1. Chapter 13 Managing compensation
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2. Managing compensation
Objectives
List the major decision areas and concepts in employee compensation management.
Describe the major administrative tools used to manage employee compensation.
Explain the importance of competitive labour-market and product-market forces in compensation decisions.
Discuss the significance of process issues, such as communication in compensation management.
Describe new developments in the design of pay structures.
Explain the reasons for the controversy over executive pay.
Describe the regulatory framework for pay in Australia.
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3. Compensation: key terms
Pay structure
The relative pay of different jobs (job structure)
How much they are paid (pay level)
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4. Equity theory
People evaluate the fairness of their situations by comparing them with those of other people.
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5. Table 13.1 Pay structure concepts and consequences
Pay structure Focus of employee Consequences of
decision area Administrative tools pay comparisons equity perceptions
Pay level Market pay surveys External equity External employee movement
(attraction and retention of
quality employees); labour
costs; and employee attitudes
Job structure Job evaluation Internal equity Internal employee movement
(promotion and job rotation);
cooperation among employees;
and employee attitudes
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6. Job evaluation An administrative procedure used to measure job worth.
Job evaluation is used to design job structures.
Key concepts:
Distributive justice (also distributive fairness). The perception that rewards are distributed in relation to contribution.
Procedural justice (also procedural fairness). A concept of justice focusing on the methods used to determine the outcomes received.
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7. Market pressures Product-market competition Labour-market competition
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8. Market pay surveys Key questions to address:
Which employers should be included in the survey?
Which jobs are included in the survey?
If multiple surveys are used, how are all the rates of pay weighted and combined?
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9. Rate ranges Award restructuring (structural efficiency principle)
Key jobs and non-key jobs
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10. Developing a job structure— Table 13
Developing a job structure— Table 13.2 Example of a three-factor job evaluation system
Compensable factors
Job title Experience Education Complexity Total
Computer operator
Computer programmer
Systems analyst
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11. Developing a pay structure
Pay-policy line
A mathematical expression that describes the relationship between a job’s pay and its job evaluation points.
Pay grade
Jobs of similar worth or content grouped together for pay administration purposes.
Range spread
The distance between the minimum and maximum amounts in a pay grade.
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12. Table 13.5 Sample pay grade structure2 3 4 5
Minimum
Maximum
Midpoint
Job evaluation points range
Fortnightly pay rate range
100
150
200
250
300
350
$1740
$2648
$3555
$4463
$5370
$2175
$3310
$4444
$5579
$6713
$2610
$3971
$5333
$6694
$8056
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13. Monitoring compensation costs
Compa-ratio
An index of the correlation between actual and intended pay.
Grade compa-ratio =
Actual average pay for grade
Pay midpoint for grade
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14. Globalisation, geographic region and pay structures
Market pay structures can differ substantially across countries both in terms of their level and in terms of the relative worth of jobs.
Compared with the labour market in Frankfurt, markets in Budapest and Bangalore provide much lower levels of pay overall and much lower payoffs to skill, education and advancement.
These differences create a dilemma for global companies.
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15. Important processes in compensation
Participation
Communication
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16. Current challenges in compensation
Problems with job-based pay structures
Responses to these problems:
Delayering and banding
Paying the person: pay for skill, knowledge and competency
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17. Comparing the competitiveness of the Australian labour force
Average hourly labour costs (cash and benefits)
Instability of country differences in labour costs
Skill levels
Productivity
Non-labour considerations
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18. Table International comparisons of hourly compensation costs for production workers in manufacturing
Labour cost Labour cost Index
US$ adjusted for US =100
2002 current US rate
2002
Country
Australia
Brazil
Canada
Korea
Singapore
Spain
Taiwan
United Kingdom
United States
Source: Robi Bendorf, CPM, 2004, ‘International comparisons of hourly compensation costs for production workers in manufacturing’, Bendorf and Associates, viewed in June, 2004, at
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19. Executive pay in Australia
Accountability and relationship to organisational performance
Governance
Design and structure
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20. Figure 13.4 A comparison of CEO pay and stock-market-based indicators
Source: P.J. Holland, P.J. Dowling & P.A. Innes, CEO compensation in Australia: Is there a relationship between principles, policies and practices?, Asia Pacific Journal of Human Resources, 39(3), 2001, p. 50.
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21. Government regulation of compensation
Minimum wage
Wage laws
The reconstruction of wage determination
Restructuring and efficiency principle
Structural efficiency principle (Award restructuring)
Enterprise bargaining principle
The Australian Fair Pay Commission
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22. The Australian Fair Pay Commission (AFPC)
The AFPC is based on the United Kingdom’s Low Pay Commission (LPC).
The role of the LPC was initially to establish a national minimum wage in Britain (90 years after Australia).
The establishment of the AFPC was announced in May 2005 to, in effect, replace the Australian Industrial Relations Commission as the arbiter of federal wage rates including the minimum wage.
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23. Summary
Equity theory suggests that social comparisons are an important influence on how employees evaluate their pay.
Pay benchmarking surveys and job evaluation are two administrative tools widely used in managing the pay-level and job-structure components of the pay structure, which influence employee social comparisons.
(cont.)
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24. Summary (cont.)
The nature of pay structures is undergoing a fundamental change in many organisations.
How a new program is designed, decided on, implemented and communicated is perhaps just as important as its core characteristics.
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