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Compensation: An Compensation: An OverviewOverviewCompensation: An Compensation: An OverviewOverview

chapterchapter

10

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CompensationCompensation

Deals with every type of reward individuals receive in exchange for performing organizational tasks

Major cost of doing businessChief reason why most individuals seek

employmentAn exchange relationship

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Financial CompensationFinancial Compensation

Direct Financial CompensationConsists of the pay an employee

receives in the form of:wagessalariesbonusescommissions

Indirect Financial CompensationConsists of all financial rewards

not included in direct financial compensation – i.e., benefits:pensionsinsurancepaid time offemployee services

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Objective of CompensationObjective of Compensation

To create a system of rewards that is equitable to the employer and employee alike

The desired outcome is an employee who is:Attracted to the workMotivated to do a good job for the employer

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A Compensation system should

be:(* focus of this chapter)

Adequate*Equitable*

Balanced

Cost-effective

Secure

Incentive-providing*

Acceptable to the employee

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Labor Market Economy

Government Unions

External Influences on CompensationExternal Influences on Compensation

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Compensation and an International Labor Compensation and an International Labor ForceForce

Issues that affect the compensation strategies of organizations competing in a global market:Global wage differentials verging on the extremeMoving American employees to foreign locationsEmploying local (foreign) managers and workersMoving foreign workers to the United States for

training or work assignments

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Government Influences: Wage ControlsGovernment Influences: Wage Controlsand Guidelines:and Guidelines: (1 of 2)(1 of 2)

Wage Stabilization Act (1942)

Defense Production Act (1950)

Economic Stabilization Act (1970)

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Government Influences: Wage ControlsGovernment Influences: Wage Controlsand Guidelines: and Guidelines: (2 of 2)(2 of 2)

Wage freezes – forbid wage increases

Wage controls – limit the size of wage increases

Wage guidelines – voluntary limits on wage increases

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Government Influences: Wage and Hour Government Influences: Wage and Hour RegulationsRegulations

Fair Labor Standards Act (FLSA) of 1938minimum wageovertime

exempt workersnonexempt workers

child laborrecordkeeping requirementsEqual Pay Act of 1963

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Equal Pay Act of 1963Equal Pay Act of 1963

Established the concept of equal pay for equal work

Prohibits wage differentials based on gender between men and women performing essentially the same work in organizationsskilleffortresponsibilityworking conditions

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Comparable Worth

Attempts to prove that employers systematically discriminate by paying women less than their work is intrinsically worth, versus what they pay men who work in comparable (equally valuable) positions – and to remedy this situation.

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Civil Rights Act(1964)

AgeDiscrimination

Act (1967)

Federal WageGarnishment

Act (1970)

Davis-BaconAct (1931)

Service ContractAct (1965)

Walsh-HealyAct (1936)

Government Influence: Other Pay LegislationGovernment Influence: Other Pay Legislation

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Internal Influences on CompensationInternal Influences on Compensation

OrganizationSize

OrganizationAge

LaborBudget

Who MakesCompensation

Decisions

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Pay and MotivationPay and Motivation

Motivation – set of attitudes and values that predisposes a person to act in a specific, goal-directed manner:the direction of behavior (working to reach a goal)the strength of behavior (how hard or strongly the

individual will work)

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SocialComparison

Theories

ExpectancyTheory

ReinforcementTheories

NeedsTheories

Herzberg’sTwo-Factor

Theory

Theories of MotivationTheories of Motivation

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Pay and Employees’ SatisfactionPay and Employees’ Satisfaction

Pay Satisfaction – refers to an employee’s liking for or dislike of the employer’s compensation package (including pay and benefits)

Lawler’s Model – the distinction between the amount employees receive and the amount they think others are receiving is the immediate cause of pay satisfaction or dissatisfaction

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Pay dissatisfaction is a function of six Pay dissatisfaction is a function of six important judgments:important judgments:

1. A discrepancy between what employees want and what they receive

2. A discrepancy between a comparison outcome and what they get

3. Past expectations of receiving more rewards4. Low expectations for the future5. A feeling of deserving or being entitled to more than

they are getting6. A feeling that they are not personally responsible for

poor results

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Pay and Employees’ ProductivityPay and Employees’ Productivity

