Objectives
• Understand the scope of “Compensation”
• Appreciate the legal framework surrounding compensation decisions in
the U.S.
• Understand how legal compliance is an important aspect of
compensation administration
• Consider competing models of best practices in pay system design
• Understand the elements of both direct pay and indirect pay
• Learn the strategic options of designing compensation as a job-based
versus a skill-based system
• Understand the three forms of equity necessary for successful
compensation systems
• Be sensitive to the intangible elements of pay as well as the more
frequently assessed tangible elements
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Module 16 - 1
Compensation
“...an exchange for effort & ideas”
“...all forms of financial returns & tangible
services & benefits employees receive as part
of an employment relationship”
“...a return for services rendered”
Compensation can include both non-financial
& psychological returns
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Module 16 - 2
Forms of Pay
Base Wages
Merit
Incentives
Services & Benefits
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Module 16 - 3
Elements of Total Compensation
Total Compensation
Intrinsic Rewards System
(Self Administered Psychological Rewards)
Teamwork * Challenge
Empowerment * Recognition * Security
Indirect Compensation (Benefits)
Public Protection
(Legally Required)
•Social Security
•Unemployment
•Disability
Paid Leave--Off Job
•Vacations
•Sick Day
•Bereavement
•Personal Leave
•Holidays
Private Protection
•Pensions
•Saving
•Supplemental
unemployment
•Insurance
Paid Leave--On Job
•Training Work
•Breaks
•Rest Periods
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Extrinsic Rewards System
(Administered by Others)
Financial
Direct Compensation (Paycheck Pay)
Miscellaneous
Benefits
•Legal Advice
•Eldercare
•Daycare
•Wellness
•Perquisites
•Moving
•Financial
Counseling
Basic
Salary
Performance-Based
Pay
•Bonuses/Variable
Pay
•Merit Pay
•Incentive Pay
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Protection Programs
Hazard
Retirement
Death
Disability
Private Plans
Public Plans
 Defined Benefit Pensions
 Defined Contribution Pensions
 Money purchase and thrift
plans (401(k)s / ESOPs)
 Group term life insurance (incl.
Accidental death & travel)
 Payouts from profit-sharing,
pension, and/or thrift plans
 Dependent survivors’ benefits
 Short-term accident and
sickness insurance
 Long-term disability insurance
 Wellness programs
 Social Security old age
benefits
Unemployment  Supplemental unemployment
benefits and/or severance pay
Medical/Dental  Hospital/surgical insurance
 Other medical insurance
Expenses
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 Dental insurance
 Vision insurance
 Social Security
survivors’ benefits
 Workers’
compensation
 Social Security
disability benefits
 State disability
benefits
 Unemployment
benefits
 Workers’
compensation
 Medicare
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Strategic Compensation
Objectives
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Reflect the organization strategy
Mirror the organization culture and values
Support the business strategy
Champion the human resource management
strategy
• “Fit” environmental and regulatory
pressures
Compensation objectives need to be tied to
corporate objectives
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Module 16 - 6
Strategic Compensation
Policies
Internal consistency
External competitiveness
Employee contributions
Administration
Techniques that make up the compensation
system translate strategic policy into practice
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Module 16 - 7
Compensation
Objectives
• Efficiency
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–
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–
performance driven
total quality
customer focus
cost control
• Equity
• Compliance
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Module 16 - 8
Best Practices Options
The New Pay
• External marketsensitive-based pay
• Variable performancebased pay
• Risk-sharing
partnership
• Flexible opportunities
to contribute; not jobs
• Teams
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High Commitment
• High wages
• Guarantee
employment security
• Apply incentives;
share gains not risks
• Employee ownership
• Participation &
empowerment
• Teams
Milkovich & Newman
Module 16 - 9
Internal
Consistency and
Job Analysis
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Module 16 - 10
Summary of Lecture
• Internal Consistency
• Job Analysis
– Job Descriptions
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Module 16 - 11
Internal Consistency (or Equity):
Refers to the relationship between the pay
structure and the design of the organization.
