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Chapter Objectives After studying this chapter, you should be able to X Chapter Objectives After studying this chapter, you should be able to Explain employer concerns in developing a strategic compensation program. Indicate the various factors that influence the setting of wages. Differentiate the mechanics of each of the major job evaluation systems. Explain the purpose of a wage survey. Define the wage curve, pay grades, and rate ranges as parts of the compensation structure. © 2010 South-Western, a part of Cengage Learning. All rights reserved.

X Chapter Objectives (cont’d) After studying this chapter, you should be able to Identify the major provisions of the federal laws affecting compensation. Discuss the current issues of equal pay for comparable worth, pay compression, and low wage budgets. © 2010 South-Western, a part of Cengage Learning. All rights reserved.

Particularly at higher levels in the organization. Compensation Pay is a statement of an employee’s worth by an employer. Pay is a perception of worth by an employee. Particularly at higher levels in the organization. Nonfinancial compensation included Employee recognition programs Rewarding jobs Work environment Flexible hours © 2010 South-Western, a part of Cengage Learning. All rights reserved.

Total Compensation Direct Indirect Wages / Salaries Time Not Worked Vacations Breaks Holidays Commissions Insurance Plans Medical Dental Life Bonuses Gainsharing Security Plans Pensions Manager’s job is to make sure all employees know their Total Compensation. Employee Services Educational assistance Recreational programs © 2010 South-Western, a part of Cengage Learning. All rights reserved. 6

Compensation Management and Other HRM Functions X Compensation Management and Other HRM Functions Aid or impair recruitment Recruitment Supply of applicants affects wage rates Pay rates affect selectivity Selection Selection standards affect level of pay required Pay can motivate training Training and Development Increased knowledge leads to higher pay Training and development may lead to higher pay Compensation Management A basis for determining employee’s rate of pay Low pay encourages unionization Labor Relations Pay rates determined through negotiation © 2010 South-Western, a part of Cengage Learning. All rights reserved.

Strategic Compensation Planning Links the compensation of employees to the mission, objectives, philosophies, and culture of the organization. And Results! Serves to mesh the monetary payments made to employees with specific functions of the HR program in establishing a pay-for-performance standard. Seeks to motivate employees through compensation. © 2010 South-Western, a part of Cengage Learning. All rights reserved.

Linking Compensation to Organizational Objectives Value-added Compensation Compensation philosophy is moving toward rewarding employees on the basis of competencies or contributions to the organization. Evaluating the individual components of the compensation program (pay and benefits) to see if they advance the needs of employees and the goals of the organization. “How does this compensation practice benefit the organization?” “Does the benefit offset the administrative cost?” © 2010 South-Western, a part of Cengage Learning. All rights reserved.

Common Strategic Compensation Goals To reward employees’ past performance Bonus—otherwise you are paying forever, maybe even in retirement, for something that is gone. To remain competitive in the labor market 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 © 2010 South-Western, a part of Cengage Learning. All rights reserved.

Strategic Compensation Policy Concerns The rate of pay within the organization and whether it is to be above, below, or at the prevailing community rate. The ability of the pay program to gain employee acceptance while motivating employees to perform to the best of their abilities. The pay level at which employees may be recruited and the pay differential between new and more senior employees. The intervals at which pay raises are to be granted and the extent to which merit and/or seniority will influence the raises. The pay levels needed to facilitate the achievement of a sound financial position in relation to the products or services offered. © 2010 South-Western, a part of Cengage Learning. All rights reserved.

The Pay-for-Performance Standard The standard by which managers tie compensation to employee effort and performance (results). Refers to a wide range of compensation options, including merit-based pay, bonuses, salary commissions, job and pay banding, team/group incentives, and various gainsharing programs. © 2010 South-Western, a part of Cengage Learning. All rights reserved.

Designing a Pay-for-Performance System How will performance be measured? How will monies to be allocated for compensation increases? Which employees will be eligible? How will payouts be made? How often will payouts occur? How large will the payouts be? Will employees perceive the rewards as valued? © 2010 South-Western, a part of Cengage Learning. All rights reserved.

