Chapter 10: Developing an Overall Approach to Compensation Jackson and Schuler © 2003 South-Western...

Chapter 10:Chapter 10:

Developing an Overall Approach Developing an Overall Approach to Compensationto Compensation

Jackson and SchulerJackson and Schuler

© 2003 South-Western College Publishing. All rights reserved.

Eighth editionEighth edition

Managing Human Managing Human ResourcesResources

© 2003 South-Western College Publishing. All rights reserved. 10–2

Chapter OutlineChapter OutlineChapter OutlineChapter Outline

Total CompensationTotal Compensation The Strategic Importance of Total The Strategic Importance of Total

CompensationCompensation Role of the External EnvironmentRole of the External Environment Involving the HR Triad in Managing Total Involving the HR Triad in Managing Total

CompensationCompensation Establishing the Value of JobsEstablishing the Value of Jobs Using Market Data to Set Pay RatesUsing Market Data to Set Pay Rates Designing the Internal Pay StructureDesigning the Internal Pay Structure


Chapter Outline (cont’d)Chapter Outline (cont’d)Chapter Outline (cont’d)Chapter Outline (cont’d)

Balancing Internal and External EquityBalancing Internal and External Equity Compensation in Context of GlobalizationCompensation in Context of Globalization


Total Compensation SystemTotal Compensation SystemTotal Compensation SystemTotal Compensation System

MonetaryMonetary NonmonetaryNonmonetary

OrganizationOrganizationMembershipMembership

Individual orIndividual orTeam AttributesTeam Attributes

Job orJob orPositionPosition

Mandatory &voluntaryinsurance

Mandatory &voluntaryinsurance

Company statusAlt. work

arrangements

Company statusAlt. work

arrangements

Performance-,skill- or tenure-

based pay

Performance-,skill- or tenure-

based pay

RecognitionCareer

opportunities

RecognitionCareer

opportunities

Wages, salaryor shift pay

Wages, salaryor shift pay

Status, taskenjoyment, social

rewards

Status, taskenjoyment, social

rewards


Compensation within the HR SystemCompensation within the HR SystemCompensation within the HR SystemCompensation within the HR System

Other HR Other HR ActivitiesActivities•FairnessFairness

•Job AnalysisJob Analysis

•RecruitmentRecruitment

GlobalGlobalEnvironmentEnvironment

Organizational Organizational EnvironmentEnvironment

Objectives for Objectives for Total Total CompensationCompensation

• Communicate Communicate ValuesValues

• Support Support ObjectivesObjectives

• Attract, retain, Attract, retain, motivatemotivate

• Contain costsContain costs

Total CompensationTotal Compensation::Base pay – Performance-based pay - BenefitsBase pay – Performance-based pay - Benefits

Key Design Key Design Choices for Choices for Base PayBase Pay

• Pay mixPay mix

• Job vs skill-Job vs skill-basedbased

• How involve How involve mgrs, employeesmgrs, employees

• Relevant labor Relevant labor marketmarket

OutcomesOutcomes• AttitudesAttitudes

• SkillsSkills

• BehaviorBehavior

• PerformancePerformance

• AdvancementAdvancement

• RetentionRetention

EvaluateEvaluateand Reviseand Revise


Pay Mixes for the Stages of Pay Mixes for the Stages of the Organizational Life Cyclethe Organizational Life CyclePay Mixes for the Stages of Pay Mixes for the Stages of the Organizational Life Cyclethe Organizational Life Cycle

Innovation, Innovation, attract key contributorsattract key contributors

HighHighHighHigh

Stock BonusStock BonusStock BonusStock Bonus

Stock OptionsStock Options(Broad Participation)(Broad Participation)

Stock OptionsStock Options(Broad Participation)(Broad Participation)

