© 2009 South-Western Cengage. All rights reserved. Chapter 7 Compensation Strategies and Practices

7–2 Types of Compensation Types of RewardsTypes of Rewards  Intrinsic  Intangible, psychological and social effects of compensation  Extrinsic  Tangible, monetary and nonmonetary effects of compensation Types of CompensationTypes of Compensation  Direct compensation  The employer exchanges monetary rewards for work done.  Indirect compensation  Employer-provided benefits—like health insurance—that are provide employees for being a member of the organization.

7–3 Types of Compensation Base Pay SalarySalary WagesWages The basic monetary compensation that an employee receives, usually as a wage or salary. Payments calculated on the amount of time worked. Consistent payments made each period regardless of the number of hours worked in the period. Variable Pay Compensation linked to individual, team, or organizational performance. BenefitsBenefits Indirect reward: health insurance, life insurance, vacation pay, pension, etc.

7–4 Figure 7.1 Continuum of Compensation Philosophies

7–5 Compensation System Design Issues Compensation fairness and equityCompensation fairness and equity  Equity  External equity  Internal equity  Procedural justice  Distributive justice Market competitiveness and compensationMarket competitiveness and compensation  Meet the market strategy  Lag the market strategy  Lead the market strategy  Selecting a quartile

7–6 Compensation Fairness EquityEquity Distributive Justice Procedural Justice The perceived fairness between what a person does (inputs) and what the person receives (outcomes). Perceived fairness of the process and procedures used to make decisions about employees. Perceived fairness of the process and procedures used to make decisions about employees. Perceived fairness in the distribution of outcomes

7–7 Market Competitiveness and Compensation Lead the Market Lag the Market Meet the Market Paying for higher qualified, more productive workers. Attempting to balance employer costs and the need to attract and retain employees. Paying all that the firm can afford. Taking advantage of the abundant supply of potential employees in a loose labor market.

7–8 FLSA Employee Classifications Exempt EmployeesExempt Employees  Employees to whom employers are not required to pay overtime under the Fair Labor Standards Act. Non-exempt EmployeesNon-exempt Employees  Employees who must be paid overtime under the Fair Labor Standards Act.  Hourly  Salaried non-exempt

7–9 Figure 7-2 Determining Exempt Status Under the FLSA

7–10 Development of a Base Pay System Pay StructuresPay Structures  Pay surveys  Pay grades  Pay ranges

7–11 Development of a Base Pay System Valuing jobs with job evaluation methodsValuing jobs with job evaluation methods  Job evaluation: formal, systematic means to identify the relative worth of jobs within an organization.  Point method  Breaks jobs down into various compensable factors and places weights, or points, on them  Legal issues and job evaluation

7–12 Development of a Base Pay System Valuing jobs using market pricingValuing jobs using market pricing  Advantages of market pricing   Closely ties organizational pay levels to what is actually occurring in the market   Allows an employer to communicate to employees that the compensation system is truly “market linked”  Disadvantages of market pricing   pay survey data are limited or may not be gathered in methodologically sound ways   tying pay levels to market data can lead to wide fluctuations based on market conditions

7–13 Valuing Jobs Using Market Pricing Pay surveyPay survey  Collection of data on compensation rates for workers performing similar jobs in other organizations  Benchmark Job  Jobs found in many organizations Pay surveys and legal issuesPay surveys and legal issues  Employers avoid charges that they are “price fixing” wages

7–14 Using Pay Surveys MethodologyMethodology ParticipantsParticipantsBroad-basedBroad-based TimelinessTimeliness Survey Data Relevance Job Matches

7–15 Pay Structures Job FamilyJob Family  A group of jobs having common organizational characteristics. Common Pay StructuresCommon Pay Structures  Hourly and salaried  Office, plant, technical, professional, managerial  Clerical, information technology, professional, supervisory, management, and executive

7–16 Figure 7-3 Establishing Pay Structures

7–17 Figure 7-3 Establishing Pay Structures (cont.)

7–18 Pay Structures Pay GradesPay Grades  Groupings of individual jobs having approximately the same job worth  Using job evaluation points  Using market banding Pay RangesPay Ranges  Using the market line as a starting point, the employer can determine minimum and maximum pay levels for each pay grade  Broadbanding

7–19 Individual Pay Pay for Specific IndividualsPay for Specific Individuals  Setting a range for each pay grade gives flexibility by allowing individuals to progress within a grade.  A pay range allows managers to reward better performing employees.  Red-circled employee: an incumbent who is paid above the range  Green-circled employee: an individual who is paid below the range Pay CompressionPay Compression  Occurs when pay differences among individuals with different levels of experience and performance in the organization becomes small.

7–20 Figure 7-4 Example of Pay Grades and Pay Ranges

7–21 Figure 7-4 Example of Pay Grades and Pay Ranges (continued)

7–22 Determining Pay Increases Pay Adjustment MatrixPay Adjustment Matrix  Compa-ratio: The pay level divided by the midpoint of the pay range.

7–23 Standardized Pay Adjustments SenioritySeniority  Time spent in an organization or on a particular job that is used to determine eligibility for organizational rewards and benefits. Cost-of-Living Adjustments (COLA)Cost-of-Living Adjustments (COLA)  Adjustments are tied to changes in an economic measure (e.g., the Consumer Price Index). Across-the-Board IncreasesAcross-the-Board Increases  All employees get the same percentage pay increase Lump-Sum Increases (LSI)Lump-Sum Increases (LSI)  A one-time payment of all or part of a yearly pay increase that does not increase base wages.

7–24 Elements of Executive Compensation Annual Executive Incentives and Bonuses Executive Salaries Executive Benefits Executive Perquisites (Perks) Executive Compensation Performance Incentives: Long-Term versus Short-Term