Motivating Employees through Compensation Pay Equity (also Distributive Fairness) An employee’s perception that compensation received is equal to the value of the work performed. A motivation theory that explains how people respond to situations in which they feel they have received less (or more) than they deserve. Individuals form a ratio of their inputs to outcomes in their job and then compare the value of that ratio with the value of the ratio for other individuals in similar jobs. © 2010 South-Western, a part of Cengage Learning. All rights reserved.

Equity Theory Distributive Fairness Perceived fairness of the amount and allocation of rewards among individuals. Procedural Fairness The perceived fairness of the process to determine the distribution of rewards.

X Relationship between Pay Equity and Motivation FIGURE 9.1 © 2010 South-Western, a part of Cengage Learning. All rights reserved.

Expectancy Theory and Pay A theory of motivation that says employees should exert greater work effort if they have reason to expect that it will result in a reward that they value. Employees also must believe that good performance is valued by their employer and will result in their receiving the expected reward. © 2010 South-Western, a part of Cengage Learning. All rights reserved.

Pay-for-Performance and Expectancy Theory FIGURE 9.2 Pay-for-Performance and Expectancy Theory © 2010 South-Western, a part of Cengage Learning. All rights reserved.

Motivating Employees through Compensation Pay Secrecy An organizational policy prohibiting employees from revealing their compensation information to anyone. Creates misperceptions and distrust of compensation fairness and pay-for-performance standards. Arguments against secrecy: Knowledge of base pay is the strongest predictor of pay satisfaction, which is highly associated with work engagement Knowledge of base pay more strongly predicts pay satisfaction than does the actual amount of pay received by employees. © 2010 South-Western, a part of Cengage Learning. All rights reserved.

The Bases for Compensation Hourly Work Work paid on an hourly basis. Piecework Work paid according to the number of units produced. Salary Workers Employees whose compensation is computed on the basis of weekly, biweekly, or monthly pay periods. © 2010 South-Western, a part of Cengage Learning. All rights reserved.

The Bases for Compensation Nonexempt Employees (USA Concept) Employees covered by the overtime provisions of the Fair Labor Standards Act. They must be paid time and one-half their regular pay for all work performed after forty regular hours of work in a workweek. © 2010 South-Western, a part of Cengage Learning. All rights reserved.

The Bases for Compensation Exempt Employees Employees who not covered in the overtime provisions of the Fair Labor Standards Act. Managers, supervisors, and white-collar professional employees are exempted on the basis of their exercise of independent judgment and other criteria. © 2010 South-Western, a part of Cengage Learning. All rights reserved.

X Factors Affecting the Wage Mix FIGURE 9.3 © 2010 South-Western, a part of Cengage Learning. All rights reserved.

The Wage Mix—Internal Factors Employer’s Compensation Strategy Establishes the internal wage relationship among jobs and skill levels Sets organization compensation policy to lead, lag, or match competitors’ pay. Rewards employee performance Guides administrative decisions concerning elements of the pay system such as overtime premiums, payment periods, and short-term or long-term incentives. © 2010 South-Western, a part of Cengage Learning. All rights reserved.

The Wage Mix—Internal Factors (cont’d) Worth of a Job Establishing the internal wage relationship among jobs and skill levels. Employee’s Relative Worth Rewarding individual employee performance Employer’s Ability-to-Pay Having the resources and profits to pay employees. © 2010 South-Western, a part of Cengage Learning. All rights reserved.

1 X Comparison of Compensation Strategies © 2010 South-Western, a part of Cengage Learning. All rights reserved.

The Wage Mix—External Factors Labor Market Conditions Availability and quality of potential employees is affected by economic conditions, government regulations and policies, and the presence of unions. Area Wage Rates A firm’s formal wage structure of rates is influenced by those being paid by other area employers for comparable jobs. © 2010 South-Western, a part of Cengage Learning. All rights reserved.

The Wage Mix—External Factors Cost of Living Local housing and environmental conditions can cause wide variations in the cost of living for employees. Inflation can require that compensation rates be adjusted upward periodically to help employees maintain their purchasing power. Consumer Price Index (CPI) A Bureau of Labor Statistics measure of the average change in prices over time in a fixed “market basket” of goods and services © 2010 South-Western, a part of Cengage Learning. All rights reserved.

