for each
factor
• Not a 500 or 1000 point system
• http://www.pvamu.edu/pages/2085.asp
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Job Evaluation for
Management Positions
• Hay Profile Method

Job evaluation technique using three factors—knowhow, problem solving, and accountability
—to evaluate executive and managerial positions.
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36
Major Factors of the Hay Plan
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36
Step 3: Grouping Jobs
Point Method
Grouping
Similar Jobs
into Pay
Grades
Ranking Method
Classification Methods
Step 4: Price Each Pay Grade
• The Wage Curve
 Shows the pay rates paid for jobs in each
pay grade, relative to the points or rankings
assigned to each job or grade by the job
evaluation.
 Shows the relationships between the value of
the job as determined by one of the job
evaluation methods and the current average
pay rates for your grades.
Plotting a Wage Curve
Wage Structure
Hierarchy of Clerical Jobs, Pay Grades, and
Weekly Pay Range for a Hypothetical Office
11–54
Step 5: Fine-Tune Pay Rates
• Developing Pay Ranges
 Flexibility in meeting external job market rates
 Easier for employees to move into higher pay grades
 Allows for rewarding performance differences and seniority
• Correcting Out-of-Line Rates
 Raising underpaid jobs to the minimum of the rate range for
their pay grade
 Freezing rates or cutting pay rates for overpaid (“red circle”)
jobs to maximum in the pay range for their pay grade
Special Issues in Compensation
•
•
•
•
•
•
•
•
•
•
Exempt vs. non-exempt employees
Independent contractors
Broadbanding
Pay compression
Comparable worth
Executive pay
Pay secrecy
Competence-based pay
Living wage
Salary card
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56 of 51
36
Some Typical Exempt, Nonexempt Job Titles
EXEMPT
NONEXEMPT
Attorneys
Paralegals
Physicians
Accounting clerks
Pharmacists
Newspaper writers
Engineers
Working supervisor
Teachers
Management trainees
Scientists
Secretaries
Computer systems analysts
Clerical employees
General managers
Personnel directors
Accountants
Purchasing agents
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57 of 51
36
FLSA Exemptions from Over Time (OT)
Apply Only to “White Collar” Employees
Exemptions from OT
• Executive
• Administrative
• Professional
• Computer employee
• Outside sales
• Highly compensated
• Fact Sheet #17A:
Exemption for
Executive,
Administrative,
Professional,
Computer & Outside
Sales Employees
Under the Fair Labor
Standards Act (FLSA)
• Coverage Under the
FLSA
11–58
Who Is Exempt? Who Is Not Exempt?
Step 1:
Salary Basis Test
Yes
Step 2:
Exemption Applicability/Duties
Test
Is the employee paid at
least $455 per week
($23,660 per annum),
*not subject to reduction
due to variations in
quantity/quality of work
performed?
Does the employee perform any
of the following types of duties/jobs?
*The computer
professional exemption
has a salary basis test of
$455 per week or $27.63
per hour. The outside
sales exemption is not
subject to the salary basis
test.
Professional/creative—employee
whose work requires highly advanced
knowledge/education; creative and
artistic professional
No
Step 3:
Job Analysis
Yes
Executive—management is the
employee’s primary duty
Administrative—employee performing
nonmanual office work
A thorough analysis of
the job duties must be
performed to determine
exempt status. An
exempt position must
pass both the salary
basis and the duties
tests.
Computer professional—employee
involved in design or application of
computers and related systems
Outside sales—employee making sales
or taking orders which influence sales
outside of the employer's premises
No
Employee is Nonexempt
Employee is Nonexempt
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36
FIGURE 11–1
Independent Contractor
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60 of 51
36
GeoLogics Employee or Independent
Contractor? From IRS
http://corporateweb.geologics.com/irs/body_irs.html
http://corporateweb.geologics.com/irs/body_irs.html
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11–61
61 of 51
36
Special Topics in Compensation
• Broadbanding
 Consolidating salary grades and ranges into a few wide levels
or “bands,” each of which contains a relatively wide range of
jobs and salary levels.
 Pros and Cons

More flexibility in assigning workers to different job grades

Provides support for flatter hierarchies and teams

Promotes skills learning and mobility

Lack of permanence in job responsibilities can be unsettling
to new employees.
Illustration of a Typical Broadband
11–63
Broadbanded Structure and How It Relates to Traditional Pay Grades and Ranges
The Issue of Wage Rate Compression
• Wage-Rate Compression

Compression of pay between new and experienced employees
caused by the higher starting salaries of new employees; also
the differential between hourly workers and their Managers.
• Reducing Wage-Rate Compression

Reward high performance and merit-worthy employees with
large pay increases.

Design the pay structure to allow a wide spread between
hourly and supervisory employees.

Prepare high-performing employees for promotions to jobs
with higher salary levels.

Provide equity adjustments for selected employees hardest
hit by pay compression.
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65 of 51
36
Comparable Worth
• Concept:
 Employers should be required to pay men and women
equal wages for dissimilar jobs that are of comparable
(rather than strictly equal) value to the employer
(generally based on job evaluation points).
• Basis:
 Seeks to address the issue that women have jobs that
are dissimilar to those of men and those jobs are often
consistently valued less than men’s jobs.
• Question at Hand:
 Who will get to make final decisions on the comparability
of jobs?

