3. A Definition . . .
• All forms of
– financial return,
– tangible services and
– benefits
• that employees receive as part of their
employment relationship
4. Components of a Total
Compensation Program - 1
• Financial
• Direct
– wages, salaries, commissions, bonuses
• Indirect
– insurance plans
• life, health, dental, disability
– social assistance benefits
• retirement plans, social security, workers’ comp
– paid absences
• vacations, holidays, sick leave
5. Components of a Total
Compensation Program - 2
• Non-Financial
• The Job
– interesting, challenging, responsible
– opportunity for recognition, advancement
– feeling of achievement
• Job Environment
– policies, supervision, co-workers, status
symbols, working conditions, flextime,
compressed work week, job sharing,
telecommuting, flexible benefits programs
6. Factors that Influence Wage
Levels
Conditions of
Labor Market Compensation
Policy of
Organization
Area Wage
Rates Worth of
Job
Cost of WAGE
Living
MIX Employee’s
Relative Worth
Collective
Bargaining
Employer’s
Legal Ability to Pay
Requirements
8. Step 1 - Establish General
Wage Level for Organization
• Factors to consider:
• Other firm’s rates
• Union demands
• Cost-of-living changes
• Firm’s ability to pay
9. Step 2 - Establish Wage
Structure (The Pay for Each
Job)
• Employ a job evaluation system
– Ranking
– Job Classification
– Point System
– Factor Comparison
• Results:
– pay grades
– rate ranges
10. Step 3 - Establish Pay for Each
Individual on Each Job
• Inputs:
• Performance appraisal information
• Seniority system
11. A Pay Model -- 3 Basic
Components
• I. Compensation Objectives
• II. Foundation Concepts
• III. Techniques for Management
12. A Pay Model
I. Compensation Objectives - 1
• Organization Performance
• Labor Costs
• Attitudes and Behaviors
• Laws and Regulations
13. A Pay Model
I. Compensation Objectives - 2
• Influence forms & procedures
• For example:
– if objective is pay for performance,
emphasize incentives, merit pay plans
– if objective is stable, experienced
workforce, emphasize seniority-based
pay
14. A Pay Model
II. Foundation Concepts
• Equity
• External Equity
• Comparison: outside organization
• Internal Equity
• Comparison: inside organization,
among jobs
• Employee Equity
• Comparison: individuals doing same
job for same organization
15. Equity Theory
Equity
Op/Ip = Oo/Io
Under-reward Inequity
Op/Ip < Oo/Io
Over-reward Inequity
Op/Ip > Oo/Io
p = personal, o = comparison other
I = Inputs O = Outcomes
effort, ability, experience pay, benefits, perks
16. Why does Equity Matter?
What Behaviors are Likely to
Occur when Inequity is Felt?
17. A Pay Model
III. Techniques for Management
• A. Pay Level
• B. Pay Structure
• C. Individual Pay Rates
18. A Pay Model
III. Techniques for Management
A. Pay Level
• Defined: average rates paid by
employer
• Applicable concept: External Equity
• 3 Pure Alternatives
– lead competition
– match competition
– lag competition
• Mechanism used: Market Wage
Survey
19. Market Wage and Salary
Surveys
Select key jobs.
Determine relevant labor market.
Select organizations.
Decide on information to collect:
wages/benefits/pay policies.
Compile data received.
Determine wages and benefits to pay.
20. Market Wage Levels
l
Leve
a ge
’ sW l
n yA eve
mp
a eL
ag el
Co etW Lev
ge
ark Wa
M B’s
pany
C om
•Which company is leading the market?
•Which company is lagging the market?
•What would the wage level line look like for a company
that was meeting/matching the market?
21. A Pay Model
III. Techniques for Management
B. Pay Structure
• Defined: pay rates for different jobs
within a single organization
• Applicable concept: Internal Equity
• Pay more for jobs with
– greater qualifications
– less desirable working conditions
– more valuable output
• Mechanism used: Job Analysis & Job
Evaluation
22. Job Evaluation
• defined: the systematic evaluation of
job descriptions
• outcome: a hierarchy of
organizational jobs according to their
content and value to the organization
• Methods:
– ranking
– classification
– factor comparison
– point method
23. Job Ranking System
Simplest and oldest system of job
evaluation by which jobs are arrayed
on the basis of their relative worth
24. Job Classification System
System of job evaluation by which jobs
are classified and grouped according
to a series of predetermined wage grades
25. Point System
Quantitative job evaluation procedure
that determines the relative value of a job
by the total points assigned to it
26. Factor Comparison System
Job evaluation system that permits the
evaluation process to be accomplished
on a factor-by-factor basis by developing
a factor comparison scale
27. Hay Profile Method
Job evaluation technique using three
factors – knowledge, mental activity,
and accountability – to evaluate
executive and managerial positions
28. A Pay Model
III. Techniques for Management
C. Individual Pay Rates
• Defined: pay rates for different
individuals doing the same job within
an organization
• Applicable concept: Employee Equity
• 2 Techniques
– Flat Rate
– Pay Ranges
• Mechanisms used: Performance or
Seniority
29. Wage Curve
Curve in a scattergram representing
the relationship between relative worth
of jobs and wage rates
33. Common Pay Grade Ranges
• Laborers & Trades, up to 20%
• Clerical, Technical, Para-professional,
15-49%
• First Level Supervisors, Professionals
30-50%
• Middle and Senior Level
Management, 40-100%
34. Monitoring Compensation
Costs
• Compra-Ratio
• Formula:
Actual Average Pay for Grade
Midpoint Pay for Grade
• A compra ratio < 1 indicates lag
• A compra-ratio > indicates excess
35. How Would You Handle Outliers?
An individual whose current pay is beyond
the maximum of the pay grade for his/her
job
An individual whose current pay is
below the minimum of the pay grade
for his/her job
36. Federal Wage Laws
Davis-Beacon Act
of 1931
Walsh-Healy Act
of 1936
Fair Labor
Standards Act of
1938
37. Nonexempt Employees
Employees covered by the overtime
provisions of the Fair Labor Standards Act
39. Comparable Worth
The concept that male and female jobs
that are dissimilar, but equal in terms
of value or worth to the employer,
should be paid the same
40. Wage-Rate Compression
Compression of differentials between
job classes, particularly the differential
between hourly workers and their
managers
Editor's Notes
compensation means different things to different people: >return on effort >reward for satisfactory or outstanding work >indicative of value attached to skills and abilities >return on investment in education and training >source of personal wealth >important determinant of economic and social well being
Determining the wage offered an employee is a function of both internal and external factors (referred to as the “wage mix”). Internal factors include: Employer’s Compensation Policy . Each employer views compensation as one of the variables under their control and so uses pay as a tool for accomplishing organization goals. In general, companies may lead, match, or trail pay standards relative to the competition and/or combine base pay with incentives to reward specific goal-based accomplishment. Worth of a Job . Where a formal compensation system is lacking, pay is set on the subjective opinion of the responsible party’s evaluation of the worth of a job. Employee’s Relative Worth . The differential contributions and accomplishments of different employees (both hourly and salaried), may be reflected in different levels of pay, often within a given range for an employment level. Employer’s Ability to Pay . All organizations have finite budgets and compensation is limited to what is available. External factors include: Conditions of the Labor Market . The labor market reflects the forces of supply and demand for qualified labor within an area. Area Wage Rates . The company should be aware of the prevailing wage rates being paid in the area of operation. Cost of Living . Inflation increases the cost of living and compensation rates have to be adjusted upward periodically. A common benchmark is the consumer price index (CPI), compiled by the federal government. Collective Bargaining . Collective bargaining pools the power of the labor force in an effort to negotiate an increase in real wages (pay increases above the CPI). Legal Requirements . Legislative actions, such as minimum wage laws, typically set a floor for compensation, at least for hourly employees.
Facilitate Organization Performance Control Labor Costs Influence Employee Attitudes and Behaviors attract retain motivate Comply with Laws and Regulations Fair Labor standards Act sets minimum wage exempt/non-exempt; 1 1/2 for OT ages of employees Equal Pay Act equal pay for equal work Comparable Worth?
> Equity = building block foundation on which pay systems are designed >Review equity theory: outcomes to inputs External Equity Comparison: outside organization 2 issues: are rates competitive enough to attract/retain employees control HR costs so org prices remain competitive Internal Equity Comparison: inside organization, among jobs does 1 job require more/less skill or experience than another is output of one job more/less value than that of another Employee Equity Comparison: individuals doing same job for same organization should all employees receive the same pay?
Reducing one’s own inputs Increasing one’s outcomes Leaving the situation
Market Wage Survey -- >done by interview, mailed questionnaire, telephone >done by org or consultants KEY FACTORS: benchmark job work content relatively stable over time held by large # of employees free of discriminatory patterns not subject to recent surpluses/shortages job description employers to include geographic area to cover data gathered median minimum maximum average
Effects of Structure: experts argue that equitable pay structures are related to everything from employee performance to strikes Effects employee decisions to join stay leave organization whether or not to invest in additional training required for promotions, new jobs
Flat Rate common in union contracts distrust of evaluation system Pay Ranges set limits on rates an employer will pay for a particular job design: 1) develop classes or grades groups of jobs considered substantially similar for pay purposes 2) set midpoints, maximums, minimums Next issue: progression through the ranges criteria? seniority, merit
pay structure represents policy, but practice may not always coincide >1 way to examine the correspondence is to compute a Compra-Ratio >the actual average pay for grade/midpoint pay for grade >provides a direct assessment of the degree to which actual pay is consistent with the pay policy a CR of less than 1 suggests that actual pay is LAGGING behind policy a CR of more than 1 suggests that pay and costs exceed policy
Compensation management is subject to state and federal regulation. On the state level, a majority of states have minimum wage laws or wage boards that fix minimum wage rates on an industry-by-industry basis. On the federal level, three principal acts of legislation affect wages: Davis-Beacon Act of 1931 . Also called the Prevailing Wage Law, this law requires that the minimum wage paid to persons employed on federal public works projects worth more than $2,000 be at least equal to the prevailing rates and that overtime be 1.5 times this rate. “Prevailing” is defined as the rate paid to at least 30 percent of the workers in the area. In areas where there is a mixture of both union and non-union labor, this 30 percent rule is controversial. If the union represents at least 30 percent of the labor force, then federal contracts there might pay significantly higher wages than are received by the majority of workers. Walsh-Healy Act of 1936 . Called the Public Contracts Act, Walsh-Healy covers workers employed on government contract work for supplies, equipment, and materials greater than $10,000. The act requires employers to pay employees at least the prevailing rates and overtime of 1.5 times the regular rate for work beyond 8 hours a day and 40 hours a week. The wage rate computation must also include any bonuses or incentive payments part of the employee’s total earnings. Walsh-Healy also restricts child and convict labor practices. Fair Labor Standards Act of 1938 (as amended) . Called the Wage and Hour Act, this bill and amendments cover those employees engaged in the production of goods for interstate and foreign commerce. Major provisions are concerned with minimum wage and overtime payments, child labor, and equal rights.