The Wage Mix—External Factors Collective Bargaining Escalator clauses in labor agreements provide for quarterly upward cost-of-living (COLA) wage adjustments for inflation to protect employees’ purchasing power. Unions bargain for real wage increases that raise the standard of living for their members. Real wages are increases larger than rises in the consumer price index; that is, the real earning power of wages. © 2010 South-Western, a part of Cengage Learning. All rights reserved.

Job Evaluation Systems The systematic process of determining the relative worth of jobs in order to establish which jobs should be paid more than others within an organization. © 2010 South-Western, a part of Cengage Learning. All rights reserved.

Different Job Evaluation Systems X Different Job Evaluation Systems JOB AS JOB PARTS BASIS FOR A WHOLE OR FACTORS COMPARISON (NONQUANTITATIVE) (QUANTITATIVE) Job vs. job Job ranking Factor comparison system system Job vs. scale Job classification Point system system SCOPE OF COMPARISON © 2010 South-Western, a part of Cengage Learning. All rights reserved.

Job Evaluation Systems Job Ranking System Oldest system of job evaluation by which jobs are arrayed on the basis of their relative worth. Disadvantages Does not provide a precise measure of each job’s worth. Final job rankings indicate the relative importance of jobs, not the extent of differences between jobs. Method can used to consider only a reasonably small number of jobs. © 2010 South-Western, a part of Cengage Learning. All rights reserved.

Paired-Comparison Job Ranking Table Directions: Place an X in the cell where the value of a row job is higher than that of a column job. © 2010 South-Western, a part of Cengage Learning. All rights reserved.

Job Evaluation Systems Job Classification System A system of job evaluation in which jobs are classified and grouped according to a series of predetermined wage grades. Successive grades require increasing amounts of job responsibility, skill, knowledge, ability, or other factors selected to compare jobs. © 2010 South-Western, a part of Cengage Learning. All rights reserved.

Point System Point System The Point Manual A quantitative job evaluation procedure that determines the relative value of a job by the total points assigned to it. Permits jobs to be evaluated quantitatively on the basis of factors or elements—compensable factors—that constitute the job. The Point Manual A handbook that contains a description of the compensable factors and the degrees to which these factors may exist within the jobs. © 2010 South-Western, a part of Cengage Learning. All rights reserved.

2 Point Values for Job Factors of the American Association of Industrial Management © 2010 South-Western, a part of Cengage Learning. All rights reserved.

3 Description of Education Factor and Degrees of the American Association of Industrial Management 1. EDUCATION This factor measures the basic trades training, knowledge or “scholastic contact” essential as background or training preliminary to learning the job duties. This job knowledge or background may have been acquired either by formal education or by training on jobs of lesser degree or by any combination of these approaches. 1st Degree 14 points Requires the use of simple writing, adding, subtracting, whole numbers and the carrying out of instructions; and the use of fixed gauges and direct reading instruments and devices in which interpretation is not required. 2nd Degree 28 points Requires the use of commercial English, grammar and arithmetic such as addition, subtraction, multiplication and division, including decimals and fractions; simple use of formulas, charts, tables, drawings, specifications, schedules, wiring diagrams, together with the use of adjustable measuring instruments, graduates and the like requiring interpretation in their various applications; or the posting, preparation, interpretation, use and checking of reports, forms, records and comparable data. 3rd Degree 42 points Requires the use of shop mathematics together with the use of complicated drawings, specifications, charts, tables, various types of adjustable measuring instruments and the training generally applicable in a particular or specialized occupation. Equivalent to 1 to 3 years applied trades training. 4th Degree 56 points Requires the use of advanced shop mathematics, together with the use of complicated drawings, specifications, charts, tables, handbook formulas, all varieties of adjustable measuring instruments and the uses of broad training in a recognized trade or craft. Equivalent to complete, accredited, indentured apprenticeship or equivalent to high school plus a 2-year technical college education. 5th Degree 70 points Requires the use of higher mathematics involved in the application of engineering principles and the 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 4 years of technical college or university education. © 2010 South-Western, a part of Cengage Learning. All rights reserved.