Below market levelBelow market levelBelow market levelBelow market level


Recruit, TrainRecruit, TrainRecruit, TrainRecruit, Train

ModerateModerateModerateModerate

Cash BonusCash BonusCash BonusCash Bonus

Stock OptionsStock Options(Limited participation)(Limited participation)

Stock OptionsStock Options(Limited participation)(Limited participation)

At market levelAt market levelAt market levelAt market level


HR Management Focus

Risk Profile

Short-Term Incentives

Long-Term Incentives

Base Salary

Benefits

Start-Up Growth


Pay Mixes for the Stages of the Pay Mixes for the Stages of the Organizational Life Cycle (cont’d)Organizational Life Cycle (cont’d)Pay Mixes for the Stages of the Pay Mixes for the Stages of the

Organizational Life Cycle (cont’d)Organizational Life Cycle (cont’d)

Retention, ConsistencyRetention, Consistency

LowLow

Profit SharingProfit SharingCash BonusCash Bonus

Stock PurchaseStock Purchase

At or above market At or above market levellevel

At or above marketAt or above marketlevellevel

Cutting back, cost controlCutting back, cost control

Moderate to HighModerate to High

UnlikelyUnlikely

UnlikelyUnlikely

At or below marketAt or below marketlevellevel

At or below marketAt or below marketlevellevel

Maturity DeclineHR Management

Focus

Risk Profile

Short-Term Incentives

Long-Term Incentives

Base Salary

Benefits


The Strategic Importance of The Strategic Importance of Total CompensationTotal Compensation

The Strategic Importance of The Strategic Importance of Total CompensationTotal Compensation

Three important objectives:Three important objectives: Attracting and retaining the talent required Attracting and retaining the talent required

for sustainable competitive advantagefor sustainable competitive advantage Focusing the energy of employees on Focusing the energy of employees on

implementing the organization’s competitive implementing the organization’s competitive strategystrategy

Controlling costsControlling costs


The Strategic Importance ofThe Strategic Importance ofTotal CompensationTotal Compensation

The Strategic Importance ofThe Strategic Importance ofTotal CompensationTotal Compensation

Objective No. 1: Objective No. 1: Attracting and Retaining TalentAttracting and Retaining Talent

Three sensitive practices:Three sensitive practices: Low payLow pay Pay secrecyPay secrecy Pay gapsPay gaps


Pay FairnessPay FairnessPay FairnessPay Fairness

Pay fairnessPay fairness What people believe they deserve to be paid What people believe they deserve to be paid

in relation to what others deserve to be paid.in relation to what others deserve to be paid.

EquityEquity Perceptions based on comparisons between Perceptions based on comparisons between

an individual’s ratio of inputs and outcomes an individual’s ratio of inputs and outcomes and the ratios of others doing similar work.and the ratios of others doing similar work.• Inputs: What an employee gives to the jobInputs: What an employee gives to the job• Outcomes: What people get out of doing the jobOutcomes: What people get out of doing the job


Equity PerceptionsEquity PerceptionsEquity PerceptionsEquity Perceptions

Inputs

Outcomes

Inputs

Outcomes


How Employees Reduce InequityHow Employees Reduce InequityHow Employees Reduce InequityHow Employees Reduce Inequity

Increase inputs (time, effort) to justify higher Increase inputs (time, effort) to justify higher rewards when they feel overrewardedrewards when they feel overrewarded

Decrease inputs when feeling underrewardedDecrease inputs when feeling underrewarded Change the compensation they receiveChange the compensation they receive

Form a unionForm a union File a grievanceFile a grievance Leave work earlyLeave work early

Choose a different comparison “other”Choose a different comparison “other” Rationalize that inequities are justifiedRationalize that inequities are justified Leave the situation by quittingLeave the situation by quitting


Low PayLow PayLow PayLow Pay

Companies decide to lead, lag, or match Companies decide to lead, lag, or match market pay ratesmarket pay rates

External equityExternal equity Fairness relative to the external market Fairness relative to the external market

