10 Managing Compensation © 2001 by Prentice Hall 10-1

© 2001 by Prentice Hall 10-2 Goals of Compensation System  Internal Equity—assure that jobs are objectively and consistently valued in relation to one another  External Equity—assure that the company is able to attract and retain the knowledge and skills needed to meet its objectives  Individual Equity—assure that individual employees are compensated in a manner that is fair in relation to the work they do and value they bring to the organization  Strategic impact—maximize productivity and effectiveness in achieving organization’s strategic goals

© 2001 by Prentice Hall 10-3 Challenges  Identify the compensation policies and practices that are most appropriate for a particular firm.  Weigh the strategic advantages and disadvantages of the different compensation options.  Establish a job-based compensation scheme that is internally consistent and linked to the labor market.  Understand the difference between a compensation system in which employees are paid for the skills they use and one in which they are paid of the job they hold.  Make compensation decisions that comply with the legal framework.

© 2001 by Prentice Hall 10-4 Total Compensation The package of quantifiable rewards an employee receives for his or her labors. Includes three components: base compensation, pay incentives, and indirect compensation/benefits

© 2001 by Prentice Hall 10-5 The Elements of Total Compensation Total Compensation Pay Incentives Indirect Compensation/ Benefits Base Compensation

© 2001 by Prentice Hall 10-6 The Nine Criteria for Developing a Compensation Plan 1.Internal versus External Equity Will the compensation plan be perceived as fair within the company, or will it be perceived as fair relative to what other employers are paying for the same type of labor? 2.Fixed versus Variable Pay Will compensation be paid monthly on a fixed basis —through base salaries —or will it fluctuate depending on such preestablished criteria as performance and company profits? 3.Performance versus Membership Will compensation emphasize performance and tie pay to individual or group contributions, or will it emphasize membership in the organization —logging in a prescribed number of hours each week and progressing up the organizational ladder?

© 2001 by Prentice Hall 10-7 The Nine Criteria for Developing a Compensation Plan (cont.) 4.Job versus Individual Pay Will compensation be based on how the company values a particular job, or will it be based on how much skill and knowledge an employee brings to that job? 5.Egalitarianism versus Elitism Will the compensation plan place most employees under the same compensation system (egalitarianism), or will it establish different plans by organizational level and/or employee group (elitism)? 6.Below-Market versus Above-Market Compensation Will employees be compensated at below-market levels, at market levels, or at above-market levels?

© 2001 by Prentice Hall 10-8 The Nine Criteria for Developing a Compensation Plan (cont.) 7.Monetary versus Nonmonetary Awards Will the compensation plan emphasize motivating employees through monetary rewards like pay and stock options, or will it stress nonmonetary rewards such as interesting work and job security? 8.Open versus Secret Pay Will employees have access to information about other workers’ compensation levels and how compensation decisions are made (open pay) or will this knowledge be withheld from employees (secret pay)? 9.Centralization versus Decentralization of Pay Decisions Will compensation decisions be made in a tightly controlled central location, or will they be delegated to managers of the firm’s units?

© 2001 by Prentice Hall 10-9 The Key Steps in Creating Job-Based Compensation Plans © 1998 by Prentice Hall 1. Job Analysis Job Evaluation for Internal Equity 2. Job Descriptions Identify Compensable Factors 3. Job Specifications 4. Rate Worth of All Jobs Using a Predetermined System 5. Job Hierarchy 7. Establish Final Pay Policy Individual Pay Assignment 6. Classify Jobs by Grade Levels 1. Check Market Value Using Benchmark or Key Jobs Market Surveys for External Equity Within-Pay-Range Positioning Criteria for Individual Equity Criteria for Pay Positioning Within Range for Each Job Experience Seniority Performance © 2001 by Prentice Hall 10-9

© 2001 by Prentice Hall Hierarchy of Clerical Jobs, Pay Grades, and Weekly Pay Range for a Hypothetical Office 1 Points 2 Grade 3 Weekly Pay Range $500-$650 $450-$550 $425-$475 $390-$430 $350-$400 Customer Service Rep. Executive Secretary/Admin. Asst. Senior Secretary Secretary Senior General Clerk Credit and Collection Accounting Clerk General Clerk Legal Secretary/Assistant Senior Word Processing Operator Work Processing Operator Purchasing Clerk Payroll Clerk Clerk-Typist File Clerk Mail Clerk Personnel Clerk Receptionist

© 2001 by Prentice Hall Market Salary Data for Selected Benchmark Office Jobs Weekly Pay Percentile 1. Customer Service Rep. 2. Credit and Collection Clerk 3. Accounting Clerk 4. Word Processing Operator 5. Clerk-Typist 25th Weekly Pay Average $400 $370 $380 $330 50th75th $500 $450 $425 $390 $350 $650 $550 $475 $430 $400 $495 $455 $423 $394 $343 Benchmark Jobs

© 2001 by Prentice Hall Job based versus skill based compensation  Skill based establishes pay grades for acquisition of specified skills  Advantages: u Develops more flexible work force u Encourages personal skills development  Dangers: u Can increase costs if excess of skills develop u Skills may become rusty u May attract/retain employees who are better at playing the game than applying the skills  Used by less than 10% of companies

© 2001 by Prentice Hall Pay Structure of a Large Restaurant Developed Using a Job-Based Approach Jobs Number of Positions Pay GRADE 6 GRADE 5 GRADE 4 GRADE 3 GRADE 2 GRADE 1 Chef Manager Sous-Chef Assistant Manager Lead Cook Office Manager General Cook Short Order Cook Assistant to Lead Cook Clerk Server Hostess Cashier Kitchen Helper Dishwasher Janitor Busser Security Guard $20.00-$31.00/hr. $11.50-$21/hr. $7.50-$12.00/hr. $6.50-$8.00/hr. $6.00-$7.00/hr. $5.50-$6.25/hr.

© 2001 by Prentice Hall Pay Schedule of a Large Restaurant Designed Using a Skill-Based Approach Skill s Create new items for menu Find different uses for leftovers (e.g., hot dishes, buffets) Coordinate and control work of all employees upon manager’s absence Cook existing menu items following recipe Supervise kitchen help Prepare payroll Ensure quality of food and adherence to standards Schedule servers and assign workstations Conduct inventory Organize work flow on restaurant floor $23.00/hr. $17.00/hr $10.50/hr PaySkill Block

© 2001 by Prentice Hall Pay Schedule of a Large Restaurant Designed Using a Skill-Based Approach (cont.) Skill s 2121 Greet customers and organize tables Take orders from customers Bring food to tables Assist in kitchen with food preparations Perform security checks Help with delivery Use dishwashing equipment Use chemicals/disinfectants to clean premises Use vacuum cleaner, mop, waxer, and other cleaning equipment Clean and set up tables Perform routine kitchen chores (e.g., making coffee) $7.50/hr. $6.00/hr. PaySkill Block

© 2001 by Prentice Hall Suggestions for Implementing Job-based Compensation Plans  Think strategically in making policy decisions concerning pay.  Secure employee input.  Increase each job’s range of pay while expanding its scope of responsibility.  Expand the proportion of employees’ pay that is variable (bonuses, stock plans, and so forth).  Establish dual-career ladders for different types of employees so that moving into management ranks or up the organizational hierarchy is not the only way to receive a substantial increase in pay.

© 2001 by Prentice Hall Example of a Dual-Career Ladder ManagerialIndividual Contributor Band President Executive Vice President Assistant Vice President Director Senior Manager Manager Nurse Anesthetist Clinical Nurse Specialist Senior Staff Nurse Staff Nurse LPN CNA