Work Valuation Methods A job evaluation system that seeks to measure a job’s worth through its value to the organization. Jobs are be valued relative to financial, operational, or customer service objectives of the organization. Considers that work should be valued relative to the business goals of the organization rather than by an internally applied point-factor job evaluation system. Work valuation serves to direct compensation dollars to the type of work pivotal to organizational goals. © 2010 South-Western, a part of Cengage Learning. All rights reserved.

Job Evaluation for Management Positions X Job Evaluation for Management Positions Hay Profile Method Job evaluation technique using three factors—knowledge, mental activity, and accountability—to evaluate executive and managerial positions. © 2010 South-Western, a part of Cengage Learning. All rights reserved.

The Compensation Structure Wage and Salary survey A survey of the wages paid to employees of other employers in the surveying organization’s relevant labor market. Helps maintain internal and external pay equity for employees. Labor Market The area from which employers obtain certain types of workers. © 2010 South-Western, a part of Cengage Learning. All rights reserved.

Collecting Survey Data X Collecting Survey Data Outside Sources of Data Bureau of Labor Statistics (BLS) National Compensation Survey State and local wage surveys Online survey data Problems with Surveys They are not always compatible with the user’s jobs The user cannot specify what specific data to collect. © 2010 South-Western, a part of Cengage Learning. All rights reserved.

Collecting Survey Data (cont’d) X Collecting Survey Data (cont’d) Conducting Employer-initiated Surveys Select key jobs. Determine relevant labor market. Select organizations. Decide on information to collect: wages/ benefits/ pay policies. Compile data received. Determine wage structure and benefits to pay. © 2010 South-Western, a part of Cengage Learning. All rights reserved.

4 X Bureau of Labor Statistics National Compensation Survey NCS data are used by managers and compensation specialists in large and small organizations to answer such questions as the following: How much must I pay accountants in Atlanta, Georgia? Is a 3 percent benefits increase comparable to that of other employers in the manufacturing industry? Is vision coverage a prevalent benefit among large employers in the Northeast? How have wage costs changed over the past year? © 2010 South-Western, a part of Cengage Learning. All rights reserved.

Characteristics of Key Jobs X Characteristics of Key Jobs Key (Benchmark) Jobs Jobs that are important for wage-setting purposes and are widely known in the labor market. Characteristics of Key Jobs They are important to both the employees and the organization. They contain a large number of positions. They have relatively stable job content. They have the same job content across many organizations. They are acceptable to employees, management, and labor as appropriate for pay comparisons. © 2010 South-Western, a part of Cengage Learning. All rights reserved.

The Wage Curve X Wage Curve Pay Grades Rate Ranges Red Circle Rates A curve in a scattergram representing the relationship between relative worth of jobs and wage rates. Pay Grades Groups of jobs within a particular class that are paid the same rate. Rate Ranges A range of rates for each pay grade that may be the same for each grade or proportionately greater for each successive grade. Red Circle Rates Payment rates above the maximum of the pay range. © 2010 South-Western, a part of Cengage Learning. All rights reserved.

X Freehand Wage Curve FIGURE 9.4 © 2010 South-Western, a part of Cengage Learning. All rights reserved.

X Single Rate Structure FIGURE 9.5 © 2010 South-Western, a part of Cengage Learning. All rights reserved.

X Wage Structure with Increasing Rate Ranges FIGURE 9.6 © 2010 South-Western, a part of Cengage Learning. All rights reserved.

The Wage Curve (cont’d) X The Wage Curve (cont’d) Competence-based Pay, (also skill-based pay or knowledge-based pay) Compensation for the different skills or increased knowledge employees possess rather than for the job they hold in a designated job category. Greater productivity, increased employee learning and commitment to work, improved staffing flexibility to meet production or service demands, and the reduced effects of absenteeism and turnover, Broadbanding Collapses many traditional salary grades into a few wide salary bands. © 2010 South-Western, a part of Cengage Learning. All rights reserved.