(outside the organization)(outside the organization) May be difficult to make comparisons when May be difficult to make comparisons when

companies mix several forms of pay (e.g. companies mix several forms of pay (e.g. salary, bonus, benefits) salary, bonus, benefits)


Low Pay Cont’d)Low Pay Cont’d)Low Pay Cont’d)Low Pay Cont’d)

Dissatisfied employees mayDissatisfied employees may Leave the companyLeave the company Perform poorlyPerform poorly Steal from the companySteal from the company


Pay SecrecyPay SecrecyPay SecrecyPay Secrecy

Secrecy is the normSecrecy is the norm Employees may have inaccurate informationEmployees may have inaccurate information Companies can benefit fromCompanies can benefit from

Involving employees in system designInvolving employees in system design Implement pay systems fairly Implement pay systems fairly

and provide due processand provide due process


Pay GapsPay GapsPay GapsPay Gaps

$0

$100

$200

$300

$400

$500

$600

1980 1990 2000

Pay to CEO per Dollar paid to Blue-Collar Workers


Pay GapsPay GapsPay GapsPay Gaps

““In the U.S., even lower level executives make In the U.S., even lower level executives make far more than their counterparts in other far more than their counterparts in other advanced economies, while average workers advanced economies, while average workers make comparatively less.”make comparatively less.”


Importance of Total CompensationImportance of Total CompensationImportance of Total CompensationImportance of Total Compensation

Objective 2:Objective 2: Focusing employee energy on implementing Focusing employee energy on implementing

the competitive strategythe competitive strategy

Strategy changesStrategy changes Mergers and acquisitionsMergers and acquisitions Organizational life cycleOrganizational life cycle


Changing Compensation to Match Changing Compensation to Match Changes in StrategyChanges in Strategy

Changing Compensation to Match Changing Compensation to Match Changes in StrategyChanges in Strategy

Egalitarian pay systems may facilitate a Egalitarian pay systems may facilitate a quality-driven, customer-focused strategyquality-driven, customer-focused strategy

Today, performance-based pay and rewards Today, performance-based pay and rewards for teamwork, quality, and new skills have for teamwork, quality, and new skills have replaced pay based on job title and seniorityreplaced pay based on job title and seniority


Compensation After Mergers and Compensation After Mergers and AcquisitionsAcquisitions

Compensation After Mergers and Compensation After Mergers and AcquisitionsAcquisitions

Contrasting Cultures and Compensation SystemsContrasting Cultures and Compensation Systems

• Preference for risk taking vs. risk aversionPreference for risk taking vs. risk aversion

• Flexibility & informality vs. rigidity & formalityFlexibility & informality vs. rigidity & formality

• Decentralized vs. centralizedDecentralized vs. centralized

• Concern for results vs. concern for peopleConcern for results vs. concern for people

• Team focus vs. focus on individual starsTeam focus vs. focus on individual stars

Portfolio ApproachPortfolio Approach Blending ApproachBlending Approach New System ApproachNew System Approach


Importance of Total CompensationImportance of Total CompensationImportance of Total CompensationImportance of Total Compensation

Objective 3:Objective 3: Increasing ProductivityIncreasing Productivity

• Gainsharing programs link Gainsharing programs link financial rewards to performance financial rewards to performance improvements in a plant or facilityimprovements in a plant or facility

• Incentive pay programs link Incentive pay programs link rewards to individual or team rewards to individual or team performanceperformance


Role of the External EnvironmentRole of the External EnvironmentRole of the External EnvironmentRole of the External Environment

LaborLaborMarketMarketLaborLaborMarketMarket

Legal and SocialLegal and SocialConsiderationsConsiderationsLegal and SocialLegal and SocialConsiderationsConsiderations

LaborLaborUnionsUnionsLaborLabor

UnionsUnions

• Pay levelPay level• Pay mixPay mix

• LegislationLegislation• Comparable worthComparable worth

• Wage clausesWage clauses


Pay Mix for Different Categories of Pay Mix for Different Categories of EmployeesEmployees

