1 Compensation Paul L. Schumann, Ph.D. © 2011 by Paul L. Schumann. All rights reserved.

2 Equity Issues External equity External equity Internal equity Internal equity Equity Theory Equity Theory My situation is fair if:My situation is fair if:

3 Market-Based Pay System Doesn’t use internal job evaluation Doesn’t use internal job evaluation Use market pay data directly Use market pay data directly Use pay data collected by others (compare multiple reliable and valid sources)Use pay data collected by others (compare multiple reliable and valid sources) (problem: broad, match by job title) (problem: broad, match by job title) (sources and participants?) (sources and participants?) (good) (good) (good at cleaning data) (good at cleaning data) (good) (good) (good) (good) (info on pay differentials by region) (info on pay differentials by region) pational_Employment_Statistics.aspx (match on job descriptions, not just titles) pational_Employment_Statistics.aspx (match on job descriptions, not just titles) pational_Employment_Statistics.aspx pational_Employment_Statistics.aspx directory.google.com/Top/Business/Human_Resources/Compensation_and_Benefi ts/Compensation/?tc=1 directory.google.com/Top/Business/Human_Resources/Compensation_and_Benefi ts/Compensation/?tc=1 directory.google.com/Top/Business/Human_Resources/Compensation_and_Benefi ts/Compensation/?tc=1 directory.google.com/Top/Business/Human_Resources/Compensation_and_Benefi ts/Compensation/?tc=1 Use pay data you collect yourselfUse pay data you collect yourself

Market-Based Pay Systems Advantages Easier to explain & understand than Point- Factor Method Easier to explain & understand than Point- Factor Method Competitive focus Competitive focus Reduce administrative burdens Reduce administrative burdens Puts the Compensation Analyst on solid ground in pay discussions Puts the Compensation Analyst on solid ground in pay discussions Disadvantages You can’t market price every job You can’t market price every job Room for abuse of the statistics Room for abuse of the statistics You get what you pay for – good surveys cost money You get what you pay for – good surveys cost money You need to participate in the surveys, which require expertise You need to participate in the surveys, which require expertise May require a culture shift from internal equity to the market May require a culture shift from internal equity to the market 4

5 Point-Factor Pay System Define compensable factors Define compensable factors Perform job evaluation Perform job evaluation Select benchmark jobs Select benchmark jobs Get market pay data for benchmark jobs Get market pay data for benchmark jobs Estimate pay policy lines Estimate pay policy lines Use pay policy lines to determine pay for all jobs (directly or pay grades) Use pay policy lines to determine pay for all jobs (directly or pay grades)

6 Internal vs. External Conflicts Example: Example: Suppose market pay has been $12 per hour for a particular jobSuppose market pay has been $12 per hour for a particular job We have employees at $12 We have employees at $12 When we go to hire a new employee, we discover the market now pays $13When we go to hire a new employee, we discover the market now pays $13 We hire the new employee at $13 We hire the new employee at $13 What do you do with the existing employees who are still at $12?What do you do with the existing employees who are still at $12?

7 Internal vs. External Conflicts Example: Example: Internal: Job evaluation determines VP- Marketing & VP-IT have the same value to the organizationInternal: Job evaluation determines VP- Marketing & VP-IT have the same value to the organization External: Market pay of VP-IT is higher than market pay of VP-MarketingExternal: Market pay of VP-IT is higher than market pay of VP-Marketing Option 1: Pay both at VP-IT rateOption 1: Pay both at VP-IT rate Option 2: Pay both at VP-Marketing rateOption 2: Pay both at VP-Marketing rate Option 3: Pay VP-IT more than VP-MrktOption 3: Pay VP-IT more than VP-Mrkt

8 Incentive Pay Theories Reinforcement theory Reinforcement theory Expectancy theory Expectancy theory Effort  Performance  RewardsEffort  Performance  Rewards Valence: Reward (incentive pay) must be valued Valence: Reward (incentive pay) must be valued Instrumentality: Must have strong link between performance & rewards Instrumentality: Must have strong link between performance & rewards Expectancy: Must have strong link between effort & performance Expectancy: Must have strong link between effort & performance Agency theory Agency theory

9 Incentive Pay Systems Merit pay Merit pay Incentive pay bonus Incentive pay bonus Individual employee incentive bonusIndividual employee incentive bonus Group incentive bonusGroup incentive bonus Profit sharing bonus Profit sharing bonus Stock ownership Stock ownership Stock optionsStock options ESOPESOP Gain sharing bonus Gain sharing bonus Skill based pay Skill based pay

10 Employee Benefits Mandatory social insurance Mandatory social insurance Social SecuritySocial Security Benefit types: retirement, disability, family, survivors, & Medicare Benefit types: retirement, disability, family, survivors, & Medicare Unemployment InsuranceUnemployment Insurance Workers’ CompensationWorkers’ Compensation

11 Employee Benefits Private group insurance Private group insurance Medical insuranceMedical insurance Types: Types: Fee for serviceFee for service Preferred Provider Plan (PPO)Preferred Provider Plan (PPO) Health Maintenance Organization (HMO)Health Maintenance Organization (HMO) Plan design elements: Plan design elements: DeductibleDeductible Co-paysCo-pays Co-insuranceCo-insurance

12 Employee Benefits Private group insurance (cont’d.) Private group insurance (cont’d.) Disability insuranceDisability insurance Pension plansPension plans Regulation: ERISA Regulation: ERISA Types: Types: Defined benefit planDefined benefit plan Defined contribution planDefined contribution plan Vesting Vesting

13 Employee Benefits Other benefits Other benefits Pay for time not workedPay for time not worked Child careChild care Employee wellness programsEmployee wellness programs Flexible spending accounts (flex benefits, cafeteria benefits) Flexible spending accounts (flex benefits, cafeteria benefits)