Government Regulation of Compensation (U.S.A. Federal Wage Laws) X Government Regulation of Compensation (U.S.A. Federal Wage Laws) Davis-Bacon Act (1931) Required minimum wage, prevailing wage rates, 1½ overtime premium payments by federal contractors. Walsh-Healy Act (1936) Required overtime payments after 8 daily or 40 regular work hours for workers on federal contracts. Fair Labor Standards Act (FLSA) 1938 (as Amended) Interstate commerce clause used to cover workers except agricultural and exempted (managerial) employees, child labor (under 16) is prohibited. © 2010 South-Western, a part of Cengage Learning. All rights reserved. 4

5 X Minimum Wage Laws in the States Note: Where Federal and state law have different minimum wage rates, the higher standard applies © 2010 South-Western, a part of Cengage Learning. All rights reserved.

6 X The Federal Wage Poster © 2010 South-Western, a part of Cengage Learning. All rights reserved.

Exemption from FLSA Overtime Provisions Fair Pay Rules Were implemented to strengthen overtime protections and redefine the job requirements for exempt groups of employees. Overtime must be paid to employees earning less than $455 a week, or $26,660 annually. A new “standards test” is used to determine whether employees who earn between $26,660 and $100,000 annually are excluded from overtime requirements. Administrative personnel to be exempt must have primary duties that include the exercise of discretion and independent judgment with respect to matters of significance. © 2010 South-Western, a part of Cengage Learning. All rights reserved.

Significant Compensation Issues Equal Pay for 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. Low-Salary Budgets Current wage budgets reflect the general trend toward tight compensation cost controls. © 2010 South-Western, a part of Cengage Learning. All rights reserved.

X The Equal Pay Act: The Jury’s Still Out FIGURE 9.7 The Equal Pay Act: The Jury’s Still Out Has the Equal Pay Act been effective in raising the wages of women relative to the wages of men? That depends on whom you ask and the importance you place on government statistics. “Fifty-nine cents on the dollar” was the rallying cry of the women’s movement more than thirty years ago to illustrate the large gap between the wages of women and men. That is, for every dollar that a man made, a woman earned fifty-nine cents. Currently, government wage figures based on the usual weekly earnings of full-time wage and salary workers peg women’s average pay at 79.3 percent of men’s compensation. Unfortunately, the gain in women’s wages relative to men’s wages has not changed significantly in recent years, as the following figures show. © 2010 South-Western, a part of Cengage Learning. All rights reserved.

X Salary Budgets by Type of Employee, 1998–2009 FIGURE 9.8 © 2010 South-Western, a part of Cengage Learning. All rights reserved.

The Issue of Wage Rate Compression Compression of pay differentials between job classes, particularly the pay differentials between hourly workers and their managers. Reducing Wage-Rate Compression Reward high performance and merit-worthy employees with large pay increases. Design the pay structure to allow a wide spread between hourly and supervisory employees. Prepare high-performing employees for promotions to jobs with higher salary levels. Provide equity adjustments for selected employees hardest hit by pay compression. © 2010 South-Western, a part of Cengage Learning. All rights reserved.

consumer price index (CPI) escalator clauses exempt employees comparable worth competence-based pay consumer price index (CPI) escalator clauses exempt employees Hay profile method hourly work job classification system job evaluation job ranking system nonexempt employees pay equity pay-for-performance standard pay grades piecework point system real wages red circle rates wage and salary survey wage curve wage rate compression work valuation © 2010 South-Western, a part of Cengage Learning. All rights reserved.

Discussion Questions (page 445) #2 Should we pay a different wage for each individual based on what they contribute? #4 How do you conduct a wage and salary survey? © 2010 South-Western, a part of Cengage Learning. All rights reserved.

Page 448 #2, Competency Based Compensation Case Study Page 448 #2, Competency Based Compensation © 2010 South-Western, a part of Cengage Learning. All rights reserved.

Team Assignment (page 446) Why This Salary? © 2010 South-Western, a part of Cengage Learning. All rights reserved.