1. PowerPoint Presentation by Charlie Cook Copyright © 2004 South-Western. All rights reserved.

2. 9–2 Objectives After studying this chapter, you should be able to: 1.Explain employer concerns in developing a strategic compensation program. 2.Indicate the various factors that influence the setting of wages. 3.Differentiate the mechanics of each of the major job evaluation systems. 4.Explain the purpose of a wage survey. 5.Define the wage curve, pay grades, and rate ranges as parts of the compensation structure.

3. Copyright © 2004 South-Western. All rights reserved.9–3 Objectives (cont’d) After studying this chapter, you should be able to: 6.Identify the major provisions of the federal laws affecting compensation. 7.Discuss the current issues of equal pay for comparable worth, pay compression, living-wage laws, and low wage budgets.

4. Copyright © 2004 South-Western. All rights reserved.9–4 Compensation Pay is a statement of an employee’s worth by an employer. Pay is a perception of worth by an employee.

5. Copyright © 2004 South-Western. All rights reserved.9–5 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 Presentation Slide 9–1

6. Copyright © 2004 South-Western. All rights reserved.9–6 Compensation Management and Other HRM Functions Pay rates affect selectivity SelectionSelection Selection standards affect level of pay required Pay can motivate training Training and Development Increased knowledge leads to higher pay Training and development may lead to higher pay Compensation Management A basis for determining employee’s rate of pay Presentation Slide 9–2 Aid or impair recruitment RecruitmentRecruitment Supply of applicants affects wage rates Low pay encourages unionization Labor Relations Pay rates determined through negotiation

7. Copyright © 2004 South-Western. All rights reserved.9–7 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.

8. Copyright © 2004 South-Western. All rights reserved.9–8 Significant Goals Driving Pay and Reward Changes Figure 9.1 Source: Towers Perrin and Duncan Brown, “Reward Strategies for Real: Moving from Intent to Impact,” WorldatWork Journal 10, no. 3 (Third Quarter 2001): 43. Used with permission.

9. Copyright © 2004 South-Western. All rights reserved.9–9 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?”

10. Copyright © 2004 South-Western. All rights reserved.9–10 Common Strategic Compensation Goals 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

11. Copyright © 2004 South-Western. All rights reserved.9–11 Strategic Compensation Policy Concerns The rate of pay within the organization and whether it is to be above, below, or at the prevailing community rate. The ability of the pay program to gain employee acceptance while motivating employees to perform to the best of their abilities. The pay level at which employees may be recruited and the pay differential between new and more senior employees. The intervals at which pay raises are to be granted and the extent to which merit and/or seniority will influence the raises. The pay levels needed to facilitate the achievement of a sound financial position in relation to the products or services offered.

12. Copyright © 2004 South-Western. All rights reserved.9–12 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.

13. Copyright © 2004 South-Western. All rights reserved.9–13 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?

14. Copyright © 2004 South-Western. All rights reserved.9–14 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.

15. Copyright © 2004 South-Western. All rights reserved.9–15 Relationship between Pay Equity and Motivation Figure 9.2 The greater the perceived disparity between my input/output ratio and the comparison person’s input/output ratio, the greater my motivation to reduce the inequity.

16. Copyright © 2004 South-Western. All rights reserved.9–16 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.

17. Copyright © 2004 South-Western. All rights reserved.9–17 Pay-for-Performance and Expectancy Theory Figure 9.3

18. Copyright © 2004 South-Western. All rights reserved.9–18 Motivating Employees through Compensation Pay Secrecy  An organizational policy requiring that compensation levels and decisions about employee compensation be kept secret and, usually, prohibiting employees from revealing their compensation information to anyone.  Can create employee misperceptions and distrust of compensation fairness and pay-for- performance standards.

19. Copyright © 2004 South-Western. All rights reserved.9–19 The Bases for Compensation Hourly Work  Work paid on an hourly basis. Piecework  Work paid according to the number of units produced. Salary Workers  Employees whose compensation is computed on the basis of weekly, biweekly, or monthly pay periods.

20. Copyright © 2004 South-Western. All rights reserved.9–20 The Bases for Compensation (cont’d) Nonexempt Employees  Employees covered by the overtime provisions of the Fair Labor Standards Act.  They must be paid time and one-half their regular pay for all work performed after forty regular hours of work.

21. Copyright © 2004 South-Western. All rights reserved.9–21 The Bases for Compensation (cont’d) Exempt employees  Employees who not covered in the overtime provisions of the Fair Labor Standards Act.  Managers, supervisors, and white-collar professional employees are exempted on the basis of their exercise of independent judgment and other criteria.

22. Copyright © 2004 South-Western. All rights reserved.9–22 Components of the Wage Mix WAGEMIX Labor Market Conditions Area Wage Rates Cost of Living Collective Bargaining Legal Requirements Compensation Strategy of the Organization Worth of the Job Employee’s Relative Worth Employer’s Ability to Pay Presentation Slide 9–3

23. Copyright © 2004 South-Western. All rights reserved.9–23 Factors Affecting the Wage Mix Figure 9.4

24. Copyright © 2004 South-Western. All rights reserved.9–24 The Wage Mix—Internal Factors 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. Relative Worth of an Employee  Rewarding individual employee performance Ability-to-Pay  Having the resources and profits to pay employees.

25. Copyright © 2004 South-Western. All rights reserved.9–25 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.

26. Copyright © 2004 South-Western. All rights reserved.9–26 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.

27. Copyright © 2004 South-Western. All rights reserved.9–27 The Wage Mix—External Factors Collective Bargaining  Escalator clauses in labor agreements that 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.

