Flynn Mathis Jackson Langan
Chapter 12
PowerPoint Presentation by
Tonya L. Elliott, PHR

Learning Objectives
After you have read this chapter, you should be able to:
 Describe the differences between an entitlement compensation philosophy and a performance-focused compensation philosophy
 Define the issues confronting the healthcare industry in complying with the Fair Labor Standards Act (FLSA)
 Discuss the various methods of administering a compensation process
 Explain the issues associated with awarding pay increases
 Discuss the five components of executive compensation
2

Healthcare Compensation Responsibilities
4 Objectives :
1.
Legal compliance with all appropriate law and regulations
2.
Cost-effectiveness for the organization
3.
Internal, external, and individual equity for employees
4.
Performance enhancement for the organization
3

Nature of Compensation
Intrinsic Rewards
Psychological effects
Social effects
Examples:
Base pay & Benefits
Extrinsic Rewards
Monetary
Non-monetary
Tangible
- Direct
- Indirect
Examples:
Praise & recognition
4

Direct & Indirect Compensation
Direct Compensation
Base Pay
 Wages
 Salaries
Variable Pay
 Bonuses
 Incentives
 Stock options
Indirect Compensation
Benefits
 Medical/life insurance
 Paid time off
 Retirement pensions
 Workers’ compensation
 Others
5

Compensation Components
Base pay
 Basic compensation an employee receives, usually in a wage or salary
Wages – payments directly calculated on the amount of time worked
Salaries – consistent payments each period regardless of the number of hours worked
Variable pay
 Compensation linked directly to individual, team, or organizational performance
Benefits
 An indirect reward given as part of organizational membership, regardless of performance
6

Figure 12-2
Compensation Approaches
7

Compensation Philosophies
Figure 12-3
8

Market-Based
Compensation
Strategies
Figure 12-4
9

Competency-Based Pay
Employees paid for their knowledge or skill rather than the completion of tasks, duties, & responsibilities
Considerations
Significant time investment
Strong management commitment
Training required to gain & maintain competencies
Limitations on number of people allowed to gain competencies
10

Individual vs. Team Awards
Team Rewards
Use as variable pay added to base pay
Use to reward group performance beyond satisfactory level
Base pay for individual employees paid as competency-based
Most frequently distributed annually as a specified dollar amount, rather than a percentage of base pay
11

Compensation Systems Design Issues
Compensation: The Strategic Decisions
1.
What philosophy and approach will be taken?
2.
How will the firm react to market pay levels?
3.
Is the job to be paid on the person’s level of competence?
4.
Will pay be individual or team-based?
12

Perceptions of Pay Fairness
Pay Openness
– The degree or openness or secrecy that organizations allow regarding their pay systems
External Equity
– The perception of the degree of equity that employees have regarding their pay in their job as compared to similar jobs in other organizations
13

Fair Labor Standards Act (FLSA)
Enforced by: U.S. Department of Labor
Provisions of the Law :
 Establishes a minimum wage floor
 Defines exempt and non-exempt status
 1990: exempts highly paid computer workers
 Sets rules for compensatory time off
 Child labor – minimum age requirements
 age 16 – unlimited hours
 Sets overtime provisions
 1 ½ times pay for hours worked over 40 in a week
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Wage/Hour Status Under Fair Labor Standards Act
Exemption
Category
A
Discretionary Authority
B
Percent of Time
C
Earning Levels
Executive 1.
Primary duty is managing
2.
Regularly directs work of at least two others
3.
Authority to hire/fire or recommend these
1.
Must spend
20% or less time doing clerical, manual, routine work
(less than
40% in retail or service establishments)
2.
Paid salary at $155/wk or $250/wk if meets A1-
A2
Figure 12-6
15

Wage/Hour Status Under Fair Labor Standards Act
Exemption
Category
A
Discretionary Authority
B
Percent of Time
C
Earning Levels
Administrative
1.
Primarily responsible for non-manual or office work related to management policies
2.
Regularly exercises discretion and independent judgment and makes important decision
3.
Regularly assists executives and works under general supervision
1.
Must spend
20% or less time doing clerical, manual, routine work
(less than
40% in retail or service establishments)
1.
Paid salary at $155/wk or $250/wk if meets A1-
A2

Wage/Hour Status Under Fair Labor Standards Act
Exemption
Category
A
Discretionary Authority
B
Percent of Time
C
Earning Levels
Professional
1.
Performs work requiring knowledge of an advanced field or creative and original artistic work or works as a teacher in an educational system
2.
Must do work that is predominantly intellectual and varied
1.
Must spend
20% or less time doing nonprofessional work
1.
Paid salary at least
$170/wk or
$250/wk if meets A1-
A2

Wage/Hour Status Under Fair Labor Standards Act
Exemption
Category
A
Discretionary Authority
B
Percent of Time
C
Earning Levels
Outside
Sales
1.
Customarily works away from employer site and
2.
Sells tangible or intangible items or
3.
Obtains orders or contracts for services
1.
Must spend
20% or less time doing work other than outside selling
2.
No salary test