• To achieve Internal Consistency, the Pay Structure
must:
– support organization’s workflow
– ensure fairness to all employees
– direct employee behaviors towards
organizational objectives
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Module 16 - 12
Results of Internal Consistency
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Reduces turnover
Reduces pay-related grievances
Reduces pay-related work stoppages
Undertake training (and increase
experience)
• Facilitates career/job progression
• Facilitates performance
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Module 16 - 13
Pay Structures and the Pay Model
Pay structures are the the array of pay rates
for different jobs within an organization.
• Pay structures vary upon three dimensions:
– the levels of work (i.e., Senior, Specialist)
– the pay differentials between these levels
– the criteria used to determine the levels and pay
differentials
• Job-based or Person-based
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Module 16 - 14
Factors Influencing Pay
Structures
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Nature of the Organization and its work
Size and Age of the Organization
Technology in the workplace
HR Policies
Employee Acceptance
Economic Pressures
Societal Customs
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Module 16 - 15
Employee Acceptance: A Key
Test
• Distributive Justice
– Pay Differences
– Number of Levels
– Structural Criteria: are decisions based on the
job or on the KSA’s of the person?
• Procedural Justice
– Fairness of Design & Administration
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Module 16 - 16
Consequences of Internal Pay
Structures
• Efficiency: Pay structure can be a
Competitive Advantage used to
attract and retain best employees
• Equity: Ensures fairness and
satisfaction amongst employees
• Compliance: Meets legal
requirements
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Module 16 - 17
Process of Building an Internal
Job Structure
Two Basic Methods:
• Job-Based Structures
• Person-Based Structures
– Skills
– Competencies
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Module 16 - 18
Job Analysis
The systematic process of collecting
relevant, work-related information
related to the nature of a specific job.
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Module 16 - 19
Many Reasons for Job Analysis
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Internal Consistency
Wage Setting
Job Evaluation
Standardizing Job Titles
Transfers and Promotions
Merit Rating
Adjustment of Grievances
Legal Defense in EEO or
ADA suits
• Almost all HR decisions are
based on job information
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• Machine Design and
Changes
• Test Development
• Safety Engineering
• Hiring Specifications
• Training
• Skill Inventory
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What Data to Collect?
• Job Title
• Describe Job
– job content and worker characteristics
• Task Data
– describes actual work performed and
the purpose of these tasks
• Behavioral Data
– behaviors expected of workers
• Essential Job Duties
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Module 16 - 21
How can Data be Collected?
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Narrative Questionnaires
Standardized Questionnaires
Interviews
Observation (Time and Motion
Studies)
• Diary/Log
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Module 16 - 22
Who is Involved?
• Who Collects the Data?
– Usually a new employee
– However, should be an
experienced employee familiar
with the company and its jobs.
• Who Provides the Data?
– Job holders, Supervisors,
Subordinates, Peers, Analyst
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Module 16 - 23
The Job Description:
The Result of Job Analysis
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General Format of a Job Description
Job Title
Fair Labor Standards Act (FLSA) Exemption Status
General Summary of Job
Essential Job Duties and Responsibilities
Knowledge, Skills, and Abilities Required
Working Conditions
Dates and Approvals
Disclaimer Statement
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Module 16 - 24
Tips on Writing Job Descriptions
• Avoid jargon and “inflationary” adjectives
• Use the most descriptive verb possible to describe job
tasks and activities.
• Knowledge, skills and abilities listed must be specific,
realistic, and justifiable.
• Indicate the intensity, frequency and duration for
physical or mental effort.
• Include the FLSA Code
• All JD’s should include a disclaimer statement to
ensure flexibility in the administration of a pay
program.
• Accurate, legally defensible JD’s are a necessity!
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Module 16 - 25