28. Copyright © 2004 South-Western. All rights reserved.9–28 Consumer Price Index (CPI) A measure of the average change in prices over time in a fixed “market basket” of goods and services

29. Copyright © 2004 South-Western. All rights reserved.9–29 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.

30. Copyright © 2004 South-Western. All rights reserved.9–30 Different Job Evaluation Systems Figure 9.5 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

31. Copyright © 2004 South-Western. All rights reserved.9–31 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.

32. Copyright © 2004 South-Western. All rights reserved.9–32 Paired-Comparison Job Ranking Table Figure 9.6 Directions: Place an X in the cell where the value of a row job is higher than that of a column job.

33. Copyright © 2004 South-Western. All rights reserved.9–33 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.

34. Copyright © 2004 South-Western. All rights reserved.9–34 Point System  A quantitative job evaluation procedure that determines the relative value of a job by the total points assigned to it.  Permits jobs to be evaluated quantitatively on the basis of factors or elements—compensable factors—that constitute the job. Point Manual  A handbook that contains a description of the compensable factors and the degrees to which these factors may exist within the jobs.

35. Copyright © 2004 South-Western. All rights reserved.9–35 Point Values for Job Factors of The American Association of Industrial Management HRM 2 1ST2ND3RD4TH5TH FACTORSDEGREEDEGREEDEGREEDEGREEDEGREE Skill 1. Education1428425670 2. Experience22446688110 3. Initiative and ingenuity1428425670 Effort 4. Physical demand1020304050 5. Mental or visual demand510152025 Responsibility 6. Equipment or process510152025 7. Material or product510152025 8. Safety of others510152025 9. Work of others510152025 Job Conditions 10. Working conditions1020304050 11. Hazards510152025 Source: Reproduced with permission of the American Association of Industrial Management, Springfield, Mass.

36. Copyright © 2004 South-Western. All rights reserved.9–36 Factor Comparison System  A job evaluation system that permits the evaluation process to be accomplished on a factor-by-factor basis by developing a factor comparison scale.  The compensable factors of a job evaluated are compared against the compensable factors of key jobs within the organization that serve as the job evaluation scale.

37. Copyright © 2004 South-Western. All rights reserved.9–37 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  They are important to employees and the organization.  They vary in terms of job requirements.  They have relatively stable job content.  They are used in salary surveys for wage determination. Presentation Slide 9–4

38. Copyright © 2004 South-Western. All rights reserved.9–38 Job Evaluation for Management Positions Hay Profile Method  Job evaluation technique using three factors— knowledge, mental activity, and accountability—to evaluate executive and managerial positions.

39. Copyright © 2004 South-Western. All rights reserved.9–39 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.

40. Copyright © 2004 South-Western. All rights reserved.9–40 Collecting Survey Data Outside Sources of Data  Bureau of Labor Statistics (BLS)  National Compensation Survey  State and local wage surveys  Online survey data

41. Copyright © 2004 South-Western. All rights reserved.9–41 Collecting Survey Data 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.

42. Copyright © 2004 South-Western. All rights reserved.9–42 The Wage Curve Wage Curve  A curve in a scattergram representing the relationship between relative worth of jobs and wage rates. Pay Grades  Groups of jobs within a particular class that are paid the same rate. Rate Ranges  A range of rates for each pay grade that may be the same for each grade or proportionately greater for each successive grade.

43. Copyright © 2004 South-Western. All rights reserved.9–43 Freehand Wage Curve Figure 9.7

44. Copyright © 2004 South-Western. All rights reserved.9–44 Single Rate Structure Figure 9.8

45. Copyright © 2004 South-Western. All rights reserved.9–45 Wage Structure with Increasing Rate Ranges Figure 9.9 Presentation Slide 9–5

46. Copyright © 2004 South-Western. All rights reserved.9–46 The Wage Curve (cont’d) Competence-based Pay, (also skill-based pay or knowledge-based pay)  Compensation for the different skills or increased knowledge employees possess rather than for the job they hold in a designated job category. Red Circle Rates  Payment rates above the maximum of the pay range. Broadbanding  Collapses many traditional salary grades into a few wide salary bands.

47. Copyright © 2004 South-Western. All rights reserved.9–47 Davis-Bacon Act 1931 Davis-Bacon Act 1931 Required minimum wage, prevailing wage rates, 1½ overtime premium payments by federal contractors. Walsh-Healy Act 1936 Walsh-Healy Act 1936 Required overtime payments after 8 daily or 40 regular work hours for workers on federal contracts. Fair Labor Standards Act (FLSA) 1938 Fair Labor Standards Act (FLSA) 1938 Interstate commerce clause used to cover workers except agricultural and exempted (managerial) employees, child labor prohibited. Government Regulation of Compensation (Federal Wage Laws)

48. Copyright © 2004 South-Western. All rights reserved.9–48 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-wage Budgets  Current wage budgets reflect the general trend toward tight compensation cost controls.

49. Copyright © 2004 South-Western. All rights reserved.9–49 Significant Compensation Issues Living-Wage Laws  Require contractors who work for local governments or private employers that receive government subsidies or tax breaks pay employees an income above the federal poverty level of $18,100 for a family of four—an hourly wage of more than $8 an hour. Low-wage Budgets  Current wage budgets reflect the general trend toward tight compensation cost controls.

50. Copyright © 2004 South-Western. All rights reserved.9–50 Salary Budgets by Type of Employee, 1991–2002 Figure 9.10 Source: Reprinted from 2001–2002 Total Salary Increase Budget Survey with permission from WorldatWork, 14040 N. Northsight Blvd., Scottsdale, AZ 85260; phone (877) 951-9191; fax (480) 483-8352; www.worldatwork.org. © 2002 WorldatWork. Unauthorized reproduction or distribution is strictly prohibited.