Pay Mix for Different Categories of Pay Mix for Different Categories of EmployeesEmployees

0% 20% 40% 60% 80% 100%

Base Salary

Short-term incentives

Long-term incentives

Benefits and services

Entry Professional

s

Managerial

Executive

CEO


Legal Constraints Legal Constraints Legal Constraints Legal Constraints

Davis-Bacon (1931) and Walsh-Healy Acts Davis-Bacon (1931) and Walsh-Healy Acts (1936): (1936): Federal construction contractors required to Federal construction contractors required to

pay prevailing wages to laborers & pay prevailing wages to laborers & mechanicsmechanics

Fair Labor Standards Act (1938)Fair Labor Standards Act (1938) Set minimum wageSet minimum wage Requires overtime for nonexempt workersRequires overtime for nonexempt workers Establishes child labor standardsEstablishes child labor standards


Exempt Employees Under FLSAExempt Employees Under FLSAExempt Employees Under FLSAExempt Employees Under FLSA

Not covered by overtime and minimum wage Not covered by overtime and minimum wage provisionsprovisions Includes executives, managers, Includes executives, managers,

professionals, administratorsprofessionals, administrators

Must be paid fixed salary and meet criteria for Must be paid fixed salary and meet criteria for job content (e.g. “professionals” must exercise job content (e.g. “professionals” must exercise independent judgment and do nonroutine independent judgment and do nonroutine work)work)


Legal ConstraintsLegal ConstraintsLegal ConstraintsLegal Constraints

Living Wage Laws:Living Wage Laws: Enacted by some local governments to Enacted by some local governments to

ensure pay reflects cost of livingensure pay reflects cost of living

Equal Pay Act (1963)Equal Pay Act (1963) Amendment to FLSA that prohibits gender Amendment to FLSA that prohibits gender

discrimination for “substantially” equal jobsdiscrimination for “substantially” equal jobs

Comparable WorthComparable Worth Based on gender differences in “true worth” Based on gender differences in “true worth”

of nonidentical jobsof nonidentical jobs Implemented by some state and local Implemented by some state and local

governments and some unionsgovernments and some unions


Impact of Unions on PayImpact of Unions on PayImpact of Unions on PayImpact of Unions on Pay

Presence of union in private-sector firm may Presence of union in private-sector firm may increase wages by 10-15% and benefits by increase wages by 10-15% and benefits by 20-30%20-30%

Union effects on productivity not clearUnion effects on productivity not clear


The HR Triad and Total The HR Triad and Total Compensation Compensation

The HR Triad and Total The HR Triad and Total Compensation Compensation

Line Managers

• With HR, align pay system with strategic objectives

• Help HR determine value of jobs and people

• Communicate and abide by pay system principles

• Make and communicate pay and benefit decisions

• Fairly administer compensation

HR Professionals

• With line managers, align pay system with strategic objectives

• Assess employees’ preferences and reactions to pay

• Design processes to measure skills, performance, evaluate jobs

• Help managers to communicate and set pay

• Ensure employee due process

Employees

• Take responsibility for understanding compensation system

• Indicate preferences for forms of pay

• Participate in job evaluation

• Actively manage indirect plans and accounts

• Provide input into pay decisions and appeals

• Register complaints


Establishing the Value of JobsEstablishing the Value of JobsEstablishing the Value of JobsEstablishing the Value of Jobs

Base pay for job-based pay systemBase pay for job-based pay system Wage or salary, exclusive of incentive pay or Wage or salary, exclusive of incentive pay or

benefitsbenefits

Based onBased on Information about the job and its relative Information about the job and its relative

value within the organization (internal value within the organization (internal equity)equity)• Job Evaluation used to gather this informationJob Evaluation used to gather this information

