Compensation

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Compensation
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Compensation

• Used to Serve Organizations Goals
• Enhance Employee Needs but Create Profits
• Relative Worth of Job
• Significant Part of HRM
• Formal Policy Essential

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Compensation Policy Objectives

• To Reward Past Performance
• To Remain Competitive in Marketplace
• To Maintain Equity Among Employees
• To Motivate Future Performance
• To Maintain a Realistic Budget
• To Attract New Employees
• To Reduce Turnover

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Total Compensation
Direct Compensation
Indirect Compensation

• Base Pay
• Wages
• Salary
• Incentives
• Commissions
• Piece rate
• Bonuses
• Stock Options
• Profit Sharing
• Gainsharing

• Pay for Time Not Worked
• Vacations
• Breaks
• Holidays
• Sick Days
• Jury Duty
• Insurance Plans
• Medical
• Hospital
• Dental
• Life
• Surgical

• Security Plans
• Pension
• Social Security
• Disability Insurance
• Employee Services
• Educational Assistance
• Recreational Programs
• Food Services

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Compensation Policy Concerns

• Pay a Fair Base Pay Rate
• Reward Enhanced Performance

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Pay-for-Performance Standard

• Standard by which managers tie compensation to
  employee effort and performance.

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Pay-for-Performance Standard

• Merit Pay
• Cash Bonuses
• Incentive Pay
• Goal Increase Performance 15-35

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Pay Equity

• An employees perception that compensation
  received is equal to the value of the work
  performed.

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Motivating Value of Compensation

• Pay Equity (Perception of fair value)
• Pay Expectancy (Rewards, Received Expected)
• Pay Secrecy

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Bases for Compensation

• Hourly
• Monthly
• Daily
• Annual
• Piecework
• Straight Commission

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Hourly Work

• Work paid on an hourly basis.

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Piecework

• Work paid according to the number of units
  produced.

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FLSA Classification of Compensation

• Exempt(Management/Professional)
• Non-Exempt (hourly)
• Pay 1.5 times hourly rate over 40 hrs/week

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Exempt Employee

• Employees not covered by the overtime provisions
  of the Fair Labor Standards Act.
• Management

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Nonexempt Employees

• Employees covered by the overtime provisions of
  the Fair Labor Standards Act.
• Labor

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External and Internal Factors Affecting the Wage
Mix

• Internal Factors
• Worth of job
• Employees
• relative worth
• Employers ability
• to pay

• External Factors
• Conditions of the labor market
• Area wage rates
• Cost of living
• Collective bargaining
• Government Influence

Wage Mix
Wage Mix
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External Influences on Wage Rates

• Labor Market Conditions
• Area Wage Rates (Surveys)
• Cost of Living (CPI Adjustments)
• Collective Bargaining
• Government

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Internal Influences on Wage Rates

• Worth of the Job
• Employee's Relative Worth (merit)
• Employer's Ability to Pay (competitiveness)

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Consumer Price Index (CPI)

• Measure of the average change in prices over time
  in a fixed market basket of goods and services.
• Inflation Influence

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Escalator Clauses

• Clauses in labor agreements that provide for
  quarterly cost-of-living adjustments in wages,
  basing the adjustments upon changes in the
  consumer price index.

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Real Wages

• Wage increases larger than rises in the consumer
  price index that is, the real earning power of
  wages.

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Job Evaluation

• Systematic process of determining the relative
  worth of jobs in order to establish which jobs
  should be paid more than others within an
  organization.

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Job Evaluation

• Determine "Relative" Worth of Jobs
• Hierarchy of Jobs (ranking)
• Assign Pay Rates
• Purpose Establish Internal Equity

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Four Basic Systems

• Job Ranking
• Job Grading
• Point System
• Factor Comparison

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Job Ranking System

• Simplest and oldest system of job evaluation by
  which jobs are arrayed on the basis of their
  relative worth.

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Job Ranking System

• Establish Committee
• Define all Jobs
• Identify Critical Factor (Responsibilities of
  Importance)
• Rank Every Job by Critical Factors

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Job Classification System

• System of job evaluation by which jobs are
  classified and grouped according to a series of
  predetermined wage grades.

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Job Grade System

• Determine Number of Grades (e.g. 20)
• Describe Each Grade
• Review Each Job Description
• Fit Job into Grade
• Government

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Point System

• Quantitative job evaluation procedure that
  determines the relative value of a job by the
  total points assigned to it.

