Compensation
• Pay is a statement of an employee’s worth by
an employer.
• Pay is a perception of worth by an employee.
Copyright © 2004 South-Western. All rights reserved.
9–1
Total Compensation
Direct
Indirect
Wages / Salaries
Time Not Worked
Commissions
• Vacations
• Breaks
• Holidays
Insurance Plans
Bonuses
Gainsharing
• Medical
• Dental
• Life
Security Plans
• Pensions
Employee Services
• Educational assistance
• Recreational programs
Presentation Slide 9–1
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9–2
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
Copyright © 2004 South-Western. All rights reserved.
Presentation Slide 9–2
9–3
Common Strategic Compensation Goals
• To reward employees’ past performance
• To remain competitive in the labor market
• To maintain salary equity among employees
• To mesh employees’ future performance with
organizational goals
• To control the compensation budget
• To attract new employees
• To reduce unnecessary turnover
Copyright © 2004 South-Western. All rights reserved.
9–4
The Bases for Compensation
• Hourly Work
 Work paid on an hourly basis.
• Piecework
 Work paid according to the number of units
produced.
• Salary Workers
 Employees whose compensation is computed on
the basis of weekly, biweekly, or monthly pay
periods.
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9–5
• Some jobs have range of possible wages
Job Title
Salary
Office Services Aide
16,298 min
22,250 max
Office Services Assistant
18,502 min
25,615 max
Secretary
18502 min
25615 max
Senior Secretary
21,135 min
29,636 max
Executive Secretary
22,639 min
31,932 max
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9–6
• Range takes into account experience,
education, performance level and other personal
factors
9–7
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The Bases for Compensation (cont’d)
• 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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9–8
The Bases for Compensation (cont’d)
• 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.
Copyright © 2004 South-Western. All rights reserved.
9–9
Components of the Wage Mix
Labor Market
Conditions
Compensation Strategy
of the Organization
Area Wage
Rates
Cost of
Living
Worth of
the Job
WAGE
MIX
Employee’s
Relative
Worth
Collective
Bargaining
Legal
Requirements
Copyright © 2004 South-Western. All rights reserved.
Employer’s
Ability
to Pay
Presentation Slide 9–3
9–10
The Wage Mix—Internal Factors
• Compensation Strategy
 Setting organization compensation policy to lead,
lag, or match competitors’ pay.
• Worth of a Job
 Establishing the internal wage relationship among
jobs and skill levels.
• Relative Worth of an Employee
 Rewarding individual employee performance
• Ability-to-Pay
 Having the resources and profits to pay
employees.
Copyright © 2004 South-Western. All rights reserved.
9–11
The Wage Mix—External Factors
• Labor Market Conditions
 Availability and quality of potential employees is
affected by economic conditions, government
regulations and policies, and the presence of
unions.
• Area Wage Rates
 A firm’s formal wage structure of rates is
influenced by those being paid by other area
employers for comparable jobs.
Copyright © 2004 South-Western. All rights reserved.
9–12
The Wage Mix—External Factors
• Cost of Living
 Local housing and environmental conditions can
cause wide variations in the cost of living for
employees.
 Inflation can require that compensation rates be
adjusted upward periodically to help employees
maintain their purchasing power.
Copyright © 2004 South-Western. All rights reserved.
9–13
The Wage Mix—External Factors
• Collective Bargaining
 Escalator clauses in labor agreements that
provide for quarterly upward cost-of-living wage
adjustments for inflation to protect employees’
purchasing power.
 Unions bargain for real wage increases that raise
the standard of living for their members.
 Real wages are increases larger than rises in the
consumer price index; that is, the real earning
power of wages.
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9–14
Consumer Price Index (CPI)
• A measure of the average change in prices over time
in a fixed “market basket” of goods and services
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9–15
Setting up a compensation system
1. Set company goals for pay
2. Determine worth of each job in organization
through job evaluation
3. Arrange jobs into pay groups or grades to
establish internal equity
4. Use wage mix factors and salary surveys to
determine external equity
5. Attach dollar amounts to each pay grade
6. Abide by legal requirements
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9–16
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.
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9–17
Different Job Evaluation Systems
SCOPE OF COMPARISON
BASIS FOR
COMPARISON
Job vs. job
Job vs. scale
JOB AS
A WHOLE
JOB PARTS
OR FACTORS
(NONQUANTITATIVE)
(QUANTITATIVE)
Job ranking
system
Factor comparison
system
Job classification
system
Point
system
Copyright © 2004 South-Western. All rights reserved.
Figure 9.5
9–18
Job Evaluation Systems
• 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 extent of differences
between jobs.