Market information about what other Market information about what other employers pay (external equity)employers pay (external equity)• Salary surveys used to gather this informationSalary surveys used to gather this information


Job Evaluation MethodsJob Evaluation MethodsJob Evaluation MethodsJob Evaluation Methods

Ranking methodRanking method Job classification Job classification

methodmethod Point rating methodPoint rating method Competency-based Competency-based

job evaluationjob evaluation


Example of Point Rating MethodExample of Point Rating MethodExample of Point Rating MethodExample of Point Rating Method

Compensable Compensable FactorFactor

11st st degreedegree

22ndnd degreedegree

33rdrd degreedegree 44thth degreedegree

Job KnowledgeJob Knowledge 5050 100100 150150 200200

Problem SolvingProblem Solving 5050 100100 150150 205205

ImpactImpact 6060 120120 180180 240240

Working ConditionsWorking Conditions 1010 3030 5050 N/AN/A

Supervision NeededSupervision Needed 2525 5050 7575 100100

Supervision GivenSupervision Given 3030 6060 9090 120120


Example of Compensable Factor Example of Compensable Factor and Degree Statementsand Degree Statements

Example of Compensable Factor Example of Compensable Factor and Degree Statementsand Degree Statements

Factor: Problem SolvingFactor: Problem Solving Degree 1: Actions performed in set order Degree 1: Actions performed in set order

according to written or verbal instructions. according to written or verbal instructions. Problems referred to a supervisorProblems referred to a supervisor

Degree 2: Routine problems solved and Degree 2: Routine problems solved and choices made regarding order in which work choices made regarding order in which work is performed within standard practices. is performed within standard practices. Information may be obtained from various Information may be obtained from various sources.sources.


Example of Compensable Factor Example of Compensable Factor and Degree Statements (cont’d)and Degree Statements (cont’d)Example of Compensable Factor Example of Compensable Factor and Degree Statements (cont’d)and Degree Statements (cont’d)

Factor: Problem SolvingFactor: Problem Solving Degree 3: Problems are solved that require Degree 3: Problems are solved that require

general knowledge of company policies and general knowledge of company policies and procedures applicable within own area of procedures applicable within own area of responsibility. Decisions based on choice from responsibility. Decisions based on choice from established alternatives. Actions expected to be established alternatives. Actions expected to be within standards and established procedures. within standards and established procedures.

Degree 4: Analytical judgment, initiative, or Degree 4: Analytical judgment, initiative, or innovation required in dealing with complex innovation required in dealing with complex problems or situations. Evaluation not easy problems or situations. Evaluation not easy because there is little precedent or information because there is little precedent or information may be incomplete.may be incomplete.(See Chapter 10 text for Degree 5)(See Chapter 10 text for Degree 5)


Competency-Based Job EvaluationCompetency-Based Job EvaluationCompetency-Based Job EvaluationCompetency-Based Job Evaluation

Emphasizes competencies needed to perform Emphasizes competencies needed to perform job rather than job dutiesjob rather than job duties

Often used with broadbanding approachOften used with broadbanding approach Promotes individual development and growth Promotes individual development and growth

through lateral movesthrough lateral moves Hierarchical, bureaucratic and rule-driven Hierarchical, bureaucratic and rule-driven

corporate cultures may make implementation corporate cultures may make implementation difficult.difficult.


Job-Based Pay PolicyJob-Based Pay PolicyJob-Based Pay PolicyJob-Based Pay Policy

Three decisions:Three decisions: Single plan or multiple plansSingle plan or multiple plans Job evaluation methodJob evaluation method Process to drive the planProcess to drive the plan


Skill-Based Pay Skill-Based Pay Skill-Based Pay Skill-Based Pay

Pay based on:Pay based on: What skills the employee hasWhat skills the employee has What skills could be used, if neededWhat skills could be used, if needed People are paid according People are paid according

to capabilities, not job to capabilities, not job assignmentassignment


Using Market Data to Set Pay RatesUsing Market Data to Set Pay RatesUsing Market Data to Set Pay RatesUsing Market Data to Set Pay Rates