Independent Contractor Regulations
Figure 12-6
19

Equal Pay and Pay Equity
The Equal Pay Act of 1963
Prohibits using different wage scales for men and women performing substantially the same jobs
Pay differences can be justified based on merit
(i.e. better performance, higher seniority, etc.
Pay Equity
A concept that the pay for all jobs requiring comparable knowledge, skills, and abilities should be the same even if job duties and market rates differ significantly
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State Laws & Garnishment Laws
State Laws
Many states have enacted modified versions of federal laws, and they must be recognized
Garnishment Laws
Garnishment – when a creditor obtains a court order that directs an employer to set aside a portion of one employee’s wages to pay debt owed
Consumer Credit Protection Act – sets limitations on amount of wages that can be garnished, and restricts employers for discharging affected employees
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Compensatio n
Administratio n Process
Figure 12-8
22

Job Evaluation
Job Evaluation
– A systematic basis for determining the relative worth of jobs within an organization
– Priced according to
:
 Relative importance of the job
 Knowledge, skills, & abilities (KSAs) needed to perform the job
 Difficulty of the job
Benchmark Jobs
– Jobs found in other healthcare organizations and performed by several individuals who have similar duties that are relatively stable and that require similar KSAs.
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Methods of Job Evaluation
Ranking Method
Classification Method
Point Method
Factor Comparison
Integrated & Computerized Job Evaluations
24

Legal Issues & Job Evaluation
Americans with Disabilities Act (ADA)
Job evaluation considers all functions of the job, not just the essential functions
Gender Issues
Traditional job evaluation programs place less weight on knowledge, skills, and working conditions for many female-dominated jobs
25

Pay Surveys
Pay Survey
– A collection of data on compensation rates for workers performing similar jobs in other organizations
Legal Issues
Using outside consultants to conduct pay surveys helps avoid charges of “price-fixing” on wages
26

Pay Structures
Types of Pay Structures:
1.
Hourly and salaried
2.
Office, technical, professional, and managerial
3.
Clinical allied health and support
4.
Clerical, information technology, professional, supervisory, management, and executive
27

Pay Structures: Pay Grades
Pay Grades
– Grouping of individual jobs having approximately the same job worth
Broadbanding
– Practice of using fewer pay grades with much broader ranges than in traditional compensation systems
– Why Broadbanding?
 Creates more flexible organizations
 Encourages competency development
 Emphasizes career development
28

Pay Ranges
Start with market line, used as the midpoint
Determine minimum and maximum pay levels
Types of Jobs
Executives
Range Above Minimum % Around Midpoint
Mid-Management/Professional
Technicians/Skilled Craft & Clerical
General Clerical/Others
50%-70%
40%-50%
30%-40%
25$-35%
+ or –20-25%
+ or –16-20%
+ or –13-16%
+ or –11-15%
29

Pay Rate Issues
Rates out of Range
RedCircled Employees
An incumbent who is paid above the range of the job
GreenCircled Employees
An incumbent who is paid below the range of the job
Pay Compression
– Occurs when the pay differences among individuals with different levels of experience and performance becomes small
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Performance-Based Pay Adjustment Matrix
Figure 12-11
31

Pay Adjustment Factor: Compa-Ratio
Compa-ratio
– A person’s pay level divided by the midpoint of the pay range
Examples:
Employee A

$25.00
(current pay)
$24.00
(midpoint)

100

104
Employee B

$22.00
(current pay)
$24.00
(midpoint)

100

92
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Issues Involving Pay Increases
Seniority
– Time spent in the organization or on a particular job
– Step systems -- pay increases based solely on how long they have been with the organization
Cost-of-Living Adjustments (COLA)
– A standard raise given based on economic pressure, such as the consumer price index
Lump-Sum Increases (LSI)
– A one-time payment for all or part of the yearly pay increase
– Does not increase base pay
33

Executive Compensation Components
Figure 12-13
34

Executive Compensation
Executive Salaries
 Vary by job type, organizational size, region, & industry
 Typically 40% - 60% of total compensation package
Executive Bonus Plans
 Usually tied to specific performance measures
 Typically 25% of total compensation package
Performance Incentives
 Attempt to tie executive compensation to the longterm growth & success of the organization
35

Executive Compensation (cont’d)
Benefits for Executives
– Includes traditional benefits (health insurance, retirement, vacation, etc.)
– Additional benefits not available to most employees
(deferred compensation, no-limit health plans, etc.)
Executive Perquisites (Perks)
– Special executive benefits, usually non-cash
36

Executive Compensation (cont’d)
Executive Perquisites (Perks)
 car allowance
 first class air travel
 financial/tax planning
 legal counseling
 health club memberships
 lunch club memberships
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