Lecture 11: Compensation

Strategic Issues and Compensation  Why do dome employers pay more than other employers?  Why are different jobs within the same organization paid differently?  Why do different workers doing the same job get paid differently?  Why do employers get paid differently for doing the same work at different companies?

Compensation  The major goal or challenge of compensation experts is the efficient and equitable distribution of the returns for work.

Forms of Pay  Compensation or Pay refers to all forms of financial returns and tangible services and benefits employers receive as part of an employment relationship.

Pay Diagram  According to this diagram pay maybe in the form of cash (direct) or through benefits (indirect) and services.

Pay Diagram  This diagram, however, does not take into account intangible rewards such as verbal recognition, promotions, etc. While these are rewards, and should be incorporated some way or another, the value is ambiguous and therefore we will not discuss them at this point.

Pay Programs  Generally 4 types.

1. Base wage  Basic cash compensation paid for work performed.  Only reflects the value of the work itself and ignores differences in employee contributions.

Need to distinguish between salary and wage  Salary is used to refer to the compensation paid to those employees exempted from the FLSA. These employees do not receive overtime.

2. Merit Pay  Rewards past work behaviors and accomplishments.

3. Incentives  Also tie pay directly to performance. Can be long or short term.

4. Employee Services and Benefits Includes a variety of pay forms ranging from time away from work (vacations, jury duty, etc.), services (EAP’s, cafeterias, etc.), and protection (medical care, life insurance, pensions.)

A Pay Model -See overhead camera  Contains three basic components. The policies that form the foundations of the compensation system. The techniques that make up much of the mechanics of compensation management. The compensation objectives.

Compensation Objectives  Basic objectives include: 1. Efficiency -- 2 sides  Improving productivity. u Controlling labor costs.

Compensation Objectives Equity Fundamental theme of any pay system. ”A fair days pay for a fair days work” Notions of external equity, internal equity, and individual equity. Procedural equity. Do all the participants perceive the procedure for determining pay as fair.

Compensation Objectives Compliance Conforming to various state, local, and federal laws and regulations.

The four basic policy discussions  The pay model is based on Four basic policies that any employer must consider.

1. Internal Consistency or Equity.  Refers to comparisons among jobs or skill levels inside a single organization.  Essentially, the goal is to compare jobs and skills in terms of their relative contributions to the organization’s objectives.

2. External Competitiveness or Equity  Refers to how an employer positions its pay relative to what competitors are paying

When making decisions about pay, employers have several policy options.  Set pay levels higher than competitors hoping to attract the elite.  Offer lower pay but more overtime and benefits.  Offer lower pay but more job security.

3. Employee Contributions or Individual Equity  Refers to the relative emphasis placed on the performance and or seniority of people doing the same job or possessing the same skills.  Employers with strong pay for performance policies are likely to have elaborate merit and incentive systems.

4. Nature of Administration.  The first 3 policies could be well developed, but if it is not well administered, it will probably fail.

Compensation Administration Involves the Following:  Planning the elements of pay that should be included (base pay, incentives, benefits, etc.)  Evaluating how the system is operating.  Communicating with employees.  Judging whether the system is meeting the objectives.

Pay Techniques  The mechanics that tie the four basic policies to the pay objectives.

Job Evaluation Overview  The results of Job Analysis serves input for evaluating jobs and establishing a company pay structure.  Specifically, job evaluation is the systematic evaluation of job descriptions.

Major Decisions in Conducting Job Evaluation

1. Establish the purpose  It helps establish a pay structure that is internally consistent equitable to employees and consistent or equitable to employees and consistent with the goals of the company.

2. Single v. Multiple Plans  In many companies, multiple job evaluation plans are used. In general there is a plan for labor, sales, management., technical and professional, and clerical.

2. Single v. Multiple Plans...  The problem with multiple plans is that. It can build discrimination into the system. (i.e. Clerical vs.... labor, inside vs... outside) It prohibits the comparison of jobs in different pay plans. (i.e. for promotions and other employment decisions) Doesn’t allow for comparable worth to be assessed.

3. Choosing a job evaluation method  There are four general job evaluation methods. Basically a continuum of specificity.  Ranking-Classification- Factor comparison-Point factor

Compensable Factors  Most job evaluation systems rate or rank jobs on compensable factors or job characteristics that are regarded as contributing to job worth.  Where did the idea of compensable factors come from.

Compensable Factors... Equal Pay Act (1963) u See your handout booklet for some of the most commonly used factors. u Some plans use sub-factors to further define a factor. u (i.e. skill can be broken down into education, experience, training, and initiative.).

Point-Factor Method-Most popular job evaluation system.  Steps

1. Obtain job data

2. Select job evaluators

3. Select compensable factors  Two different committees 1. development-upper management. 2. evaluate-representative of jobs.  You can choose a standardized J.E. method like FES, Hay, etc. (see job evaluation methods in the Readings section) Generally 3-11 factors.

4. Define compensable factors  Once the factors are selected, clear definitions of each factor should be written.

5. Define Factor Scales  The committee decides how many degrees should be on the scale for a given factor or sub-factor.  There should be enough degrees to make meaningful distinctions among jobs. (i.e. Education 1-H.S., 2- 2 Year., 3-4 Year., 4-Masters)

6. Assign Point Values to Factors  First you have to decide how many total points to have.  One common way is to divide the highest salary by the lowest and multiply it by 100. (i.e. 10,000/1,000 x 100 = 1,000).  Another way is to assign a 12 to 15 pt. value to each degree.

7. Assigning points to degree levels within each factor. 1. One way is equal division of points. 2. Another is to rationally or statistically weight the degrees within each factor.

8. Write up Job Evaluation Manual  Documentation should include: 1. Rationale for factors chosen. 2. Rationale for factor weights. 3. Rationale for assigning points to the degrees. 4. A description of factors, sub- factors, and degrees.

9. Evaluate all jobs.

Assessing External Equity through Market Surveys  Identify competitors for labor  Identify key or benchmark jobs  Construct survey  Get agreement to participate  Send out survey  Calculate weighted averages

Weighted Averages...  Calculating the average by weighting each company response by the total number of incumbents in the job.  See example.

Constructing a Pay Plan  Use of regression analysis  For key jobs regress weighted market average on job evaluation points.  Use resulting regression equation to predict pay for all jobs.  The use of pay ranges.  The use of pay grades.