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Point System (Quantitative)

• Identify Compensatable Factors (e.g.)
• Skill
• Responsibility
• Effort
• Environment
• Establish Degree Within each Factor (e.g. 1-9)
• Create a Point Manual
• Defines Factors (3-9)
• Definitive Degrees (1-9)
• Analyze each Job
• Assign Points
• Rank by Points

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Hay Profile Method

• Job evaluation technique using three factors
  knowledge, mental activity, and accountability
  to evaluate executive and managerial positions.

Knowledge Mental Activity Accountability
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Point Values for Job Factors of the National
Metal Trades Association
Factors 1st Degree 2nd Degree 3rd Degree 4th Degree 5th Degree
Skill
1. Job knowledge 14 28 42 56 70
2. Experience 22 44 66 88 110
3 initiative and ingenuity 14 28 42 56 70
Effort
4. Physical demand 10 20 30 40 50
5. Mental or visual demand 5 10 15 20 25
Responsibility
6. Equipment or process 5 10 15 20 25
7. Material or product 5 10 15 20 25
8. Safety of others 5 10 15 20 25
9. Work of others 5 10 15 20 25
Job Conditions
10. Working conditions 10 20 30 40 50
11. Hazards 5 10 15 20 25
SOURCE Developed by the National Metal Trades Association. Reproduced with permission of the American Association of Industrial Management, Springfield, MA. SOURCE Developed by the National Metal Trades Association. Reproduced with permission of the American Association of Industrial Management, Springfield, MA. SOURCE Developed by the National Metal Trades Association. Reproduced with permission of the American Association of Industrial Management, Springfield, MA. SOURCE Developed by the National Metal Trades Association. Reproduced with permission of the American Association of Industrial Management, Springfield, MA. SOURCE Developed by the National Metal Trades Association. Reproduced with permission of the American Association of Industrial Management, Springfield, MA. SOURCE Developed by the National Metal Trades Association. Reproduced with permission of the American Association of Industrial Management, Springfield, MA.
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Description of Knowledge Factors and Degrees of
the National Metal Trades Association
1. Knowledge
This factor measures the knowledge or equivalent training required to perform the position duties.
1st Degree
Use of reading and writing, adding and subtracting of while numbers following of instructional use of fixed gauges, direct reading instruments, and similar devices where interpretation is not required.
2nd Degree
Use of addition, subtraction, multiplication, and division of numbers including decimals and fractions simple use of formulas, charts, tables, drawings, specifications, schedules, wiring diagrams use of adjustable measuring instruments checking of reports, forms, records, and comparable data where interpretation is required.
3rd Degree
Use of mathematics together with the use of complicated drawings, specifications, charts, tables various types of precision measuring instruments. Equivalent to one to three years applied trades training in a particular or specialized occupation.
4th Degree
Use of advanced trades mathematics, together with the use of complicated drawings, specifications, charts, tables, handbook formulas all varieties of precision measuring instruments. Equivalent to complete accredited apprenticeship in a recognized trade, craft or occupation or equivalent to a two-year technical college education.
5th Degree
Use of higher mathematics involved in the application of engineering principles and their performance of related practical operations, together with a comprehensive knowledge of the theories and practices of mechanical, electrical, chemical. Civil, or like engineering field. Equivalent to complete four years of technical college or university education.
SOURCE Developed by the National Metal Trades Association. Reproduced with permission of the American Association of Industrial Management, Springfield, MA.
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Factor Comparison System

• Similar to Point System
• Distinguished by "Key Jobs"
• Compensatable Factors
• Skill
• Responsibility
• Mental Effort
• Working Conditions
• Physical Effort
• Assign Value to Factor
• Each Job is Assigned a Factor
• Add up Values to get Wage Rate

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Characteristics of Key Jobs

• Have importance to employees and organizations
• Vary in terms of job requirements
• Possess relatively stable job content
• Are used as important jobs in salary surveys

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Compensation Structure

• Job Evaluation First
• Assign a Wage Rate Second
• Base Rate on Wage "Survey"
• Geographical Area of Worker Draw

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Components of the Wage Structure
Wage Classes
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Wage andSalary Survey

• Surveys of the wages paid to employees of other
  employers in the surveying organizations
  relevant labor market.

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Wage and Salary Surveys

1. Select key jobs.
2. Determine relevant labor market.
3. Select organizations.
4. Decide on information to collect
   wages/benefits/pay policies.
5. Compile data received.
6. Determine wages and benefits to pay.

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Wage Curve

• Curve in a scattergram representing the
  relationship between relative worth of jobs and
  wage rates.