Studies indicate that if pay is tied to performance, the employee produces a higher quality and quantity of work

The key to making compensation systems more effective is to be sure that they are directly connected to expected behaviors

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Compensation Decisions Compensation Decisions (1 of 3)(1 of 3)

Pay-Level DecisionExamines pay relative to employees working on

similar jobs in other organizationsObjective is to keep the organization competitive

in the labor marketPay survey is the major tool used in this decision

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Compensation Decisions Compensation Decisions (2 of 3)(2 of 3)

Pay-Structure DecisionExamines pay relative to employees working on

different jobs within the organizationInvolves setting a value on each job within the

organization relative to all other jobsJob evaluation is the approach used

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Compensation Decisions Compensation Decisions (3 of 3)(3 of 3)

Individual Pay DeterminationExamines pay relative to employees working on

the same job within the organization

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Pay-Level StrategiesPay-Level Strategies

High-Pay Strategy

Low-Pay Strategy

Comparable-Pay Strategy

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Factors Affecting the Choice of Pay StrategyFactors Affecting the Choice of Pay Strategy

The motivation and attitudes held by management

The ethical and moral attitude of managementThe degree to which an organization can

attract and retain personnelThe organization’s ability to pay

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Pay SurveysPay Surveys

Techniques and instruments used to collect data about compensation paid to employees in:a geographic areaan industryan occupational group

Obtaining valid, reliable information about pay is critical to creating a compensation system that supports corporate goals

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GovernmentSources

Professional andTrade

Organizations

Surveys Conductedby Other

Organizations

Surveys byJournals

Sources of Pay SurveysSources of Pay Surveys

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Critical Issues Determining the Usefulness Critical Issues Determining the Usefulness of Pay Surveys:of Pay Surveys:

1. The jobs covered

2. Who will be surveyed

3. The method used

4. The information gathered

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Pay Structure DecisionPay Structure Decision

An internal pay hierarchyBased on a systematic comparison between the

worth of one job and the worth of another

Job Evaluation – the formal process by which the relative worth of various jobs in the organization is determined for pay purposes

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Comparison of Job Evaluation SystemsComparison of Job Evaluation Systems

Comparison Basis Non-Quantitative Comparison

(Job as Whole)

Quantitative Comparison (Parts of Factors of Jobs)

Job versus job Job ranking Factor comparison

Job versus scale Job grading or classification

Point system

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Job Factor

Weight

1

2

3

4

5

1. Education 50% 50 100 150 200 250

2. Experience 25% 25 50 75 100 125

3. Complexity of job

12% 12 24 36 48 60

4. Relationships with others

8% 8 24 40

5. Working conditions

5% 10 15 20 25

Degrees of Factor

Example of Evaluation Points for Insurance Example of Evaluation Points for Insurance Clerical Job (500-point system)Clerical Job (500-point system)

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PAY

Job Evaluation Points

100 150 200 250 300 350

monthlysalary(000)

8

7

6

5

4

3

2

1

I II III IV VPay Classes

Pay Curve

Pay Classes and Pay CurvePay Classes and Pay Curve

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PAY

Job Evaluation Points

80 120 160 200 240 280 320

monthlysalary($000)

8

7

6

5

4

3

2

1

40 I II III IV V VI VIIPay Classes

Pay Class Graph with Range of PayPay Class Graph with Range of Pay

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Delayering and BroadbandingDelayering and Broadbanding

DelayeringA reduction of the total

number of jobsResults in a flatter job

structureCan increase flexibilityEmployees can move among

a wider range of jobs without adjusting pay with each move

BroadbandingCollapses multiple salary

grades and ranges into a few wide bands

The number of salary ranges is significantly reduced

Creates a smaller number of broad salary ranges

Places more emphasis on basing salary increases on individual performance

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Summary Summary (1 of 2)(1 of 2)

The objective of the compensation function is to create a system of rewards that is equitable to the employer and employee alike

Compensation should be adequate, equitable, cost-effective, secure, incentive-providing, and acceptable to the employee

The pay-structure decision involves comparing jobs within the organization to determine their relative worth

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Summary Summary (2 of 2)(2 of 2)

Determining the worth of a job is difficult because it involves measurement and subjective decisions

Using systematic job evaluation procedures is one way to determine net worth