2. After studying this chapter, you should be able to:
• Describe the contemporary pay and benefits environment.
• Identify the elements included in a total compensation
package.
• Understand the laws governing compensation policy and
practices.
• Describe the comparative advantages and disadvantages of
competing systems used to determine pay—point-factor job
evaluation, rank-in person, and broad-banding.
• Discuss how pay-for-performance systems work, and how
they differ from traditional civil service seniority and cost-of-
living adjustments.
Chapter Objective
3. COMPENSATION: PUBLIC VS PRIVATE
• Job stability and benefit
are among the attractions
of job in public sector
• Salary can be lower
when working in public
sector.
4. THE ROLE OF COMPENSATION
How employees are paid is one of
the most important decisions to
make.
Employee’s compensation—
especially in relation to others—
has significant implications for
recruitment, retention, and
motivation.
The total compensation package—
pay and benefits—
must meet the needs of employee
and employer under current
employment conditions.
5. REQUIREMENT OF COMPENSATION SYSTEM
For employees, economic rewards are the
measure of their worth to their employer.
Pay and benefits must be fair compared to
other employees and to the job market.
For employers, economic rewards must be
competitive enough to attract and retain
employees with valued competencies.
Because organizations and jobs are
increasingly unstable, and because work is
increasingly team based and client centered,
pay and benefits must be flexible and easy
to administer.
9. Equity and Its Impact on Pay Rates
External
equity
Procedural
equity
Internal
equity
Individual
equity
Forms of Compensation
Equity
10. Equity and Its Impact on Pay Rates
1. External Equity: External equity refers to how a job’s pay rate in one
company compares to the job’s pay rate in other companies or organizations.
2. Internal equity: how fair the job’s pay rate is when compared to other jobs
within the same organization (for instance, is the teacher’ pay fair, when
compared to what the officer is earning?).
3. Individual equity: refers to the fairness of an individual’s pay as compared
with what his or her coworkers are earning for the same or very similar jobs
within the company, based on each individual’s performance.
4. Procedural equity refers to the “perceived fairness of the processes and
procedures used to make decisions regarding the allocation of pay.”
11. Addressing Equity Issues
Area wage and salary surveys
Job analysis and job evaluation
Performance appraisal and incentive pay
Communications, grievance mechanisms,
and employees’ participation
Methods to
Address Equity
Issues
12. The Salary Survey
To price
benchmark jobs
To make
decisions about
benefits
Uses for Salary Surveys
To market-price
wages for jobs
13. Sources for Salary Surveys
Self-
Conducted
Surveys
Government
Agencies
Consulting
Firms
Sources of Wage and
Salary Information
Professional
Associations
The
Internet
18. Job Evaluation
Skills Effort Responsibility
Identifying Compensable Factors
Working
conditions
Compensable factors are certain basic factors the jobs have in
common that are used to establish how the jobs compare to one
another, and that determine the pay for each job.
20. How to Evaluate Jobs
Ranking
Job
classification
Point method
Methods for Evaluating Jobs
Factor
comparison
21. Job Evaluation Methods: Ranking
Ranking each job relative to all other jobs, usually
based on some overall factor.
Steps in job ranking:
1. Obtain job information.
2. Select and group jobs.
3. Select compensable factors.
4. Rank jobs.
5. Combine ratings.
23. CLASSIFICATION
In the beginning, salaries of public employees were
individually determined by legislative statute or by
departmental administrators => position classification.
1. Positions should be classified.
2. Duties and responsibilities constitute the
characteristics of the position.
3. Qualifications is determined by nature of those
duties
4. Individual characteristics have no bearing on the
classification of the position.
5. Persons holding positions in the same class should
be considered equally qualified for any other
position in that class.
24. CLASSIFICATION
Raters categorize jobs into groups or classes of
jobs that are of roughly the same value for pay
purposes.
Classes contain similar jobs.
Administrative assistants
Grades are jobs similar in difficulty but otherwise different.
Mechanics, welders, electricians, and machinists
Jobs are classed by the amount or level of compensable
factors they contain.
25. Critics of position classification
1. The system emphasis on the position
rather than on the qualifications and
abilities of an individual incumbent.
2. Traditional classification were
counterproductive for more highly
skilled, knowledge-oriented employees
and for highly flexible organizational
structures
3. Classification ignored the behavioral
implications of organization.
28. Point factor evaluation system
1. Job requirements: the knowledge, skills, and abilities
needed to perform the duties of a specific job.
2. Difficulty of work: the complexity or intricacy of the
work and the associated mental demands of the job.
3. Responsibility: the freedom of action required by a
job and the impact of the work performed upon the
organizational mission.
4. Personal relationships: the importance of
interpersonal relationships to the success of mission
accomplishment
5. Other factors: specific job-oriented elements that
should be considered in the evaluation process
34. Broadbanding
1. Broad-banding is a job grading structure that falls between using spot salaries vs.
many job grades to determine what to pay particular positions and incumbents
within those positions.
