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Compensation

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  • 1. Objectives After studying this chapter, you should be able to:
    • Explain employer concerns in developing a strategic compensation program.
    • Objectives of compensation.
    • Indicate the various factors that influence the setting of wages.
    • Differentiate the mechanics of each of the major job evaluation systems.
  • 2. Compensation
    • Pay is a statement of an employee’s worth by an employer.
    • Pay is a perception of worth by an employee.
  • 3. Total Compensation Bonuses Gainsharing
    • Security Plans
    • Pensions
    • Employee Services
    • Educational assistance
    • Recreational programs
    Commissions Wages / Salaries
    • Insurance Plans
    • Medical
    • Dental
    • Life
    • Time Not Worked
    • Vacations
    • Breaks
    • Holidays
    Presentation Slide 9 –1 Direct Indirect
  • 4. Issues in Developing Benefits Plans
    • Benefits to be offered.
    • Coverage of retirees in the plan
    • Denial of benefits to employees during initial “probationary” periods
    • Financing of benefits.
    • Benefit choices to give employees.
    • Cost containment procedures to use.
    • Communicating benefits options to employees.
  • 5. Compensation Management and Other HRM Functions Presentation Slide 9 –2 Pay rates affect selectivity Selection Selection standards affect level of pay required Pay can motivate training Training and Development Increased knowledge leads to higher pay Training and development may lead to higher pay Compensation Management A basis for determining employee’s rate of pay Aid or impair recruitment Recruitment Supply of applicants affects wage rates Low pay encourages unionization Labor Relations Pay rates determined through negotiation
  • 6. Strategic Compensation Planning
    • Strategic Compensation Planning
      • Links the compensation of employees to the mission, objectives, philosophies, and culture of the organization.
      • Serves to mesh the monetary payments made to employees with specific functions of the HR program in establishing a pay-for-performance standard.
      • Seeks to motivate employees through compensation.
  • 7. Significant Goals Driving Pay and Reward Changes Figure 9.1 Source: Towers Perrin and Duncan Brown, “Reward Strategies for Real: Moving from Intent to Impact,” WorldatWor k Journal 10, no. 3 (Third Quarter 2001): 43. Used with permission.
  • 8. Linking Compensation to Organizational Objectives
    • Value-added Compensation
      • Evaluating the individual components of the compensation program (pay and benefits) to see if they advance the needs of employees and the goals of the organization.
        • “ How does this compensation practice benefit the organization?”
        • “ Does the benefit offset the administrative cost?”
  • 9. Common Strategic Compensation Goals
    • To reward employees’ past performance
    • To remain competitive in the labor market
    • To maintain salary equity among employees
    • To mesh employees’ future performance with organizational goals
    • To control the compensation budget
    • To attract new employees
    • To reduce unnecessary turnover
  • 10. Strategic Compensation Policy Concerns
    • The rate of pay within the organization and whether it is to be above, below, or at the prevailing community rate.
    • The ability of the pay program to gain employee acceptance while motivating employees to perform to the best of their abilities.
    • The pay level at which employees may be recruited and the pay differential between new and more senior employees.
    • The intervals at which pay raises are to be granted and the extent to which merit and/or seniority will influence the raises.
    • The pay levels needed to facilitate the achievement of a sound financial position in relation to the products or services offered.
  • 11. The Pay-for-Performance Standard
    • Pay-for-Performance Standard
      • The standard by which managers tie compensation to employee effort and performance.
      • Refers to a wide range of compensation options, including merit-based pay, bonuses, salary commissions, job and pay banding, team/ group incentives, and various gain sharing programs.
  • 12. Designing a Pay-for-Performance System
    • How will performance be measured?
    • How will monies to be allocated for compensation increases.
    • Which employees will be eligible?
    • How will payouts be made?
    • How often will payouts occur?
    • How large will the payouts be?
    • Will employees perceive the rewards as valued?
  • 13. Motivating Employees through Compensation
    • Pay Equity (also Distributive Fairness)
      • An employee’s perception that compensation received is equal to the value of the work performed.
      • A motivation theory that explains how people respond to situations in which they feel they have received less (or more) than they deserve.
        • Individuals form a ratio of their inputs to outcomes in their job and then compare the value of that ratio with the value of the ratio for other individuals in similar jobs.
  • 14. Relationship between Pay Equity and Motivation Figure 9. 2 The greater the perceived disparity between my input/output ratio and the comparison person’s input/output ratio, the greater my motivation to reduce the inequity.
  • 15. Expectancy Theory and Pay
    • Expectancy Theory
      • A theory of motivation that holds that employees should exert greater work effort if they have reason to expect that it will result in a reward that they value.
