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Compensation Pay is a statement of an employee’s worth by an employer. Pay is a perception of worth by an employee.

Total Compensation DirectDirectIndirectIndirectBonusesBonuses GainsharingGainsharing Security Plans Pensions Security Plans Pensions Employee Services Educational assistance Recreational programs Employee Services Educational assistance Recreational programs CommissionsCommissions Wages / Salaries Insurance Plans Medical Medical Dental Dental Life Life Insurance Plans Medical Medical Dental Dental Life Life Time Not Worked Vacations Vacations Breaks Breaks Holidays Holidays Time Not Worked Vacations Vacations Breaks Breaks Holidays Holidays

Strategic Compensation Planning Links the compensation of employees to the mission, objectives, philosophies, and culture of the organization. Serves to mesh the monetary payments made to employees with specific functions of the HR program in establishing a pay-for-performance standard. Seeks to motivate employees through compensation.

Linking Compensation to Organizational Objectives Value-added Compensation Evaluating the individual components of the compensation program (pay and benefits) to see if they advance the needs of employees and the goals of the organization. “How does this compensation practice benefit the organization?” “Does the benefit offset the administrative cost?”

Common Strategic Compensation Goals 1. To reward employees’ past performance 2. To remain competitive in the labor market 3. To maintain salary equity among employees 4. To mesh employees’ future performance with organizational goals 5. To control the compensation budget 6. To attract new employees 7. To reduce unnecessary turnover

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

Designing a Pay-for-Performance System How will performance be measured? How will monies to be allocated for compensation increases. Which employees will be eligible? How will payouts be made? How often will payouts occur? How large will the payouts be? Will employees perceive the rewards as valued?

Motivating Employees through Compensation Pay Equity (also Distributive Fairness) An employee’s perception that compensation received is equal to the value of the work performed. A motivation theory that explains how people respond to situations in which they feel they have received less (or more) than they deserve. Individuals form a ratio of their inputs to outcomes in their job and then compare the value of that ratio with the value of the ratio for other individuals in similar jobs.

Relationship between Pay Equity and Motivation Doing More and Receiving Less Doing the Same and Receiving the Same Doing Less and Receiving More The greater the perceived disparity between my input/output ratio and the comparison person’s input/output ratio, the greater the motivation to reduce the inequity.

Expectancy Theory and Pay Expectancy Theory A theory of motivation that holds that employees should exert greater work effort if they have reason to expect that it will result in a reward that they value. Employees also must believe that good performance is valued by their employer and will result in their receiving the expected reward.

Pay-for-Performance and Expectancy Theory

Motivating Employees through Compensation Pay Secrecy An organizational policy prohibiting employees from revealing their compensation information to anyone. Creates misperceptions and distrust of compensation fairness and pay-for-performance standards. Arguments against secrecy: Knowledge of base pay is the strongest predictor of pay satisfaction, which is highly associated with work engagement Knowledge of base pay more strongly predicts pay satisfaction than does the actual amount of pay received by employees.

Factors Affecting the Wage Mix

The Wage Mix—Internal Factors Employer’s Compensation Strategy Setting organization compensation policy to lead, lag, or match competitors’ pay. Worth of a Job Establishing the internal wage relationship among jobs and skill levels. Employee’s Relative Worth Rewarding individual employee performance Employer’s Ability-to-Pay Having the resources and profits to pay employees.

The Wage Mix—External Factors Labor Market Conditions Availability and quality of potential employees is affected by economic conditions, government regulations and policies, and the presence of unions. Area Wage Rates A firm’s formal wage structure of rates is influenced by those being paid by other area employers for comparable jobs.

The Wage Mix—External Factors Cost of Living Local housing and environmental conditions can cause wide variations in the cost of living for employees. Inflation can require that compensation rates be adjusted upward periodically to help employees maintain their purchasing power.

The Wage Mix—External Factors Collective Bargaining Escalator clauses in labor agreements provide for quarterly upward cost-of-living wage adjustments for inflation to protect employees’ purchasing power. Unions bargain for real wage increases that raise the standard of living for their members. Real wages are increases larger than rises in the consumer price index; that is, the real earning power of wages.

Job Evaluation Systems Job Evaluation The systematic process of determining the relative worth of jobs in order to establish which jobs should be paid more than others within an organization.

Different Job Evaluation Systems JOB AS JOB PARTS BASIS FOR A WHOLE OR FACTORS COMPARISON (NONQUANTITATIVE)(QUANTITATIVE) Job vs. job Job ranking Factor comparison system system Job vs. scale Job classification Point system system SCOPE OF COMPARISON

Job Evaluation Systems Job Ranking System Oldest system of job evaluation by which jobs are arrayed on the basis of their relative worth. Disadvantages Does not provide a precise measure of each job’s worth. Final job rankings indicate the relative importance of jobs, not extent of differences between jobs. Method can used to consider only a reasonably small number of jobs.

Paired-Comparison Job Ranking Table Directions: Place an X in the cell where the value of a row job is higher than that of a column job.

Job Evaluation Systems Job Classification system A system of job evaluation in which jobs are classified and grouped according to a series of predetermined wage grades. Successive grades require increasing amounts of job responsibility, skill, knowledge, ability, or other factors selected to compare jobs.

Work Valuation Methods Work Valuation A job evaluation system that seeks to measure a job’s worth through its value to the organization. Jobs are be valued relative to financial, operational, or customer service objectives of the organization. Considers that work should be valued relative to the business goals of the organization rather than by an internally applied point-factor job evaluation system. Work valuation serves to direct compensation dollars to the type of work pivotal to organizational goals.

The Compensation Structure Wage and Salary survey A survey of the wages paid to employees of other employers in the surveying organization’s relevant labor market. Helps maintain internal and external pay equity for employees. Labor Market The area from which employers obtain certain types of workers.

Collecting Survey Data Outside Sources of Data Bureau of Labor Statistics (BLS) National Compensation Survey State and local wage surveys Online survey data Problems with Surveys They are not always compatible with the user’s jobs The user cannot specify what specific data to collect.

Collecting Survey Data (cont’d) Conducting Employer-initiated Surveys Select key jobs. Determine relevant labor market. Select organizations. Decide on information to collect: wages/ benefits/ pay policies. Compile data received. Determine wage structure and benefits to pay.

Characteristics of Key Jobs Key Jobs Jobs that are important for wage-setting purposes and are widely known in the labor market. Characteristics of Key Jobs 1. They are important to employees and the organization. 2. They contain a large number of positions. 3. They have relatively stable job content. 4. They have the same job content across many organizations. 5. They are acceptable to employees, management, and labor as appropriate for pay comparisons.

Significant Compensation Issues Equal Pay for Comparable Worth The concept that male and female jobs that are dissimilar, but equal in terms of value or worth to the employer, should be paid the same. Wage-Rate Compression Compression of pay differentials between job classes, particularly the pay differentials between hourly workers and their managers. Low-Salary Budgets Current wage budgets reflect the general trend toward tight compensation cost controls.