35. Competency-Based Pay
• Competencies
Demonstrable characteristics of a person, including knowledge,
skills, and behaviors, that enable performance
• What is Competency-Based Pay?
Paying for the employee’s range, depth, and types of skills and
knowledge, rather than for the job title he or she holds
36. Why Use Competency-Based Pay?
High-Performance
Work Systems
Strategic
Aims
Competency-Based Pay Supports
Performance
Management
37. Competency-Based Pay in Practice
• Main elements of skill/competency/knowledge–based
pay programs:
1. A system that defines specific skills
2. A process for tying the person’s pay to his or her skill
3. A training system that lets employees seek and acquire skills
4. A formal competency testing system
5. A work design that lets employees move among jobs to
permit work assignment flexibility
51. Motivation, Performance, and Pay
• Incentives
Financial rewards paid to workers whose production exceeds a
predetermined standard.
• Frederick Taylor
Popularized scientific management and the use of financial
incentives in the late 1800s.
Systematic soldiering
Fair day’s work
• Linking Pay and Performance
Understanding the motivational
bases of incentive plans
52. Incentive Pay Terminology
• Pay-for-Performance Plan
Ties employee’s pay to the employee’s performance
• Variable Pay Plan
Is an incentive plan that ties a group or team’s pay to some
measure of the firm’s (or the facility’s) overall profitability
Example: profit-sharing plans
May include incentive plans for individual employees
54. Individual Incentive Plans
• Piecework Plans
The worker is paid a sum (“piece rate”)
for each unit he or she produces.
Straight piecework
Standard hour plan
55. Pros and Cons of Piecework
• Easily understandable, equitable,
and powerful incentives
• Employee resistance to changes
in standards or work processes
affecting output
• Quality problems caused by
an overriding output focus
• Possibility of violating minimum
wage standards
• Employee dissatisfaction when
incentives either cannot be earned
or are withdrawn
56. Individual Incentive Plans (cont’d)
• Merit Pay
Is a permanent cumulative salary increase the firm awards
to an individual employee based on his or her individual
performance
Can detract from performance if awarded across the board
Becomes permanent ongoing reward for past performance
• Merit Pay Options
Give annual lump-sum merit raises that do not make the
raise part of an employee’s base salary.
Tie merit awards to both individual and organizational
performance.
57. Merit Award Determination Matrix (an Example)
To determine the dollar value of each employee’s incentive award: (1) multiply the
employee’s annual, straight-time wage or salary as of June 30 times his or her maximum
incentive award and (2) multiply the resultant product by the appropriate percentage figure
from this table.
Example: if an employee had an annual salary of $20,000 on June 30 and a maximum
incentive award of 7% and if her performance and the organization’s performance were
both “excellent,” the employee’s award would be $1,120 ($20,000 × 0.07 × 0.80 = $1,120).
Company Performance (Weight = 0.50)
Employee Performance
Rating (Weight = .50) Outstanding Excellent Good Marginal Unacceptable
Outstanding 1.00 0.90 0.80 0.70 0.00
Excellent 0.90 0.80 0.70 0.60 0.00
Good 0.80 0.70 0.60 0.50 0.00
Marginal — — — — —
Unacceptable — — — — —
58. Incentives for Professional Employees
• Professional Employees
Are those whose work involves the application
of learned knowledge to the solution of the employer’s
problems.
Lawyers, doctors, economists, and engineers
• Possible Incentives
Bonuses, stock options and grants, profit sharing
Better vacations, more flexible work hours
Improved pension plans
Equipment for home offices
59. Nonfinancial and Recognition Awards
• Effects of Recognition-Based Awards
Recognition has a positive impact on performance, either alone or
in conjunction with financial rewards.
Day-to-day recognition from supervisors, peers, and team
members is important.
• Ways to Use Recognition
Social recognition
Performance-based recognition
Performance feedback
60. Incentives for Salespeople
• Salary Plan
Straight salaries
Best for: prospecting (finding new clients),
account servicing, training customer’s sales force,
or participating in national and local trade shows
• Commission Plan
Pay is a percentage of sales results.
Keeps sales costs proportionate to sales revenues
May cause a neglect of nonselling duties
Can create wide variation in salesperson’s income
Likelihood of sales success may be linked to external
factors rather than to salesperson’s performance
Can increase turnover of salespeople
61. Incentives for Salespeople (cont’d)
• Combination Plan
Pay is a combination of salary and
commissions, usually with a sizable
salary component.
Plan gives salespeople a floor
(safety net) to their earnings.
Salary component covers company-
specified service activities.
Plans tend to become complicated,
and misunderstandings can result.
62. Team/Group Incentive Plans
• Team (or Group) Incentive Plans
Incentives are based on team’s performance.
• How to Design Team Incentives
Set individual work standards.
Set work standards for each team member
and then calculate each member’s output.
Members are paid based on one of three formulas:
All receive the same pay earned by the highest producer.
All receive the same pay earned by the lowest producer.
All receive the same pay equal to the average pay
earned by the group.
