This chapter discusses compensation system development and covers several topics: establishing internal equity through job evaluation methods; establishing external equity using wage and salary surveys; establishing individual equity by designing pay ranges and setting individual pay; legal regulation of compensation by laws like the Fair Labor Standards Act; administering compensation systems; and the issue of comparable worth. The goal is to design compensation systems that motivate employees and address different types of equity.

1. Chapter Eleven
Compensation
System Development

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Chapter Outline
• Employee Satisfaction and Motivation Issues
in Compensation Design
• Establishing Internal Equity: Job Evaluation
Methods
• Establishing External Equity
• Establishing Individual Equity
• Legal Regulation of Compensation Systems
• Administering Compensation Systems
• The Issue of Comparable Worth

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Figure 11.1 Components of the
Compensation System

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Employee Satisfaction and Motivation
Issues in Compensation Design
• Equity Theory
• Satisfaction with Pay
• Designing Equitable Compensation
Systems
– Internal Equity
– External Equity
– Individual Equity

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Types of Equity
• Internal Equity: Relationship among
jobs within a single organization
• External Equity: Comparisons of similar
jobs in different organizations
• Individual Equity: Comparisons among
individuals in the same job within the
same organization

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Figure 11.2 Equity Theory

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Establishing Internal Equity: Job
Evaluation Methods
• Job Ranking

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Figure 11.3 Job Evaluation Procedures
Source: John M. Ivancevich, “Job Evaluation Procedures,” Foundations of Personnel, Copyright 1992 by Richard D. Irwin.

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Establishing Internal Equity: Job
Evaluation Methods (cont’d)
• Job Grading or Classification
• Point Method
– Compensable Factors

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Table 11.4 A Typical Point Plan
Source: Richard Henderson, Compensation Management: Rewarding Performance, 5th
ed., © 1989, p. 204. Adapted by permission of Prentice-Hall,
Inc., Englewood Cliffs, New Jersey.

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Establishing Internal Equity: Job
Evaluation Methods (cont’d)
• Job Grading or Classification
• Point Method
– Compensable Factors
– Application to Jobs

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Table 11.5 Application of a Point
System to Two Jobs

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Establishing Internal Equity: Job
Evaluation Methods (cont’d)
• Job Grading or Classification
• Point Method
– Compensable Factors
– Application to Jobs
– The Hay Plan

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Hay Factors
• Know-How
• Problem Solving (Mental Activity)
• Accountability

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Establishing Internal Equity: Job
Evaluation Methods (cont’d)
• Factor Comparison
• Computerized Job Evaluation
• Results of Job Evaluation
• Job Grading or Classification
• Point Method
– Compensable Factors
– Application to Jobs
– The Hay Plan

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Establishing External Equity
• Wage and Salary Surveys
– Identifying Key Jobs
– Selecting Organizations to Survey
– Collecting Data
• Self-Surveys
• Online Surveys
• Government Surveys
• Interpreting the Data
• Avoiding Antitrust
• Pay Level Policy
– Matching the Competition
– Adapting a Lead Policy
– Following a Lag Approach

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Figure 11.5: Pay Policies Over Time
Source: Richard Henderson, Compensation Management: Rewarding Performance, 5th
ed., Copyright 1989, p. 477. Reprinted
by permission of Prentice-Hall, Inc., Englewood Cliffs, N.J.

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Establishing Individual Equity
• Designing Pay Ranges
– Establishing Pay Ranges
• Wage Ranges
– Broadbanding
– Above- and Below-Range
Employees
• Setting Individual Pay
– Seniority
– Merit Pay
– Skill Based Pay

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Figure 11.7 Illustration of a Typical
Broadband

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Legal Regulation of Compensation
Systems
• The Fair Labor Standards Act (FLSA)
– Minimum Wage
– Hours of Work
• Equal Pay Act (EPA)
• Other Laws Affecting
Compensation

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Administering Compensation Systems
• Pay Secrecy
• Employee Participation
• Wage Compression
• Impact of Inflation
• All-Salaried Work Force
• Wage Concessions

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The Issue of Comparable Worth
• The Earnings Gap
• Legal and Judicial Developments
• Comparable Worth and Job Evaluation
• Alternatives
• Prospects for the Future

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Table 11.9
Women’s
Earnings
as a
Percent
of Men’s
1979-2000
Source:U.S.Women’sBureauandtheNationalCommitteeonPayEquity.(Availableat:
http://infoplease.com/ipa/A0193820.html).

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Review
• Employee Satisfaction and Motivation Issues
in Compensation Design
• Establishing Internal Equity: Job Evaluation
Methods
• Establishing External Equity
• Establishing Individual Equity
• Legal Regulation of Compensation Systems
• Administering Compensation Systems
• The Issue of Comparable Worth