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9-2Compensation & Benefits –
CompensationCompensation
CompensationCompensation is the set of rewards that organizations provide is the set of rewards that organizations provide
to individuals in return for their willingness to to individuals in return for their willingness to perform various jobs and tasks within the perform various jobs and tasks within the organization.organization.
Internal equityInternal equity in compensation refers to comparisons that in compensation refers to comparisons that
employees make to other employees within the employees make to other employees within the same organization.same organization.
External equityExternal equity in compensation refers to comparisons in compensation refers to comparisons
employees make to others performing similar employees make to others performing similar jobs in different organizations.jobs in different organizations.
9-3Compensation & Benefits –
Basic Purposes of CompensationBasic Purposes of Compensation
Reward andReward andmotivatemotivate
InternalInternalequityequity
ExternalExternalequityequity
LegalLegal compliance compliance
CompensatioCompensationn
ExpenseExpensecontrolcontrol
9-4Compensation & Benefits –
Wages versus SalariesWages versus Salaries
WagesWages generally refer to hourly compensation paid to generally refer to hourly compensation paid to
operating employees; the basis for wages is operating employees; the basis for wages is time.time.
SalarySalary is income that is paid an individual not is income that is paid an individual not
on theon thebasis of time, but on the basis of basis of time, but on the basis of performance.performance.
9-5Compensation & Benefits –
Strategic Options for CompensationStrategic Options for Compensation
Anticipation of Anticipation of setting pay levelsetting pay level
DeterminationDeterminationof market payof market pay
Pay belowPay belowmarket ratemarket rate
Pay above Pay above market ratemarket rate
Pay market Pay market raterate
9-6Compensation & Benefits –
Organizational Pay RatesOrganizational Pay Rates
Pay Pay above above market market
raterate
Pay at Pay at marketmarket
raterate
Pay Pay below below market market
raterate
• Attracts better employeesAttracts better employees• Minimizes voluntary Minimizes voluntary
turnoverturnover• Fosters strong culture and Fosters strong culture and
competitive superiority competitive superiority
• Additional compensation Additional compensation costscosts
• Sense of entitlementSense of entitlement
• Higher quality of human Higher quality of human resources at midrange of resources at midrange of market-driven compensation market-driven compensation costscosts
• Does not attract higher Does not attract higher performersperformers
• Turnover will vary with labor Turnover will vary with labor demands of competing firmsdemands of competing firms
• Lower compensation costsLower compensation costs• Useful in labor markets Useful in labor markets
where unemployment is where unemployment is highhigh
• Lower-quality employeesLower-quality employees• Low morale/job satisfactionLow morale/job satisfaction• Higher turnover; especially Higher turnover; especially
among high performersamong high performers
AdvantagesAdvantagesDisadvantagesDisadvantages
9-7Compensation & Benefits –
Determinants of Compensation StrategyDeterminants of Compensation Strategy
Factors contributing to a firm’s compensation strategyFactors contributing to a firm’s compensation strategy
Relationship of overall strategy to compensation strategyRelationship of overall strategy to compensation strategy
Growth rate of firm and demand for human resourcesGrowth rate of firm and demand for human resources
Financial condition of the firm (i.e., ability to pay)Financial condition of the firm (i.e., ability to pay)
Overall attractiveness of firm (i.e., location, culture)Overall attractiveness of firm (i.e., location, culture)
Legal context of federal, state, and local labor regulationsLegal context of federal, state, and local labor regulations
Union influence and presence in labor marketUnion influence and presence in labor market
9-8Compensation & Benefits –
Pay Surveys and CompensationPay Surveys and Compensation
Pay surveysPay surveys are surveys of compensation paid to are surveys of compensation paid to
employees by other employers in a employees by other employers in a particular geographic area, an industry, or particular geographic area, an industry, or an occupational group.an occupational group.
assist firms in avoiding problems of external assist firms in avoiding problems of external equity when attempting to set compensation equity when attempting to set compensation strategy for themselves.strategy for themselves.
