Determining Pay and Benefits

1
Chapter 9
Determining Pay and Benefits
2
Chapter 9 Objectives

• Explain how effective compensation systems
  enhance competitive advantage
• Understand how people form perceptions about a
  pay system's equity
• Describe how organizations can build an equitable
  pay system
• Define the legal constraints imposed on
  organizational pay practices
• Understand the various benefit options and their
  administration

3
Linking Pay and Benefits to Competitive Advantage

• If effective, a firms compensation system can
• Improve cost efficiency.
• Ensure legal compliance.
• Enhance the success of recruitment efforts.
• Reduce morale and turnover problems.

4
Influences of Compensation on Attitudes and
Behavior Equity Theory

• People form equity beliefs based on two factors
• Inputs (I) The perceptions that people have
  concerning what they contribute to the job (e.g.,
  skill and effort).
• Outputs (O) The perceptions that people have
  regarding the returns they get (e.g., pay) for
  the work they perform.
• People judge the equity of their pay by comparing
  their outcome-to-input ratio (O/I) with another
  persons ratio, who is referred to as ones
  referent other.

5
Influences of Compensation on Attitudes and
Behavior Equity Theory

• Equity O/I ratios of the individual and his or
  her referent other are perceived as being equal.
• Inequity O/I ratios of the individual and his or
  her referent other are perceived as being
  unequal.
• When employees O/I ratios are less than that of
  their referent others, they feel they are being
  underpaid.
• When employees O/I ratios are greater, they feel
  they are being overpaid.

6
Influences of Compensation on Attitudes and
Behavior Equity Theory

• When underpaid, employees tend to decrease inputs
  or escape the situation.
• Overpaid employees consider overpayment just as
  satisfying as equity or somewhat dissatisfying,
  but not nearly as dissatisfying as underpayment.

7
Establishing Pay Rates Within an Organization

• Employees believe their pay is equitable when
  they perceive these circumstances

8
Establishing Pay Rates Within an Organization

• Achieving internal consistency
• Determine the overall importance or worth of each
  job.
• Job evaluation is the systematic process for
  determining the worth of a job.
• Standards for job evaluation
• Consistency
• Freedom from bias
• Correctability
• Representativeness
• Accuracy of information

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Establishing Pay Rates Within an Organization

• Achieving Internal Consistency (Cont.)
• How job evaluation is conducted Point-Factor
  Method
• Step 1 Select and define the compensable factors
  used to determine job worth.
• Step 2 Determine the number of levels or degrees
  for each factor.
• Step 3 Carefully define each degree level.
• Step 4 Weigh each compensable factor in terms of
  its relative importance.
• Step 5 Assign point values to the degrees
  associated with each compensable factor.
• Step 6 Calculate the total point value for a job
  by summing the points earned on each compensable
  factor.

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Establishing Pay Rates Within an Organization

• Achieving Internal Consistency (Cont.)
• Assigning jobs to pay grades
• Jobs are grouped into pay grades based on the
  total number of points received.
• Pay grades Job groupings in which all jobs
  assigned to the same group are subject to the
  same range of pay.
• Companies must decide how many pay grades to
  establish.

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Establishing Pay Rates Within an Organization

• Achieving external competitiveness
• Collecting salary survey information
• Provides information on pay rates offered by a
  firms competitors for certain benchmark jobs.
• Establishing a pay policy
• A pay policy stipulates how well a company will
  pay its employees relative to the market.
• Majority of firms pay at the market rate.
• When setting its pay policy, a company must
  consider its strategic plan.

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Establishing Pay Rates Within an Organization

• Achieving external competitiveness
• Establishing pay rates
• Market rates identified by salary surveys are
  used for benchmark jobs.
• For non-benchmark jobs, pay rates are set based
  on the pay policy line.
• Pay policy line A regression line that shows the
  statistical relationship between job evaluation
  points and prevailing market rates.

13
Establishing Pay Rates Within an Organization

• Recognizing employee contributions
• An organization must establish a pay range for
  each pay grade.
• Each employee must then be placed within that
  range based on their contribution to the
  organization.
• Pay range specifies the minimum and maximum pay
  rates for all jobs within a grade.