      • Employees also must believe that good performance is valued by their employer and will result in their receiving the expected reward.
  • 16. Pay-for-Performance and Expectancy Theory Figure 9.3
  • 17. Motivating Employees through Compensation
    • Pay Secrecy
      • An organizational policy requiring that compensation levels and decisions about employee compensation be kept secret and, usually, prohibiting employees from revealing their compensation information to anyone.
        • Can create employee misperceptions and distrust of compensation fairness and pay-for-performance standards.
  • 18. Components of the Wage Mix Presentation Slide 9 –3 WAGE MIX Labor Market Conditions Area Wage Rates Cost of Living Collective Bargaining Legal Requirements Compensation Strategy of the Organization Worth of the Job Employee’s Relative Worth Employer’s Ability to Pay
  • 19. Factors Affecting the Wage Mix Figure 9.4
  • 20. The Wage Mix—Internal Factors
    • Compensation Strategy
      • Setting organization compensation policy to lead, lag, or match competitors’ pay.
    • Worth of a Job
      • Establishing the internal wage relationship among jobs and skill levels.
    • Relative Worth of an Employee
      • Rewarding individual employee performance
    • Ability-to-Pay
      • Having the resources and profits to pay employees .
  • 21. The Wage Mix—External Factors
    • Labor Market Conditions
      • Availability and quality of potential employees is affected by economic conditions, government regulations and policies, and the presence of unions.
    • Area Wage Rates
      • A firm’s formal wage structure of rates is influenced by those being paid by other area employers for comparable jobs.
  • 22. The Wage Mix—External Factors
    • Cost of Living
      • Local housing and environmental conditions can cause wide variations in the cost of living for employees.
      • Inflation can require that compensation rates be adjusted upward periodically to help employees maintain their purchasing power.
  • 23. The Wage Mix—External Factors
    • Collective Bargaining
      • Escalator clauses in labor agreements that provide for quarterly upward cost-of-living wage adjustments for inflation to protect employees’ purchasing power.
      • Unions bargain for real wage increases that raise the standard of living for their members.
      • Real wages are increases larger than rises in the consumer price index; that is, the real earning power of wages.
  • 24. Job Evaluation
    • Job Evaluation
      • The systematic process of determining the relative worth of jobs in order to establish which jobs should be paid more than others within an organization.
  • 25. Different Job Evaluation Systems Figure 9.5 JOB AS JOB PARTS BASIS FOR A WHOLE OR FACTORS COMPARISON (NONQUANTITATIVE ) (QUANTITATIVE) Job vs. job Job ranking Factor comparison system system Job vs. scale Job classification Point system system SCOPE OF COMPARISON
  • 26. Job Evaluation Systems
    • Job Ranking System
      • Oldest system of job evaluation by which jobs are arrayed on the basis of their relative worth.
      • Disadvantages
        • Does not provide a precise measure of each job’s worth.
        • Final job rankings indicate the relative importance of jobs, not extent of differences between jobs.
        • Method can used to consider only a reasonably small number of jobs.
  • 27. Paired-Comparison Job Ranking Table Figure 9.6 Directions: Place an X in the cell where the value of a row job is higher than that of a column job.
  • 28. Job Evaluation Systems
    • Job Classification system
      • A system of job evaluation in which jobs are classified and grouped according to a series of predetermined wage grades.
      • Successive grades require increasing amounts of job responsibility, skill, knowledge, ability, or other factors selected to compare jobs.
  • 29. Point System
    • Point System
      • A quantitative job evaluation procedure that determines the relative value of a job by the total points assigned to it.
      • Permits jobs to be evaluated quantitatively on the basis of factors or elements— compensable factors —that constitute the job.
    • Point Manual
      • A handbook that contains a description of the compensable factors and the degrees to which these factors may exist within the jobs.
  • 30. Factor Comparison System
    • Factor Comparison System
      • A job evaluation system that permits the evaluation process to be accomplished on a factor-by-factor basis by developing a factor comparison scale.
      • The compensable factors of a job evaluated are compared against the compensable factors of key jobs within the organization that serve as the job evaluation scale.
  • 31. Characteristics of Key Jobs
    • Key Jobs
      • Jobs that are important for wage-setting purposes and are widely known in the labor market.
    • Characteristics of Key Jobs
      • They are important to employees and the organization.
      • They vary in terms of job requirements.
      • They have relatively stable job content.
      • They are used in salary surveys for wage determination.
    Presentation Slide 9 –4
  • 32. References
    • Managing Human Resources – Bohlander and Snell
    • Human Resources Management – DeCenzo and Robbins