PowerPoint Presentation by Charlie Cook The University of West Alabama Copyright © 2005 Thomson Business & Professional Publishing. All rights reserved. M ANAGING H UMAN R ESOURCES Developing an Approach to Total Compensation Chapter 9

Copyright © 2005 Thomson Business & Professional Publishing. All rights reserved. 9–29–2 The Strategic Importance of Total Compensation Three Important Objectives:  Attracting and retaining the talent required for sustainable competitive advantage  Focusing the energy of employees on implementing the organization’s competitive strategy  Controlling costs

Copyright © 2005 Thomson Business & Professional Publishing. All rights reserved. 9–39–3 Attracting and Retaining Talent Pay Fairness  What people believe they deserve to be paid in relation to what others deserve to be paid. Equity  Perceptions based on comparisons between an individual’s ratio of inputs and outcomes and the ratios of others doing similar work. Inputs: What an employee gives to the job Outcomes: What people get out of doing the job

Copyright © 2005 Thomson Business & Professional Publishing. All rights reserved. 9–49–4 Equity Perceptions Self Other

Copyright © 2005 Thomson Business & Professional Publishing. All rights reserved. 9–59–5 How Employees Reduce Inequity Increase inputs (time, effort) to justify higher rewards when they feel overrewarded Decrease inputs when feeling underrewarded Change the compensation they receive  Form a union  File a grievance  Leave work early Choose a different comparison “other” Rationalize that inequities are justified Leave the situation by quitting

Copyright © 2005 Thomson Business & Professional Publishing. All rights reserved. 9–69–6 Low Pay Companies choose to lead, lag, or match market pay rates External equity  Fairness relative to the external market (outside the organization)  Difficult to make comparisons when companies mix forms of pay (e.g. salary, bonus, benefits) Dissatisfied employees may  Leave the company  Perform poorly  Steal from the company

Copyright © 2005 Thomson Business & Professional Publishing. All rights reserved. 9–79–7 Pay Secrecy Secrecy is the norm—managers get fewer questions about inequitable pay Employees may have inaccurate information or misperceptions about pay. Companies can benefit from:  Involving employees in pay system design.  Implement pay systems fairly and provide due process.

Copyright © 2005 Thomson Business & Professional Publishing. All rights reserved. 9–89–8 Elements of Total Compensation within the Integrated HRM System EX 9.3

Copyright © 2005 Thomson Business & Professional Publishing. All rights reserved. 9–99–9 Monetary and NonMonetary Compensation Monetary Compensation  Direct payments such as salary, wages, and bonuses, and indirect payments such as payments to cover the costs of private and public insurance plans. Nonmonetary Compensation  Forms of social and psychological rewards— recognition and respect from others, enjoyment from doing the job itself, opportunities for self development, and so on.

Copyright © 2005 Thomson Business & Professional Publishing. All rights reserved. 9–10 Legal Constraints Davis-Bacon (1931) and Walsh-Healy (1936) Acts  Federal construction contractors required to pay prevailing wages to laborers and mechanics Fair Labor Standards Act (1938)  Set minimum wage  Requires overtime for nonexempt workers  Establishes child labor standards

Copyright © 2005 Thomson Business & Professional Publishing. All rights reserved. 9–11 Exempt Employees Under FLSA Persons not covered by overtime and minimum wage provisions  Includes executives, managers, professionals, and administrators Must be paid fixed salary and meet criteria for job content by:  Undertaking management duties  Directing the work of two or more employees  Controlling or greatly influencing hiring, firing, and promotion decisions  Exercising discretion

Copyright © 2005 Thomson Business & Professional Publishing. All rights reserved. 9–12 Legal Constraints (cont’d) Living Wage Laws:  Enacted by some local governments to ensure pay reflects cost of living Equal Pay Act (1963)  Amendment to FLSA that prohibits gender-based wage discrimination for “substantially” equal jobs Pay Equity (Comparable Worth) Policies  Based on race/gender differences in “true worth” of nonidentical jobs  Implemented by some state and local governments and some unions

Copyright © 2005 Thomson Business & Professional Publishing. All rights reserved. 9–13 The HR Triad: Roles and Responsibilities for Total Compensation

Copyright © 2005 Thomson Business & Professional Publishing. All rights reserved. 9–14 Establishing the Internal Value of Jobs: Objectives of Job Evaluation Job Evaluation  The procedure for gathering information about a job and its relative value within the organization— a consideration for internal equity in the job- based pay structure of an organization. Salary Surveys  Market information gathered about what other employers pay—validation of external equity in valuing jobs in an organization.

Copyright © 2005 Thomson Business & Professional Publishing. All rights reserved. 9–15 Skill-Based Pay Rewards employees for the range, depth, and types of skills they’re capable of using, regardless of whether the job they currently hold requires the use of those skills.

Copyright © 2005 Thomson Business & Professional Publishing. All rights reserved. 9–16 Using External Market Rates to Set Pay Levels External Equity  Exists when employees feel they are being paid fairly relative to what people in similar jobs (or with similar competencies) are paid by other employers. Achieving external equity involves three steps:  Determining external market rates  Establishing the market pay policy  Setting the organization pay policy.

Copyright © 2005 Thomson Business & Professional Publishing. All rights reserved. 9–17 Conducting Survey to Assess External Market Rates Define relevant labor market Identify benchmark jobs:  Jobs that are similar across a range of organizations Obtain market data

Copyright © 2005 Thomson Business & Professional Publishing. All rights reserved. 9–18 Set the Organization Pay Policy Organization Pay Policy  Specifies the pay rates that will be used for the jobs in a particular organization. Options  A lead policy indicates that the organization intends to pay somewhat above the market rate in valuing employees as a competitive advantage.  A match policy sets the organization’s policy line at the middle of the market.  A lag policy is where the organization intentionally pays below the market.

Copyright © 2005 Thomson Business & Professional Publishing. All rights reserved. 9–19 Designing the Internal Pay Structure (cont’d) Competency-Based:  Points assigned to jobs based on competencies required Skill-Based  Base pay equal regardless of job assignment  Additional pay earned by increasing skills

Copyright © 2005 Thomson Business & Professional Publishing. All rights reserved. 9–20 Communicating the Pay Structure Follow-upFollow-up Involve Employees Focus on the Big Picture Effective Communicatio n

Copyright © 2005 Thomson Business & Professional Publishing. All rights reserved. 9–21 Compensation in the Context of Globalization “Keeping the expatriate whole” Balance sheet approach  Provides a level of net spendable income in the new destination similar to that received in the previous (usually home) location. $