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Establishing Pay Rates Within an Organization

• Recognizing Employee Contributions
• Establishing a pay range
• Most employers set market rate as the midpoint of
  the range.
• The spread from the midpoint usually varies,
  becoming larger as one progresses to higher pay
  grades.
• The mechanism for placing each employee within a
  pay range differs for new and existing employees.
• New employees are usually paid at the bottom of
  the pay range unless their qualifications exceed
  the minimum.

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Establishing Pay Rates Within an Organization

• Recognizing Employee Contributions
• Skill-based pay
• A compensation approach that grants employees pay
  increases for acquiring new, job-related skills.
• Usually implemented as follows
• Identify tasks that need to be performed.
• Determine what skills are needed to perform the
  tasks.
• Develop tests or measures to determine whether an
  individual has learned the skills.
• Price each skill based on its value to the
  organization.
• Communicate to employees the skills they can
  learn and how much they will be paid for learning
  them.

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Establishing Pay Rates Within an Organization

• Recognizing Employee Contributions

• Skill-based pay

• Strengths
• Financial incentive to improve skills.
• Effective communication and problem solving
  skills.
• Commitment to the organization.

• Weaknesses
• Additional labor costs.
• May lead to inequity perceptions.
• Not cost-effective if company does not use the
  new skills.
• Problems determining the skill levels of
  different employees.
• Administrative burden.
• Least effective in bureaucratic organizations.

17
Legal Constraints on Pay Practices

• The law imposes constraints on organizational pay
  practices in two major areas
• Minimum wage and overtime
• Pay discrimination

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Legal Constraints on Pay Practices

• Minimum wage and overtime
• The Fair Labor Standards Act (FLSA) primarily
  regulates minimum wage and overtime pay
  practices.
• The act exempts small organizations and certain
  types of employees from its minimum wage and
  overtime requirements.
• Job categories exempted include executive,
  administrative, professional, and outside sales
  employees.

19
Christmas Vacation

• Questions
• What are Clarks issues in this scene?
• Is Clark legitimate in his expectations of a
  Christmas bonus?
• What are some strategies that Clarks company
  could have employed to avoid any potential
  backlash to cutting Christmas bonuses?
• Was Clarks psychological contract violated? How
  might this impact his future work?
• Is performance truly tied to compensation at
  Clarks company?
• If the company was concerned with increasing cash
  flow, what are some low-cost alternatives to
  monetary compensation that might have been
  alternatively employed?

20
Legal Constraints on Pay Practices

• Minimum wage and overtime (cont.)
• Minimum wage provisions If a states minimum
  wage level differs from the federal minimum wage
  level, the employer must pay the higher of the
  two rates.
• Overtime provisions All nonexempt employees who
  work in excess of 40 hours/week, must be paid for
  overtime worked, no less than one-half times the
  employees regular pay rate.

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Legal Constraints on Pay Practices

• Pay and discrimination
• The Equal Pay Act (EPA)
• The gender pay gap
• Comparable worth and the law

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Legal Constraints on Pay Practices

• Pay and Discrimination
• The Equal Pay Act
• Prohibits sex discrimination in pay.
• The equal pay for equal work standard
  requires that jobs requiring an equal level of
  skill, effort, and responsibility and performed
  under similar working conditions must be paid
  equally.
• Unequal pay for equal work is allowed if
  differences are based on seniority, productivity,
  merit, or any factor other than sex.

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Legal Constraints on Pay Practices

• Pay and Discrimination
• The gender pay gap
• Despite the existence of EPA, pay gap still
  exists between the sexes.
• This pay gap has been attributed to women working
  part-time, staying for a shorter period in the
  workforce, and being less effective in
  negotiating starting salaries.
• The equal pay for equal worth standard is
  called comparable worth.

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Legal Constraints on Pay Practices

• Pay and Discrimination
• Comparable worth and the law
• To win a comparable worth case, plaintiffs must
  prove disparate impact caused by intentional
  discrimination.
• Employers can win the case if they can prove that
  pay differences are not the result of intentional
  discrimination.