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Survey Data

• Government Statistical Survey
• Employer Initiated Survey
• By Job Classification
• World Wide Web

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Pay Grades

• Groups of jobs within a particular class that are
  paid the same rate or rate range.

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SINGLE RATE STRUCTURE
Organization wage curve
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2
3
4
5
6
7
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Wage Classes
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Point Conversion Table
Wage Class Point Range Hourly Rate Range
1 101-150 14.25-15.50
2 151-200 15.25-16.50
3 201-250 16.25-17.50
4 251-300 17.25-18.50
5 301-350 18.25-19.50
6 351-400 19.25-20.50
7 401-450 20.25-21.50
8 450-500 21.25-22.50
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Wage Structure withIncreasing Rate Ranges
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Issues in Rate Structures

• Wage Rate Compression
• Narrow Difference from Job to Job
• White-Grey-Blue Collar Impact
• Low Morale/Turnover/Behavior
• Two Tier Wage Systems
• A/B Scales
• Time of Employment
• Grandfathering
• Cost of Living Comparison (COLA)

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Government Regulations

• Overtime Mandate (1 1/2 times over 40 hours)
• Pay Prevailing Rates in Area
• Minimum Wages
• Child Labor (16-19 yrs)
• Equal Rights for All

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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.

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Wage-Rate Compression

• Compression of differentials between job classes,
  particularly the differential between hourly
  workers and their managers.

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Advantages ofIncentive Pay Programs

• Employee effort is focused on important targets
• Rewards are variable costs linked to results
• Incentives are directly related to improved
  performance
• Incentives reward those responsible for higher
  performance

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Straight Piecework

• Incentive plan under which employees receive a
  certain rate for each unit produced.

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Differential Piece Rate

• Compensation rate under which employees whose
  production exceeds the standard amount of output
  receive a higher rate for all of their work than
  the rate paid to those who do not exceed the
  standard amount.

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Employee Opposition to Incentive Plans

• Production standards are set unfairly.
• Incentive plans are really work speedup.
• Incentive plans create competition among workers.
• Increased earnings result in tougher standards.
• Payout formulas are complex and difficult to
  understand.
• Incentive plans cause friction between employees
  and management.

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Six Components ofEffective Incentive Plan
Administration

1. Grant incentives based on performance
2. Adequate financial resources to reward
   performance
3. Clearly defined and accepted performance
   standards
4. Easily understood payout formula
5. Reasonable administrative costs
6. Wide coverage of employees

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Merit Guidelines

• Guidelines for awarding merit raises that are
  ties to performance objectives.

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Motivating ThroughMerit Raises
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Bonus

• Incentive payment that is supplemented to the
  base wage.

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Team or Group Incentive Plan

• Compensation plan where all team members receive
  an incentive bonus payment when productive or
  services standards are met or exceeded.

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Standard Hourly Plan

• Incentive plan that sets rates based upon the
  completion of a job in a predetermined standard
  time.

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Criticisms of Executive Incentive Plans

• Incentive payments are excessive compared with
  return to stockholders.
• Time periods for judging and rewarding
  performance are too short.
• Quarterly earnings growth is emphasized at the
  expense of research and development.
• Emphasis is placed upon equaling or exceeding
  executive salary survey averages.
• Benefits do no relate closely to individual
  performance

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Perquisites

• Special benefits given to executives often
  referred to as perks.

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Executive Perquisites

• Company-provided car
• Free financial consulting
• Club memberships
• Use of company plane and yacht
• Low-cost or no-cost loans
• Special travel allowances
• Limousine service
• Kidnap and ransom protection
• Free legal counseling
• Family member travel allowances
• Home entertainment allowance
• Payment of childrens educational expense
• Executive dining room
• Estate planning

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StraightCommissionPlan

• Compensation plan based upon a percentage of
  sales.

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Straight Salary Plan

• Compensation plan that permits salespeople to be
  paid for performing various duties that are not
  reflected immediately in their sales volume.

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Combined SalaryandCommission Plan

• Compensation plan that includes a straight salary
  and a commission.

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Gainsharing Plans

• Programs under which both employees and the
  organization share the financial gains according
  to a predetermined formula that reflects improved
  productivity and profitability.

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Profit Sharing

• Any procedure by which an employer pays, or makes
  available to all regular employees, in addition
  to base pay, special current or deferred sums
  based upon the profits of the enterprise.

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Relationship of CompensationManagement to Other
HRM Functions
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Compensation Hot Links

• Abbott, Langer, and Associates
• ERI
• Hewitt Associates
• Office Team
• Robert Half
• Americas Job Bank
• World at Work (Formerly ACA)

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