Employers

Courts
Comparable Worth…
• A reform effort to pay different job titles the
same based on their value (read: job
evaluation points) to their employer
regardless of the gender predominance of
those working in such titles.
• When jobs filled mostly by women are judged
“comparable” to jobs filled mostly by men,
wages for both should be the same but often
they are not.
At the heart of comparable worth
Is the fact that jobs traditionally done by
women have been systematically undervalued
in the marketplace. The net result is that jobs
disproportionately held by women are paid less
than comparable jobs with the same levels of
skills and responsibilities but commonly held by
males.
Comparable Worth
Has been promoted by feminists and
advocates of women’s rights as the most
significant new tool in the struggle to
bring women’s economic positions up to
the level of men’s.
What would remedy this?
• A substantial proportion of school districts in
the U.S. pay secretaries and teaching
assistants considerably less than the janitors.
• In Denver, nurses were found to make less
than gardeners. In New York State, school
nurses in the West Islip school district start at
$27,000, groundsmen at $29,000.
Example of Minnesota State Jobs
• RNs (mostly women; 92%)-$1368/month;
• Truck Driver (mostly men; 87%)-$1493/month
• Look at secretary and maintenance
carpenter on next slide (both have
the same job evaluation points
[197])
Job Evaluation Points, Monthly
Pay, and Proportion of Females
Opponents of Comparable Worth
• Women are free to choose whatever work they
wish
• The pay differences among jobs result from
market forces, especially the excessive supply
among women for certain kinds of work
• Would interfere with free market mechanisms
that are required for economic efficiency, and
would thereby damage our economy
• Would raise payrolls leading to huge losses for
private employers and higher deficits in the
public sector
Comparable Worth
• City employees in Chicago, San
Francisco, and San Jose, and state
employees in Michigan and New York,
among others, have successfully
negotiated pay adjustments for
predominantly female job categories
• Note absence of private sector firms
Comparable Worth
The courts have failed to rule definitively
on the comparable worth issue. The
argument continues, with one side
advocating remedial action to increase
equity while the other side maintains that
the current system is fair, and that any
attempt to alter the system will cause great
harm to society.
Pricing Managerial and Professional Jobs
• What Determines Executive Pay?
 CEO pay is set by the board of directors taking into account
factors such as the business strategy, corporate trends, and
where they want to be in the short and long term.
 CEOs can have considerable influence over the boards that
determine their pay.
 Firms pay CEOs based on the complexity of the jobs they fill.
 Shareholder activism and government oversight have
tightened the restrictions on what companies pay top
executives.
 Boards are reducing the relative importance of base salary
while boosting the emphasis on performance-based pay.
100 Highest-Paid EEOs
http://www.aflcio.org/CorporateWatch/CEO-Pay-and-You/100-HighestPaid-CEOs
11–77
Motivating Employees through Compensation
• Pay Secrecy

An organizational policy prohibiting employees from
revealing their compensation information to anyone.
– Creates misperceptions and distrust of compensation
fairness and pay-for-performance standards.

Arguments against secrecy:
– Knowledge of base pay is the strongest predictor of pay
satisfaction, which is highly associated with work engagement
– Knowledge of base pay more strongly predicts pay
satisfaction than does the actual amount of pay received
by employees.
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78 of 51
36
Pay Secrecy and Open-Book Management
• The Case for Open Book Management
11–79
OpenBooks—Oklahoma’s Finances:
Online & In Action
• https://data.ok.gov/
• Scroll down to State of Oklahoma Payroll — Q3 2013 and
then click on the link
• In the box called “Find in this Dataset” type 66000 and
then press Enter
• Filter by LAST_NAME (click to sort)
• Filter by AMOUNT (click to sort)
11–80
Competence-based Pay
• Competence-based Pay (also skill-based pay
or knowledge-based pay)

Compensation for the different skills or increased
knowledge employees possess rather than for the
job they hold in a designated job category.
– Greater productivity, increased employee learning and
commitment to work, improved staffing flexibility to meet
production or service demands, and the reduced effects
of absenteeism and turnover,
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81 of 51
36
Board Oversight of Executive Pay
• Factors Influencing Executive Compensation
 Financial Accounting Standards Board (FASB)
requirements for expensing of stock options at fair market
value.
 U.S. government’s “pay czar” overseeing certain pay
awards in firms which had U.S. treasury loans.
 Increased SEC reporting requirements for compensation-
related information.
 Increased executive liability for accuracy in corporate
financial reporting under the Sarbanes Oxley Act.
 Shareholder activism protesting excessive executive
compensation due to lack of independence by executive
board compensation committees.
Living Wage
• Paying people based on need rather than on what the
job is worth.
• Living wage is defined by the wage that can meet the
basic needs to maintain a safe, decent standard of living
within the community. The particular amount that must
be earned per hour to meet these needs varies
depending on location.
• Minimum wage vs. living wage
• Von Bergen, C. W., Mawer, W. T., & Soper, B. (2007).
Living Wage Ordinances in the Public Sector. Public
Personnel Management, 36, 281-305.
11–83
Salary Card
• Especially relevant for universities, including SE
• Everyone at same professorial level (e.g.,
assistant professor, associate professor) should
be paid the same/have the same salary structure
• Statement from Some Faculty at UCO
• Market forces (e.g., supply and demand) require
that inequities between the disciplines exist.
Should this be the case?
11–84