9-9Compensation & Benefits –
Developing Pay SurveysDeveloping Pay Surveys
Select Employers with Comparable JobsSelect Employers with Comparable Jobs
Determine Jobs to be SurveyedDetermine Jobs to be Surveyed
Decide What Information Is NeededDecide What Information Is Needed
Conduct SurveyConduct Survey
9-10Compensation & Benefits –
Establishing Pay StructuresEstablishing Pay Structures
Establishing Pay Structures
9-11Compensation & Benefits –
Traditional Pay Structure vs. Traditional Pay Structure vs. BroadbandingBroadbanding
Traditional Pay Structure vs. Traditional Pay Structure vs. BroadbandingBroadbanding
9-13Compensation & Benefits –
Determining a Wage and Salary Structure Determining a Wage and Salary Structure
FactorFactorcomparisoncomparison
method method
Job rankingJob rankingmethodmethod
ClassificationClassificationsystemsystem
Point systemPoint systemJob Job
EvaluationEvaluationRegression-Regression-
based systembased system
9-14Compensation & Benefits –
Job Evaluation and Job WorthJob Evaluation and Job Worth
Job Ranking
Job A B C D Total
A 0
B 1 1 2
C 1 1 1 3
D 1 1
Point System
CompensableFactors
Degree1
Degree2
Degree3
Degree4
Degree5
TotalPoints
Knowledge 10 20 30 40 50 150
Experience 15 30 45 60 75 225
Job responsibilities 25 50 75 100 125 375
Working conditions 5 10 15 20 25 75
9-15Compensation & Benefits –
Job Evaluation and Job WorthJob Evaluation and Job Worth
Factor comparison methodFactor comparison method assesses jobs on a factor-by-factor basis, using assesses jobs on a factor-by-factor basis, using
a a factor comparison scalefactor comparison scale as a benchmark. as a benchmark. Regression-based systemRegression-based system
uses a statistical technique called uses a statistical technique called multiple multiple regressionregression to develop an equation that to develop an equation that establishes the relationship between different establishes the relationship between different dimensions of the job and compensation.dimensions of the job and compensation.
9-16Compensation & Benefits –
Factor Comparison Method of Job EvaluationFactor Comparison Method of Job Evaluation
Six steps:Six steps: Comparison factors are selected and defined.Comparison factors are selected and defined. Benchmark or key jobs are identified.Benchmark or key jobs are identified. Benchmark jobs are ranked on each Benchmark jobs are ranked on each
compensation factor.compensation factor. A part of each benchmark job’s wage rate is A part of each benchmark job’s wage rate is
allocated to each job factor.allocated to each job factor. Two sets of ratings are prepared, based on the Two sets of ratings are prepared, based on the
ranking and the assigned wages, to determine ranking and the assigned wages, to determine the consistency demonstrated by the the consistency demonstrated by the evaluators.evaluators.
A job comparison chart is developed to display A job comparison chart is developed to display the benchmark jobs and the monetary values the benchmark jobs and the monetary values that each job receives for each factor.that each job receives for each factor.
9-17Compensation & Benefits –
A Sample Wage StructureA Sample Wage Structure
Sal
ary
(in
do
llar
s)S
alar
y (i
n d
oll
ars)
||
11
ABCABC
||
22
DEFDEF
||
33
GHIGHI
||
44
JKLMJKLM
55
NOPNOP
MidpointMidpointMinimumMinimum
MidpointMidpointMaximumMaximum
MaximumMaximum
MinimumMinimum
MinimumMinimum
MidpointMidpoint
MaximumMaximum
MinimumMinimum
MidpointMidpoint
MaximumMaximum
MinimumMinimum
MidpointMidpoint
MaximumMaximum
Grade (class):Grade (class):
Containing jobs:Containing jobs:
9-18Compensation & Benefits –
Wage and Salary AdministrationWage and Salary Administration
Managing compensationManaging compensation allows the organization to control compensation allows the organization to control compensation
costs and to maintain a compensation structure costs and to maintain a compensation structure that fits the needs of both the organization and that fits the needs of both the organization and its employees. As organizational circumstances its employees. As organizational circumstances change, it may become necessary to modify or change, it may become necessary to modify or change the compensation strategy.change the compensation strategy.