To achieve external equity in pay:To achieve external equity in pay: Conduct a compensation surveyConduct a compensation survey Set overall market pay policySet overall market pay policy Establish an organizational pay policyEstablish an organizational pay policy


Conducting a Survey to Assess Conducting a Survey to Assess External Market RatesExternal Market Rates

Conducting a Survey to Assess Conducting a Survey to Assess External Market RatesExternal Market Rates

Define relevant labor Define relevant labor marketmarket

Identify Identify benchmark benchmark jobsjobs:: Jobs that are Jobs that are

similar across similar across range of range of organizationsorganizations

Collect survey dataCollect survey data


Establishing the Market Pay Policy LineEstablishing the Market Pay Policy LineEstablishing the Market Pay Policy LineEstablishing the Market Pay Policy Line

250 500 750 1,000 Job Evaluation Points

*Programmer-Micro Subsystems*Programmer-Micro Subsystems

*Sr. Analyst*Sr. Analyst

*SD Engineer*SD Engineer

$25,000

$50,000

$75,000

$100,000

Ave

rag

e A

nn

ual

Pay

*Sr. Programmer*Sr. Programmer

*Intermediate Programmer*Intermediate Programmer

Based on Exhibit 10.15 in text


Designing the Internal Pay StructureDesigning the Internal Pay StructureDesigning the Internal Pay StructureDesigning the Internal Pay Structure

Job-Based Pay Grades and RangesJob-Based Pay Grades and Ranges Pay line is midpointPay line is midpoint

Common ranges:Common ranges: Laborers: Up to 25%Laborers: Up to 25% Clerical, technical, paraprofessional: 15-Clerical, technical, paraprofessional: 15-

50%50% First-level managers. and professionals: 30-First-level managers. and professionals: 30-

50%50% Middle and Sr. managers: 40-100%Middle and Sr. managers: 40-100%


Designing the Internal Pay Structure Designing the Internal Pay Structure (cont’d)(cont’d)

Designing the Internal Pay Structure Designing the Internal Pay Structure (cont’d)(cont’d)

Competency-Based:Competency-Based: Points assigned to jobs based on Points assigned to jobs based on

competencies requiredcompetencies required

Skill-BasedSkill-Based Base pay equal regardless of job assignmentBase pay equal regardless of job assignment Additional pay earned by increasing skillsAdditional pay earned by increasing skills


Pay Grade Structure for Job-Based Pay Grade Structure for Job-Based SystemSystem

Pay Grade Structure for Job-Based Pay Grade Structure for Job-Based SystemSystem

$3,000

$4,000

$5,000 Corporate Policy LineCorporate Policy Line

MidpointMidpoint

250 350 450 550 650 Job Evaluation Points

MaximumsMaximums

Pay Grade WidthPay Grade Width

Month

ly P

ay


Balancing Internal and External Balancing Internal and External EquityEquity

Balancing Internal and External Balancing Internal and External EquityEquity

Internal External

Pay EquityPay Equity

PayDifferentials

•Market •Shift

PayCompression


Compensation in the Context of Compensation in the Context of GlobalizationGlobalization

Compensation in the Context of Compensation in the Context of GlobalizationGlobalization

Considerations:Considerations: Compensation philosophyCompensation philosophy Base payBase pay Relocation premiumsRelocation premiums Country differencesCountry differences


Assessing CompensationAssessing CompensationAssessing CompensationAssessing Compensation

Purposes of assessing compensation:Purposes of assessing compensation: To attract qualified employeesTo attract qualified employees To motivate employees to work toward To motivate employees to work toward

corporate goalscorporate goals To retain qualified employeesTo retain qualified employees To administer pay within legal constraintsTo administer pay within legal constraints

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