 Method can used to consider only a
reasonably small number of jobs.
Copyright © 2004 South-Western. All rights reserved.
9–19
Paired-Comparison Job Ranking Table
Directions: Place an X in the cell where the value of a row job is higher than that of a column job.
Copyright © 2004 South-Western. All rights reserved.
Figure 9.6
9–20
Job Evaluation Systems
• 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.
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9–21
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.
• Point Manual
 A handbook that contains a description of the
compensable factors and the degrees to which
these factors may exist within the jobs.
Copyright © 2004 South-Western. All rights reserved.
9–22
Point Values for Job Factors
of The American Association of Industrial Management
FACTORS
1ST
2ND
3RD
4TH
5TH
DEGREE DEGREE DEGREE DEGREE DEGREE
Skill
1. Education
2. Experience
3. Initiative and ingenuity
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
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
Source: Reproduced with permission of the American Association of Industrial Management, Springfield, Mass.
Copyright © 2004 South-Western. All rights reserved.
HRM 2
9–23
Factor Comparison System
• Factor Comparison System
 A job evaluation system that permits the
evaluation process to be accomplished on a
factor-by-factor basis by developing a factor
comparison scale.
 The compensable factors of a job evaluated are
compared against the compensable factors of key
jobs within the organization that serve as the job
evaluation scale.
Copyright © 2004 South-Western. All rights reserved.
9–24
Characteristics of Key Jobs
• Key Jobs
 Jobs that are important for wage-setting purposes
and are widely known in the labor market.
• Characteristics of Key Jobs
 They are important to employees and the
organization.
 They vary in terms of job requirements.
 They have relatively stable job content.
 They are used in salary surveys for wage
determination.
Copyright © 2004 South-Western. All rights reserved.
Presentation Slide 9–4
9–25
Setting up a compensation system
1. Set company goals for pay
2. Determine worth of each job in organization
through job evaluation
3. Arrange jobs into pay groups or grades to
establish internal equity
4. Use wage mix factors and salary surveys to
determine external equity
5. Attach dollar amounts to each pay grade
6. Abide by legal requirements
Copyright © 2004 South-Western. All rights reserved.
9–26
The Compensation Structure
• Wage and Salary survey
 A survey of the wages paid to employees of other
employers in the surveying organization’s
relevant labor market.
 Helps maintain internal and external pay equity
for employees.
• Labor Market
 The area from which employers obtain certain
types of workers.
Copyright © 2004 South-Western. All rights reserved.
9–27
Survey
• Survey asks questions about total compensation
and then by specific job
• Salary should be designed to:
 Include key jobs
 Use job descriptions rather than just titles so
rater compares like jobs
 Look at entire compensation package
•
•
•
•
Large participant pool provides better data
Use reputable companies
Example
Be ready to share data
Watch dates
Copyright © 2004 South-Western. All rights reserved.
9–28
Collecting Survey Data
• Outside Sources of Data
 Bureau of Labor Statistics (BLS)
 National Compensation Survey
 State Occupational and Employment Estimates
 State and local wage surveys
 Online survey data
Copyright © 2004 South-Western. All rights reserved.
9–29
Freehand Wage Curve
Copyright © 2004 South-Western. All rights reserved.
Figure 9.7
9–30
Single Rate
Structure
Copyright © 2004 South-Western. All rights reserved.
Figure 9.8
9–31
Wage Structure
with Increasing
Rate Ranges
Figure 9.9
Presentation Slide 9–5
Copyright © 2004 South-Western. All rights reserved.
9–32
The Wage Curve
• Wage Curve
 A curve in a scattergram representing the
relationship between relative worth of jobs and
wage rates.
• Pay Grades
 Groups of jobs within a particular class that are
paid the same rate.
• Rate Ranges
 A range of rates for each pay grade that may be
the same for each grade or proportionately
greater for each successive grade.
Copyright © 2004 South-Western. All rights reserved.
9–33
The Wage Curve (cont’d)
• 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.
• Red Circle Rates
 Payment rates above the maximum of the pay
range.
• Broadbanding
 Collapses many traditional salary grades into a
few wide salary bands.
Copyright © 2004 South-Western. All rights reserved.
9–34
Setting up a compensation system
1. Set company goals for pay
2. Determine worth of each job in organization
through job evaluation
3. Arrange jobs into pay groups or grades to
establish internal equity
4. Use wage mix factors and salary surveys to
determine external equity
5. Attach dollar amounts to each pay grade
6. Abide by legal requirements
Copyright © 2004 South-Western. All rights reserved.
