Chapter Eleven

1
Chapter Eleven

• Managing Basic Compensation

2
Chapter Outline

• Developing a Compensation Strategy
• Determining a Wage and Salary Structure
• Wage and Salary Administration
• Legal Issues in Compensation
• Evaluating Compensation Policies

3
Chapter Objectives

• Describe the basic issues involved in developing
  a compensation strategy.
• Discuss how organizations develop a wage and
  salary structure.
• Identify and describe the basis issues involved
  in wage and salary administration.
• Identify and describe basic legal issues in
  compensation.
• Describe the importance to an organization of
  evaluating its compensation policies.

4
What Is Compensation?

• The set of rewards that organizations provide to
  individuals in return for their willingness to
  perform various jobs and tasks within the
  organization

5
Developing a Compensation Strategy

• Internal equity
• Refers to comparisons made by employees to other
  employees within the same organization
• External equity
• Refers to comparisons made by employees to others
  employed by different organizations performing
  similar jobs

6
Wages Versus Salaries

• Wages
• Hourly compensation paid to operating employees
  the basis for wages is time
• Salary
• Income paid to an individual on the basis of
  performance, not on the basis of time

7
Strategic Options for Compensation
8
Determinants of Compensation Strategy

• A firm in a high-growth mode is constantly
  striving to attract new employees and may find
  itself in a position of having to pay
  above-market rates to do so.
• A stable firm may be more likely to pay market
  rates, given the relatively predictable and
  stable nature of its operations.
• An organization in retrenchment or decline may
  decide to pay below-market rates because it wants
  to reduce the size of its workforce.

9
Determinants of Compensation Strategy (contd)

• The organizations ability to pay
• Ability of the organization to attract and retain
  employees
• Legal context
• Union influences

10
Pay Surveys and Compensation

• Pay surveys
• Surveys of compensation paid to employees by
  other employers in a particular geographic area,
  industry, or occupational group
• The purpose of pay surveys is to ask other
  organizations what they pay people to perform
  various jobs.
• Pay surveys provide the information organizations
  need to avoid problems of external equity.

11
Example of a Pay Survey
12
Determining a Wage and Salary Structure

• Job evaluation
• A method for determining the relative value or
  worth of a job to the organization so that
  individuals who perform that job can be
  compensated adequately and appropriately
• Job ranking
• A job evaluation method requiring the manager to
  rank-order jobs, based on their relative
  importance to the organization, from most
  important to least important

13
Determining a Wage and Salary Structure (contd)

• Classification system
• A job evaluation method that attempts to group
  sets of jobs together into clusters, often called
  grades
• Point system
• A job evaluation method that requires managers to
  quantify, in objective terms, the value of the
  various elements of specific jobs

14
Determining a Wage and Salary Structure (contd)

• Compensable factors
• Any aspect of a job for which an organization is
  willing to provide compensation
• Point manual
• In the point system, the point manual carefully
  and specifically defines the degrees of points
  from first to fifth

15
Determining a Wage and Salary Structure (contd)

• Factor comparison
• A job evaluation method that assesses jobs, on a
  factor-by-factor basis, using a factor comparison
  scale as a benchmark
• Regression-based system
• A job evaluation method that utilizes a
  statistical technique called multiple regression
  to develop an equation that establishes the
  relationship between different dimensions of job
  and compensation

16
Establishing Job Classes

• Job classes represent gradations of
  responsibility and competence regarding
  performance of a specific job.
• Different levels of competence can exist among
  different mechanics.
• Organizations differentiate among people with
  different competencies.
• Organizations that use this method should
  establish their job classes as part of the job
  evaluation process itself.

17
Establishing a Pay Structure

• A pay structure has to specify the level of pay
  the organization will provide to each job class.
• A pay structure must identify the pay
  differentials to be paid to individuals within
  each job class.

18
A Sample Wage Structure
19
Pay-for-Knowledge and Skill-Based Pay

• Pay-for-knowledge
• Compensating employees for learning specific
  information
• Skill-based pay
• Rewarding employees for acquiring new skills

20
Wage and Salary Administration

• The ongoing process of managing a wage and salary
  structure
• All managers must be sensitive to compensation
  costs and must be vigilant about managing them
  properly.
• The ongoing management of compensation and
  benefits is a critical part of effective wage and
  salary administration.

21
Determining Individual Wages

• For both ethical and legal reasons, the basis for
  differential pay should not be a non-job-related
  factor such as gender or race.
• It is perfectly appropriate and desirable,
  however, for the organization to reward people
  with differential compensation based on
  job-related qualifications.

22
Terminology

• Pay secrecy
• The extent to which the compensation of any
  individual in an organization is secret or the
  extent to which it is formally made available to
  other individuals
• Pay compression
• Occurs when individuals with substantially
  different levels of experience an/or performance
  abilities are being paid wages or salaries that
  are relatively equal

23
Legal Issues in Compensation

• The Fair Labor Standards Act includes provisions
  for the minimum wage, overtime, and child labor.
• Several minimum wages exist, such as for
  agricultural jobs.
• According to overtime pay laws, employees who
  work more than 40 hours a week must be paid time
  and a half for all hours over 40 unless they are
  exempt.

24
Evaluating Compensation Policies

• It is important that the organization provide
  reasonable compensation and appropriate benefits
  to its employees.
• It is in the best interests of the stockholders
  and other constituents of the organization that
  the firm manage its resources wisely.
• It is important to asses this topic periodically
  to ensure that costs are in line.