Chapter Eleven Compensation System Development

Copyright © Houghton Mifflin Company. All rights reserved. 11–2 Chapter Outline Employee Satisfaction and Motivation Issues in Compensation Design Establishing Internal Equity: Job Evaluation Methods Establishing External Equity Establishing Individual Equity Legal Regulation of Compensation Systems Administering Compensation Systems The Issue of Comparable Worth

Copyright © Houghton Mifflin Company. All rights reserved. 11–3 Figure 11.1 Components of the Compensation System

Copyright © Houghton Mifflin Company. All rights reserved. 11–4 Employee Satisfaction and Motivation Issues in Compensation Design Equity Theory Satisfaction with Pay Designing Equitable Compensation Systems –Internal Equity –External Equity –Individual Equity

Copyright © Houghton Mifflin Company. All rights reserved. 11–5 Types of Equity Internal Equity: Relationship among jobs within a single organization External Equity: Comparisons of similar jobs in different organizations Individual Equity: Comparisons among individuals in the same job within the same organization

Copyright © Houghton Mifflin Company. All rights reserved. 11–6 Figure 11.2 Equity Theory

Copyright © Houghton Mifflin Company. All rights reserved. 11–7 Establishing Internal Equity: Job Evaluation Methods Job Ranking

Copyright © Houghton Mifflin Company. All rights reserved. 11–8 Figure 11.3 Job Evaluation Procedures Source: John M. Ivancevich, “Job Evaluation Procedures,” Foundations of Personnel, Copyright 1992 by Richard D. Irwin.

Copyright © Houghton Mifflin Company. All rights reserved. 11–9 Establishing Internal Equity: Job Evaluation Methods (cont’d) Job Grading or Classification Point Method –Compensable Factors

Copyright © Houghton Mifflin Company. All rights reserved. 11–10 Table 11.4 A Typical Point Plan Source: Richard Henderson, Compensation Management: Rewarding Performance, 5 th ed., © 1989, p Adapted by permission of Prentice-Hall, Inc., Englewood Cliffs, New Jersey.

Copyright © Houghton Mifflin Company. All rights reserved. 11–11 Establishing Internal Equity: Job Evaluation Methods (cont’d) Job Grading or Classification Point Method –Compensable Factors –Application to Jobs

Copyright © Houghton Mifflin Company. All rights reserved. 11–12 Table 11.5 Application of a Point System to Two Jobs

Copyright © Houghton Mifflin Company. All rights reserved. 11–13 Establishing Internal Equity: Job Evaluation Methods (cont’d) Job Grading or Classification Point Method –Compensable Factors –Application to Jobs –The Hay Plan

Copyright © Houghton Mifflin Company. All rights reserved. 11–14 Hay Factors Know-How Problem Solving (Mental Activity) Accountability

Copyright © Houghton Mifflin Company. All rights reserved. 11–15 Establishing Internal Equity: Job Evaluation Methods (cont’d) Factor Comparison Computerized Job Evaluation Results of Job Evaluation Job Grading or Classification Point Method –Compensable Factors –Application to Jobs –The Hay Plan

Copyright © Houghton Mifflin Company. All rights reserved. 11–16 Establishing External Equity Wage and Salary Surveys –Identifying Key Jobs –Selecting Organizations to Survey –Collecting Data Self-Surveys Online Surveys Government Surveys Interpreting the Data Avoiding Antitrust Pay Level Policy –Matching the Competition –Adapting a Lead Policy –Following a Lag Approach

Copyright © Houghton Mifflin Company. All rights reserved. 11–17 Figure 11.5: Pay Policies Over Time Source: Richard Henderson, Compensation Management: Rewarding Performance, 5 th ed., Copyright 1989, p Reprinted by permission of Prentice-Hall, Inc., Englewood Cliffs, N.J.

Copyright © Houghton Mifflin Company. All rights reserved. 11–18 Establishing Individual Equity Designing Pay Ranges –Establishing Pay Ranges Wage Ranges –Broadbanding –Above- and Below-Range Employees Setting Individual Pay –Seniority –Merit Pay –Skill Based Pay

Copyright © Houghton Mifflin Company. All rights reserved. 11–19 Figure 11.7 Illustration of a Typical Broadband

Copyright © Houghton Mifflin Company. All rights reserved. 11–20 Legal Regulation of Compensation Systems The Fair Labor Standards Act (FLSA) –Minimum Wage –Hours of Work Equal Pay Act (EPA) Other Laws Affecting Compensation

Copyright © Houghton Mifflin Company. All rights reserved. 11–21 Administering Compensation Systems Pay Secrecy Employee Participation Wage Compression Impact of Inflation All-Salaried Work Force Wage Concessions

Copyright © Houghton Mifflin Company. All rights reserved. 11–22 The Issue of Comparable Worth The Earnings Gap Legal and Judicial Developments Comparable Worth and Job Evaluation Alternatives Prospects for the Future

Copyright © Houghton Mifflin Company. All rights reserved. 11–23 Table 11.9 Women’s Earnings as a Percent of Men’s Source: U.S. Women’s Bureau and the National Committee on Pay Equity. (Available at:

Copyright © Houghton Mifflin Company. All rights reserved. 11–24 Review Employee Satisfaction and Motivation Issues in Compensation Design Establishing Internal Equity: Job Evaluation Methods Establishing External Equity Establishing Individual Equity Legal Regulation of Compensation Systems Administering Compensation Systems The Issue of Comparable Worth