63. Pros and Cons of Team Incentives
• Pros
Reinforces team planning and problem solving
Helps ensure collaboration
Encourages a sense of cooperation
Encourages rapid training of new members
• Cons
Pay is not proportionate to an individual’s effort
Rewards “free riders”
64. Organizationwide Incentive Plans
• Profit-Sharing Plans
Current profit-sharing (cash) plans
Employees receive cash shares of the firm’s profits at regular
intervals.
Deferred profit-sharing plans
A predetermined portion of profits based on the employee’s
contribution to the firm’s profits is placed in each employee’s
retirement account under a trustee’s supervision.
Employees’ income taxes on the distributions are deferred,
often until the employee retires.
66. Implementing a Gainsharing Plan
1. Establish general plan objectives.
2. Choose specific performance measures.
3. Decide on a funding formula.
4. Decide on a method for dividing and distributing
the employees’ share of the gains.
5. Choose the form of payment.
6. Decide how often to pay bonuses.
7. Develop the involvement system.
8. Implement the plan.
67. At-Risk Variable Pay Plans
• Put some portion of the employee’s
weekly pay at risk.
If employees meet or exceed
their goals, they earn incentives.
If they fail to meet their goals, they
forego some of the pay they would
normally have earned.
68. Organizationwide Incentive Plans (cont’d)
• Employee Stock Ownership Plan (ESOP)
A firm annually contributes its own stock—or cash
(with a limit of 15% of compensation) to be used to
purchase the stock—to a trust established for the
employees.
The trust holds the stock in individual employee
accounts and distributes it to employees upon
separation from the firm if the employee has worked
long enough to earn ownership of the stock.
69. Advantages of ESOPs
• For the Company
Can take a tax deduction equal to the fair market value
of the shares transferred to the ESOP trustee
Gets an income tax deduction for dividends paid
on ESOP-owned stock
Can borrow against ESOP in trust and then repay
the loan in pretax rather than after-tax dollars
• For the Employees
Develop a sense of ownership in and commitment to the firm.
Do not pay taxes on ESOP earnings until they receive
a distribution.
• For the Shareholders of Closely-Held Corporations
Can place assets into an ESOP trust which will allow them to
purchase other marketable securities to diversify their holdings
71. Employee Benefits
Part of a total compensation
package includes benefits.
Employee benefit programs may be
separated for analytical purposes
into two categories:
• entitlement or mandated benefits,
and
• discretionary benefits.
72. Required Employee Benefits
Mandatory Benefits:
Benefits for which all
recipients of social
assistance are eligible.
(Social Security, workers’
compensation, and
unemployment insurance)
Discretionary Benefits:
Benefits that may be
available to you depending
on your circumstances
(benefit package to attract or
retain employees)
83. Pay For Time Not Worked
Vacations and
holidays
Parental leave
Supplemental
unemployment
benefits
Supplemental
Pay Benefits
Unemployment
insurance
Sick leave
Severance pay
84. Pay for Time Not Worked
• Unemployment Insurance
Provides for benefits if a person is unable to work through
no fault of his or her own.
Is an employer payroll tax that is determined by an
employer’s rate of personnel terminations.
Tax is collected and administered by the state.
• Vacations and Holidays
Number of paid leave days and holidays varies by employer.
Qualification for and calculation of holiday and leave pay
varies by employer.
Premium pay for those who work on holidays.
86. Pay for Time Not Worked (cont’d)
• Severance Pay
A one-time payment when terminating an employee.
• Reasons for granting severance pay:
Acts as a humanitarian gesture and good public relations.
Mirrors employee’s two-week quit notice.
Avoids litigation from disgruntled former employees.
Reassures employees who stay on after the employer
downsizes its workforce of employer’s good intentions.
87. Health Care Benefit
Premiums and co-pays
Communication and
empowerment
Health savings accounts
Claim audits
Wellness programs
HealthCare
88. Other Benefits Issues
• Long-Term Care
Insurance for older workers is a growing issue.
• Life Insurance
Types
Group life insurance
Accidental death and dismemberment
Personnel policy considerations
Benefits-paid schedule
Supplemental benefits
Financing (employee contribution)
• Benefits for Part-Time and Contingent Workers
Leave and health benefits available to part-time workers.
Benefits for long-term independent contractors.
89. Family-Friendly (Work–Life) Benefits
• Subsidized child care
• Sick child benefits
• Elder care
• Time off
• Subsidized employee transportation
• Food services
• Educational subsidies
• Fitness and medical facilities
• Flexible work scheduling
90. Flexible Benefits Programs
• Cafeteria (Flexible Benefits) Approach
Each employee is given a limited benefits fund budget
to spend on preferred benefits.
Types of plans
Flexible spending accounts
Core plus option plans
• Employee Leasing
Professional employer organizations or staff leasing firms
Handle human resources functions for leased employees
of small firms
Can provide benefits by aggregating employees into
larger insurable groups
Can raise worker commitment, co-employment, and
workers’ compensation issues
91. Flexible Work Schedules
• Flextime
• Compressed workweek schedules
• Workplace flexibility
• Job sharing
• Work sharing
