Chapter 9 Managing Compensation

Learning Outcomes Distinguish a strategic compensation program from one that is non-strategic Determine how to design pay systems Estimate whether or not a pay system is consistent within the firm as well as comparable to industry standards and government laws Be able to design a compensation scorecard

Figure 9.1 - Compensation Components

Figure 9.2 - Compensation Alignment

Goals of Strategic Compensation Policy Compensation of employees in ways that enhance motivation and growth To reward employees’ past performance To remain competitive in the labor market To maintain salary equity among employees To mesh employees’ future performance with organizational goals To control the compensation budget To attract new employees To reduce unnecessary turnover

Pay-for-Performance Standard Standard by which managers tie compensation to employee effort and performance Refers to a wide range of compensation options Includes merit-based pay, bonuses, salary commissions, job and pay banding, team/group incentives, and gainsharing programs

Motivating Employees through Compensation Pay equity: Employee’s perception that compensation received is equal to the value of the work performed Distributive fairness - Motivation theory that explains how people respond to situations in which they feel they have received less/more than they deserve

Kinds of Pay Equity External equity People in similar jobs compare themselves to what others are making in different organizations External equity People compare themselves to peers in different jobs in the same organization Internal equity People compare themselves to others in their organization with the same job Individual equity

Bases for Compensation Hourly work Piecework Salaried employees Nonexempt employees Exempt employees

Figure 9.6 - Factors Affecting the Pay Mix

Important Terms in Pay Mix Consumer price index (CPI) Measure of the average change in prices over time in a fixed market basket of goods and services Escalator clauses Labor agreements clauses that provide for quarterly cost-of-living adjustments in wages, basing the adjustments on changes in the CPI Real wages Wage increases larger than rises in the CPI, that is, the real earning power of wages

Job Evaluation Systematic process of determining the relative worth of jobs in order to establish which jobs should be paid more than others within an organization Methods of comparison Rank the value of jobs from highest to lowest Classify jobs so they can be benchmarked internally and externally Award points to each job based on how much they are linked to organizational objectives

Wage and Salary Surveys Survey of the wages paid to employees of other employers in the surveying organization’s relevant labor market Labor market - Area from which employers obtain certain types of workers Collecting survey data HRIS and salary surveys Employer-initiated surveys

Wage Curve, Pay Grades, and Rate Ranges Curve in a scattergram representing the relationship between relative worth of jobs and pay rates Wage curve Groups of jobs within a particular class that are paid the same rate Pay grades Range of rates for each pay grade that may be the same for each grade or proportionately greater for each successive grade Red circle rates: Payment rates above the maximum of the pay range Rate ranges

Figure 9.7 - Freehand Wage Curve

Competence-Based Pay Pay based on an employee’s skill level, variety of skills possessed, or increased job knowledge Systems represent fundamental change in the attitude of management regarding: How work should be organized How employees should be paid for their work efforts Encourages employees to acquire training when new or updated skills are needed by an organization

Minimum Wage and Pay Compression Pay rate compression: Compression of pay between new and experienced employees caused by the higher starting salaries of new employees Differential between hourly workers and their managers Reasons for pay compression are market based than government based

Compensation Assessment Assessing the effectiveness of compensation system is important to linking compensation with strategy Measures Help the company detect potential compensation problems Make compensation decisions more transparent Improve the alignment of compensation decisions with organizational objectives

Compensation Assessment Compensation scorecard: Displays the results for all the measures that a company uses to monitor and compare compensation among internal departments or units Creates a comparative tool within the organization that can reinforce desired outcomes that are unique to the company’s strategy