9–35
Government Regulation of Compensation
(Federal Wage Laws)
Davis-Bacon Act
1931
Required minimum wage, prevailing wage
rates, 1½ overtime premium payments by
federal contractors.
Walsh-Healy Act
1936
Required overtime payments after 8 daily
or 40 regular work hours for workers on
federal contracts.
Fair Labor
Standards Act
(FLSA)
1938
Interstate commerce clause used to cover
workers except agricultural and
exempted (managerial) employees, child
labor prohibited.
Copyright © 2004 South-Western. All rights reserved.
9–36
Fair Labor Standards Act
• Federal Minimum Wage: $7.25/hour
• Be aware that many states also have minimum
wage laws
 State of Wisconsin Minimum Wage: $7.25/hour

http://en.wikipedia.org/wiki/Minimum_wage_in_the_United_States
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9–37
• “White Collar” Exemptions
• Section 13(a)(1) of the FLSA provides an exemption
from both minimum wage and overtime pay for
employees who are employed in a bona fide:




Executive;
Administrative;
Professional; or
Outside Sales capacity.
• Certain computer employees may be exempt
professionals under Section 13(a)(1) or exempt under
Section 13(a)(17) of the FLSA.
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9–38
• Three Tests for Exemption
 Salary Level
 Employees paid less than $23,600 per year
($455 per week) are nonexempt. (Employees
who earn more than $100,000 per year are
almost certainly exempt.)
 Salary Basis
 Employee paid on a salary basis if s/he has a
"guaranteed minimum" amount of money s/he
can count on receiving for any work week in
which s/he performs "any" work.
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9–39
 Job Duties
 Employee performs typical categories of
exempt job duties, called "executive,"
"professional," and "administrative."
Source: Chamberlain, Kaufman and Jones
http://www.flsa.com/coverage.html; Accessed 4/21/2104
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9–40
• Equal Pay Act of 1967
 Jobs should be paid equally between genders
 Parity has not been achieved yet
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9–41
Significant Compensation Issues
• Equal Pay for Comparable Worth
 The concept that male and female jobs that are
dissimilar, but equal in terms of value or worth to
the employer, should be paid the same.
• Wage-Rate Compression
 Compression of pay differentials between job
classes, particularly the pay differentials between
hourly workers and their managers.
• Low-wage Budgets
 Current wage budgets reflect the general trend
toward tight compensation cost controls.
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9–42
Significant Compensation Issues
• Living-Wage Laws
 Require contractors who work for local
governments or private employers that receive
government subsidies or tax breaks pay
employees an income above the federal poverty
level of $18,100 for a family of four—an hourly
wage of more than $8 an hour.
• Low-wage Budgets
 Current wage budgets reflect the general trend
toward tight compensation cost controls.
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9–43
Salary Budgets by Type of Employee, 1991–2002
Source: Reprinted from 2001–2002 Total Salary Increase Budget Survey with permission from WorldatWork,
14040 N. Northsight Blvd., Scottsdale, AZ 85260; phone (877) 951-9191; fax (480) 483-8352;
www.worldatwork.org. © 2002 WorldatWork. Unauthorized reproduction or distribution is strictly prohibited.
Copyright © 2004 South-Western. All rights reserved.
Figure 9.10
9–44
Linking Compensation to Organizational
Objectives
• Value-added Compensation
 Evaluating the individual components of the
compensation program (pay and benefits) to see
if they advance the needs of employees and the
goals of the organization.
 “How does this compensation practice benefit
the organization?”
 “Does the benefit offset the administrative
cost?”
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9–45
Significant Goals Driving Pay and Reward
Changes
Source: Towers Perrin and Duncan Brown, “Reward Strategies for Real: Moving from Intent
to Impact,” WorldatWork Journal 10, no. 3 (Third Quarter 2001): 43. Used with permission.
Copyright © 2004 South-Western. All rights reserved.
Figure 9.1
9–46
Strategic Compensation Policy Concerns
• The rate of pay within the organization and whether it is to be
above, below, or at the prevailing community rate.
• The ability of the pay program to gain employee acceptance
while motivating employees to perform to the best of their
abilities.
• The pay level at which employees may be recruited and the pay
differential between new and more senior employees.
• The intervals at which pay raises are to be granted and the
extent to which merit and/or seniority will influence the raises.
• The pay levels needed to facilitate the achievement of a sound
financial position in relation to the products or services offered.
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9–47
Relationship between Pay Equity and Motivation
The greater the perceived disparity between my input/output ratio and
the comparison person’s input/output ratio, the greater my motivation
to reduce the inequity.
Copyright © 2004 South-Western. All rights reserved.
Figure 9.2
9–48