© 2004 by Prentice Hall Terrie Nolinske, Ph.D Managing Compensation

© 2004 by Prentice Hall Terrie Nolinske, Ph.D HR Challenges What compensation practices are most appropriate for a firm? What (dis)advantages of compensation systems exist? On what is employee compensation based? How are compensation decisions affected by the legal system?

© 2004 by Prentice Hall Terrie Nolinske, Ph.D Total Compensation Package Quantifiable rewards employee gets for work done… base compensation, pay incentives indirect compensation and benefits

© 2004 by Prentice Hall Terrie Nolinske, Ph.D Total Compen $ ation Pay Incentives Indirect Compensation Benefits Base Compensation

© 2004 by Prentice Hall Terrie Nolinske, Ph.D Elements of a Compensation Plan 1. Internal vs. External Equity perceived fairness 2. Fixed vs. Variable Pay paid at fixed times via base salary or fluctuate based on criteria 3.Performance vs. Membership tie pay to individual or group contributions

© 2004 by Prentice Hall Terrie Nolinske, Ph.D Elements of Compensation Plan (cont’d) 4. Job vs. Individual Pay based on job or skill / knowledge 5. Egalitarianism vs. Elitism all have same plan or establish different plans 6.Below-Market vs. Above-Market Pay above-market level at market level below-market level

© 2004 by Prentice Hall Terrie Nolinske, Ph.D Elements of Compensation Plan (cont’d) 7.Monetary vs. Nonmonetary Awards motivate via money or job security 8.Open vs. Secret Pay know what others are paid or not 9.Centralization vs. Decentralization made in central location or delegated to unit managers

© 2004 by Prentice Hall Terrie Nolinske, Ph.D The Labor Market Model Supply of workers Demand for workers Number of Qualified Workers Wages

© 2004 by Prentice Hall Terrie Nolinske, Ph.D Percent of Salary in Form of Bonus and Long-term Income for Various Salary Brackets Over $750 $550- $750 $450- $550 $350- $450 $250- $350 $200- $250 $165- $200 $135- $165 $105- $135 $65- $105 $25- $65 Percent of base salary

© 2004 by Prentice Hall Terrie Nolinske, Ph.D Use Job-based Pay Policy When… job and technology are stable staff do not cover for one another training is required turnover is relatively low jobs are fairly standardized in industry

© 2004 by Prentice Hall Terrie Nolinske, Ph.D Use Individual-based Compensation When… firm has educated workforce firm is in uncertain environment collaboration occurs in organization limited mobility exists chances to learn new skills exist lost production cost high due to employee turnover / absenteeism

© 2004 by Prentice Hall Terrie Nolinske, Ph.D Pay Structure of Large Restaurant Developed Using Job-Based Approach JOBS # POSITIONS PAY6 GRADE 6Chef 2$ / hr GRADE 5Manager 1$ / hr Sous-Chef 1 GRADE 4Assistant Manager 2$ / hr Office Manager 1 GRADE 3General Cook 5$ / hr GRADE 2Server45$ / hr Cashier 4 GRADE 1Dishwasher 3$ / hr

© 2004 by Prentice Hall Terrie Nolinske, Ph.D Pay Schedule of Large Restaurant Designed Using Skill-Based Approach Creating new items for the menu! Find different uses for leftovers$23.00 /hr (e.g., hot dishes, buffets) Coordinate staff in manager absence Cook food following recipes$17.00 / hr Supervise kitchen help Prepare payroll Ensure adherence to standards Schedule servers / workstations$10.50 / hr Conduct inventory Organize work flow on restaurant floor

© 2004 by Prentice Hall Terrie Nolinske, Ph.D Pay Schedule of Large Restaurant Designed Using Skill-Based Approach Organize tables $7.50 / hr Take orders from customers Bring food to tables Assist kitchen with food prep Perform security checks Help with delivery Use dishwashing equipment $6.00 / hr Clean premises with disinfectants Clean and set up tables Perform routine kitchen chores (e.g., making coffee)

© 2004 by Prentice Hall Terrie Nolinske, Ph.D MAA National Position Evaluation Plan Factor1 st 2 nd 3 rd 4 th 5 th SKILL 1. Experience Initiative EFFORT 3. Physical demand Mental demand RESPONSIBILITY 5. Material or product Work of others

© 2004 by Prentice Hall Terrie Nolinske, Ph.D Hierarchy of Clerical Jobs in an Office 1 point 2 grade 3 wkly pay range Customer Service Rep3005$ Administrative Assistant2985 Secretary2304$ Accounting Clerk1753$ Senior Word Processor1603 Word Processor1252$ Payroll Clerk1202 Mail Clerk801$

© 2004 by Prentice Hall Terrie Nolinske, Ph.D Market Salary Data for Selected Benchmark Office Jobs Weekly Pay Percentile Benchmark Jobs25 th 50gh75 th Weekly Pay Average Customer Service Representative $400$500$650$495 Credit Clerk$400$450$550$455 Accounting Clerk$370$425$475$423 Word Processor$380$390$430$394 Clerk Typist$330$350$400$343

© 2004 by Prentice Hall Terrie Nolinske, Ph.D Drawbacks of Job-based Compensation Programs Uniqueness of firm not taken into account Subjective, arbitrary process Less appropriate at high levels of firm Wage and salary data obtained from market surveys are not definitive Employees’ perception of internal/external equity matter

© 2004 by Prentice Hall Terrie Nolinske, Ph.D Suggestions for Implementing Job-based Compensation Plans Think strategically Secure employee input Increase job range of pay and expand scope of responsibility Expand variable proportion of pay Establish dual-career ladders

© 2004 by Prentice Hall Terrie Nolinske, Ph.D Example of a Dual-Career Ladder BandManagerialIndividual Contributor 13President 12Executive VP 11VPExecutive Consultant 10Assistant VPSenior Consultant 9DirectorConsultant 8Senior ManagerSenior Adviser 7ManagerAdviser 6Senior Specialist 5Specialist 4Senior Technician 3Senior Administrative Support

© 2004 by Prentice Hall Terrie Nolinske, Ph.D Pay Systems and the Legal Environment Fair Labor Standards Act of 1938 The Equal Pay Act of 1963 The Internal Revenue Code

© 2004 by Prentice Hall Terrie Nolinske, Ph.D As an employee, many firm’s expect that you take a percent of the risk with them. Firms have moved away from fixed forms of compensation in favor of variable forms. No longer are there many jobs where your benefits and pay steadily climb. What do you think about this trend – how did it start, is it a good thing? Case