Managing Compensation

1
Managing Compensation

• Employees desire compensation systems that they
  perceive as being fair and commensurate with
  their skills and expectations.
• Pay, therefore, is a major consideration in HRM
  because it provides employees with a tangible
  reward for their services, as well as a source of
  recognition and livelihood.
• Strategic Compensation Planning
• What is strategic compensation planning?
• Simply stated, it is the compensation of
  employees in ways that enhance motivation and
  growth while, at the same time, aligning their
  efforts with the objectives, philosophies, and
  culture of the organization.
• Strategic compensation planning goes beyond
  determining what market rates to pay employees.
• The recruitment of new employees, the rate of pay
  for jobs can increase or limit the supply of
  applicants.
• Traditionally low-wage employers have needed to
  raise their starting wages to attract a
  sufficient of jobs applicants to meet staffing
  requirements.

2
Managing Compensation

• Strategic Compensation Planning
• What is strategic compensation planning?
• If rates of pay are too high, creating a large
  applicant pool, then organizations may choose to
  raise their selection standards and hire
  better-qualified employees.
• Linking Compensation to Organizational Objectives
• Compensation has been revolutionized by
  heightened domestic competition, globalization,
  increased employee skill requirements, and new
  technology.
• An outcome of todays dynamic business
  environment is that managers have needed to
  change their pay philosophies from paying for a
  specific position or job title to rewarding
  employees on the basis of their individual
  competencies or groups contributions to
  organizational success.
• Value added Compensation the components the
  individual components of the compensation program
  to see if they advance the needs of employees and
  the goals of the organization.

3
Managing Compensation

• Linking Compensation to Organizational
  Objectives
• Some common goals of a strategic compensation
  policies includes
• To reward employees past performances
• To remain competitive in the labor force
• To maintain salary equity among employees
• To mesh employees future performance with
  organizational goals
• To control the compensation budget
• To attract new employees
• To reduce unnecessary turnover
• The Pay-for-Performance Standard
• It is agreed that managers must tie at least some
  reward to employee effort and performance.
  Examples
• 1) Merit based pay 2) Bonuses
• 3) Salary commission 4) Team/Group incentives
• Bottom line is that employees will be rewarded
  based on their performance

4
Managing Compensation

• The Pay-for-Performance Standard
• Pay Equity
• Simply defined, equity embraces the concept of
  fairness
• Pay equity is achieved when the compensation
  received is equal to the value of the work
  performed.
• Expectancy Theory and Pay
• The expectancy theory of motivation predicts that
  ones level of motivation depends on the
  attractiveness of the rewards sought and the
  probability of obtaining those rewards.
• Expectancy theory therefore holds that employees
  should exert greater work effort if they have
  reason to expect that it will result in a reward
  that is valued.
• Pay Secret
• There is reason to believe that secrecy can
  generate distrust in the compensation system,
  reduce employee motivation, and inhibit
  organizational effectiveness.
• Organization should stay way, as much as
  possible, from pay secrecy.

5
Managing Compensation

• The Bases for Compensation
• Hourly Work work paid on an hourly basis
• Piecework work paid according to the number of
  units produced
• Nonexempt employees employees covered by the
  overtime provisions of the FLSA. Employees must
  be paid a rate of 1 ½ times their regular pay
  rate for time worked in excess of forty hours in
  their workweek.
• Exempt Employees employees not covered in the
  overtime provisions of the FLSA. (Managers and
  Supervisors)
• Determining Compensation The Wage Mix
• Employees may inquire of their managers, How are
  the wages for my job determined? In practice, a
  combination of internal and external factors can
  influence.
• Internal Factors
• The internal Factors are
• Employers Compensation Strategy (HRM1)
  determines which compensation strategy the
  organization adopts and how they are being
  administered. (competition, admin. Decisions,
  reward policy, internal wages)

6
Managing Compensation

• Determining Compensation The Wage Mix
• The internal Factors are
• Worth of a job organizations without a formal
  compensation program generally base the worth of
  jobs on the subjective opinions of people
  familiar with the jobs.
• Pay rates may be influenced heavily by the labor
  market or, in the case of unionized employers, by
  collective bargaining.
• Job evaluations
• Employees relative worth In both hourly and
  salary jobs, employee performance can be
  recognized ad rewarded through promotion and with
  various incentive systems.
• Superior performance can also be rewarded by
  granting merit raises on the basis of steps
  within a rate range established for a job class.
• Employers ability to Pay pay levels are limited
  by earned profits and other financial resources
  available to employers.
• Economic conditions and competition faced by
  employers can also significantly affect the rates
  they are able to pay.

7
Managing Compensation

• Determining Compensation The Wage Mix
• External Factors
• Labor Market Conditions the labor market
  reflects the forces of supply and demand for
  qualified labor within an area.
• Area Wage Rates a formal wage structure should
  provide rates that are in line with those being
  paid by other employers form comparable jobs
  within the area. Data may be obtain from
  governmental agencies (EDD)
• Cost of Living because of inflation,
  compensation rates have had to be adjusted upward
  periodically to help employees maintain their
  purchasing power. The CPI is a measure of the
  average change in prices over time in a fixed
  market basket of goods and services.
• Changes in CPI can have important effects on pay
  rates.
• Collective Bargaining the union's goal in each
  new agreement is to achieve increases in real
  wages wages increases larger than increase in
  the CPI- thereby improving the purchasing power
  and standard of living of its member.
• The agreement negotiated by unions tend to
  establish rate patterns within the labor market.