Determining individual wagesDetermining individual wages has its basis in the organization’s awarding has its basis in the organization’s awarding
differential compensation to employees on the differential compensation to employees on the basis of qualifications, seniority, or other job-basis of qualifications, seniority, or other job-related factors.related factors.
9-19Compensation & Benefits –
Wage and Salary AdministrationWage and Salary Administration
Pay secrecyPay secrecy refers to the extent to which an individual’s refers to the extent to which an individual’s
compensation in an organization is secret.compensation in an organization is secret. Arguments for pay secrecyArguments for pay secrecy
An individual’s compensation is a private matter and An individual’s compensation is a private matter and not for public knowledge.not for public knowledge.
Knowing pay levels fosters jealousy and resentment.Knowing pay levels fosters jealousy and resentment. Argument against pay secrecyArgument against pay secrecy
Public knowledge about an open-pay system creates Public knowledge about an open-pay system creates proper perceptions of equity and motivates proper perceptions of equity and motivates performance.performance.
Pay compressionPay compression occurs when individuals of substantially occurs when individuals of substantially
different levels of experience or seniority are different levels of experience or seniority are paid similar wages or salaries.paid similar wages or salaries.
9-20Compensation & Benefits –
Typical Employee CompensationTypical Employee Compensation
Work wages $32,000
68%
Benefits $15,000
32%
9-21Compensation & Benefits –
Meet employee Meet employee expectationsexpectations
Improve Improve satisfaction/ satisfaction/
decrease turnoverdecrease turnover
Respond to Respond to external forcesexternal forces
Attract better Attract better employeesemployees
Indirect Compensation and Employee BenefitsIndirect Compensation and Employee Benefits
Indirect Indirect compensation compensation and employee and employee
benefitsbenefits
9-22Compensation & Benefits –
Mandated by LawMandated by Law OptionalOptional
Health CareHealth Care
Unemployment InsuranceUnemployment Insurance
Workers’ CompensationWorkers’ Compensation
Time Not Worked PayTime Not Worked Pay
Social SecuritySocial Security
Unpaid Leave (FMLA)Unpaid Leave (FMLA)
Life & Care InsuranceLife & Care Insurance
Retirements & PensionsRetirements & Pensions
Types of Employee BenefitsTypes of Employee Benefits
Benefits refer to rewards, incentives, and other things of value Benefits refer to rewards, incentives, and other things of value that an organization provides its employees beyond their wages, that an organization provides its employees beyond their wages,
salaries, and other forms of direct financial compensation.salaries, and other forms of direct financial compensation.
9-23Compensation & Benefits –
Paid Time OffPaid Time Off
Paid holidaysPaid holidays
Paid vacationsPaid vacations Sick leaveSick leave
Personal leavePersonal leave
9-24Compensation & Benefits –
Cafeteria-Style Benefit PlansCafeteria-Style Benefit Plans
Cafeteria-style benefit plansCafeteria-style benefit plans allow employees to choose the benefits they really want.allow employees to choose the benefits they really want. maximize the effectiveness of the benefit program for the maximize the effectiveness of the benefit program for the
organization and the employees.organization and the employees. can lead to increased satisfaction and reduced turnover.can lead to increased satisfaction and reduced turnover. can be used to encourage employees to chose more cost-can be used to encourage employees to chose more cost-
effective benefits (e.g., HMO versus traditional medical effective benefits (e.g., HMO versus traditional medical plans).plans).
can entail significant administrative costs.can entail significant administrative costs. mean that costs of some benefits cannot be amortized mean that costs of some benefits cannot be amortized
across less-intense users (adverse selection).across less-intense users (adverse selection). must be monitored to ensure that employees make rational must be monitored to ensure that employees make rational
choices about benefits.choices about benefits.