8
Managing Compensation

• Job Evaluation System
• Job evaluation is the systematic process of
  determining the relative worth of jobs in order
  to establish with jobs should be paid more than
  other within the organization.
• Job evaluation helps establish internal equity
  between various jobs.
• There are four methods of job evaluation
• Job Ranking System the simplest and oldest
  system, which arrays jobs on the basis of their
  relative worth.
• Job Classification System jobs are classified
  and grouped according to a series of
  predetermined grades. Successive grades require
  increasing amounts of job responsibility, skill,
  knowledge, ability, or other factors selected to
  compare jobs.
• Point System a quantitative job evaluation
  procedure that determines a jobs relative value
  by calculating the total points assigned to it.
• Job Comparison System permits the evaluation
  process to be accomplished on a factor-by-factor
  basis by developing a factor comparison scale.

9
Managing Compensation

• Job Evaluation System
• Job Evaluation for Managers
• Hay Profile Method uses only three factors
  because it is assumed that these factors
  represent the most important aspects of all
  executive and managerial positions. 1) Knowledge,
  2) mental activity, 3) accountability
• The compensation Structure
• Wage and Salary Surveys surveys of the wages
  paid by employers in an organizations relevant
  labor market local, regional or national,
  depending on the job.
• Wage Curve the relationship between the relative
  worth of jobs and their wage rates. Fig. 9.7
• Pay Grades from an administrative standpoint, it
  is generally preferable to groups jobs into pay
  grades and to pay all jobs within a particular
  grade the same rate or rate range.
• Rate Ranges although a single rate may be
  created for each pay grade, it is more common to
  provide a range of rates for each pay grade. Fib.
  9.8

10
Managing Compensation

• The compensation Structure
• Competence-Based pay - also referred as
  skill-based pay or knowledge-based pay,
  compensates employees for the different skills or
  increased knowledge they posses rather than for
  the job they hold in a designated job category.
• Governmental Regulation of Compensation
• Compensation management, like the other areas of
  HRM, is subject to state and federal regulations.
  There are three prevailing laws
• Davis-Beacon Act of 1931
• Passed in 1931 and is the oldest of t her three
  federal wage laws. It requires that minimum wage
  rates paid to people employed on federal public
  works projects with more than 2,000 be at least
  equal to the prevailing rates and the overtime be
  paid at 1½ times this rates.
• This act is criticized because the prevailing
  rates are often the union rates for jobs in t he
  area and are often higher than average (nonunion)
  rates.

11
Managing Compensation

• Governmental Regulation of Compensation
• 2) Walsh-Healey Act of 1936
• Covers workers employed on government contract
  work for supplies, equipment, and materials worth
  in excess of 10,000.
• The act requires contractors to pay employees at
  least the prevailing wage rates established for
  the areas by the Secretary of Labor and overtime
  of 11/2 times the regular rated for all work
  performed in excess of either hours in one day or
  forty hours in one week, depending on which basis
  provided the larger premium.
• 3) Fair Labor Standards Act of 1938
• It covers employees who are engaged in the
  production of goods for interstate and foreign
  commerce, including those whose work is closely
  related to or essential to such production.
  There are 4 issues
• Wage and Hour Provisions the minimum wage
  prescribed by federal law has been raised may
  times, from and original figure of 25 cents per
  hour to 5.75. This is the minimum any employers
  can pay and 1 ½ for overtime.

12
Managing Compensation

• Governmental Regulation of Compensation
• 3) Fair Labor Standards Act of 1938
• Child Labor Provisions The FLSA forbids the
  employment of minors between ages 16 and 18 in
  hazardous occupations such as mining, logging,
  woodworking, meatpacking, and certain types of
  manufacturing.
• Minors under 16 cannot work.
• Equal Rights Provisions
• In the fourth quarter of 2000, the median
  earnings level of all women workers in the UIS
  was 76 of the median for all working men. This
  figure is about 14 points higher than in 1980,
  with little change since 1990. The median
  earnings of young women (ages 16 to 24) toward
  greater comparability in earnings continues as
  these women become older, this age group may set
  the stage for more equitable treatment in the
  future.
• Because of the continued differences in pay for
  women and men, some HR professionals are
  suggesting that the wage differences could be
  reduced if women were paid on the basis of equal
  pay for comparable work.

13
Managing Compensation

• Governmental Regulation of Compensation
• The Issue of Equal Pay for comparable Worth
• The issue of comparable worth goes beyond
  providing equal pay for jobs that involve the
  save duties for women as for men.
• It is not concerned with whether a female
  secretary should receive the same pay as a male
  secretary.
• Rather, the argument for comparable worth is that
  jobs held by women are not compensated the same
  as those held by men, even though both job types
  may contribute equally to organizational success.