1. HR SPRING Managing Compensation 10-1

2. 10-2 Objectives:  Identify the compensation policies and practices that are most appropriate for a particular firm.  Weigh the strategic advantages and disadvantages of the different compensation options.  Establish a job-based compensation scheme that is internally consistent and linked to the labor market.  Understand the difference between a compensation system in which employees are paid for the skills they use and one in which they are paid of the job they hold.  Make compensation decisions that comply with the legal framework.

3. 10-3 Total Compensation The package of quantifiable rewards an employee receives for his or her labors. Includes three components: base compensation, pay incentives, and indirect compensation/benefits

4. 10-4 The Elements of Total Compensation Total Compensation Pay Incentives Indirect Compensation/ Benefits Base Compensation

5. 10-5 Direct financial compensation Indirect financial compensation Non- financial compensation TOTAL COMPENSATION  Praise  Self- esteem  Recognit ion  Benefits  Service s  Wages  Salaries  Bonuses  Commissi ons

6. 10-6 Compensation Policies: Criteria for Effectiveness  Adequate  Equitable  Balanced  Cost-effective  Secure  Incentive-providing  Acceptable to the employee

7. 10-7 External Influences on Compensation: Government Influences (Wage and Hour Regulations) PROVISIONS INCLUDE:  Minimum wage  Overtime (Exhibit 10-3)  Salaried or exempt (from overtime pay) employees  Hourly or nonexempt employees Fair Labor Standards Act (FLSA) of 1938 Child Labor Equal Pay Act of 1963

8. 10-8 External Influences on Compensation: Government Influences Earnings gap reduction u Nearly 3/4ths of reduction due to men’s earnings decline u Comparable worth (pay equity) An effort to close the earnings gap between men and women. Four exceptions: Merit Seniority Quality or quantity of production Or any other fact other than sex EQUAL PAY ACT OF 1963

9. 10-9 External Influences on Compensation: Labor Markets DOMESTIC LABOR FORCE ISSUES u Supply & demand conditions create differential pay levels u Increasing labor force diversity INTERNATIONAL LABOR FORCE ISSUES u Global supply and demand conditions u Global wage differentials  American employees working abroad  Employing foreign nationals in their countries  Foreign workers training or working in the U.S.

10. 10-10 The Nine Criteria for Developing a Compensation Plan 1.Internal versus External Equity Will the compensation plan be perceived as fair within the company, or will it be perceived as fair relative to what other employers are paying for the same type of labor? 2.Fixed versus Variable Pay Will compensation be paid monthly on a fixed basis —through base salaries —or will it fluctuate depending on such preestablished criteria as performance and company profits? 3.Performance versus Membership Will compensation emphasize performance and tie pay to individual or group contributions, or will it emphasize membership in the organization —logging in a prescribed number of hours each week and progressing up the organizational ladder?

11. 10-11 The Nine Criteria for Developing a Compensation Plan (cont.) 4.Job versus Individual Pay Will compensation be based on how the company values a particular job, or will it be based on how much skill and knowledge an employee brings to that job? 5.Egalitarianism versus Elitism Will the compensation plan place most employees under the same compensation system (egalitarianism), or will it establish different plans by organizational level and/or employee group (elitism)? 6.Below-Market versus Above-Market Compensation Will employees be compensated at below-market levels, at market levels, or at above-market levels?

12. 10-12 The Nine Criteria for Developing a Compensation Plan (cont.) 7.Monetary versus Nonmonetary Awards Will the compensation plan emphasize motivating employees through monetary rewards like pay and stock options, or will it stress nonmonetary rewards such as interesting work and job security? 8.Open versus Secret Pay Will employees have access to information about other workers’ compensation levels and how compensation decisions are made (open pay) or will this knowledge be withheld from employees (secret pay)? 9.Centralization versus Decentralization of Pay Decisions Will compensation decisions be made in a tightly controlled central location, or will they be delegated to managers of the firm’s units?

13. 10-13 The Labor Market Model Wage Number of Qualified Workers 0 W1W1 N1N1 Supply of Qualified Employees Demand for Employees

14. 10-14  Pacesetters in demands for pay and benefits  Can help determine wages even for non-unionized employees  Collective bargaining agreements can set wage and benefit levels  Tend to support seniority over merit-based wage increases External Influences on Compensation: Labor Unions

15. 10-15 Percent of Salary in the Form of Bonus and Long-term Income for Various Pay Salary Brackets Percent of Base Salary

16. 10-16 When to Use a Job-based Pay Policy  A job-based pay policy tends to work best in situations where: u Technology is stable u Jobs do not change often u Employees do not need to cover for one another frequently u Much training is required to learn a given job u Turnover is relatively low u Employees are expected to move up through the ranks over time u Jobs are fairly standardized within the industry

17. 10-17 Individual-based Compensation  Individual-based compensation programs are more suitable when: u The firm has a relatively educated workforce with both the ability and the willingness to learn different jobs u The company’s technology and organizational structure change frequently u Employee participation and teamwork are encouraged throughout the organization u Opportunities for upward mobility are limited u Opportunities to learn new skills are present u The costs of employee turnover and absenteeism in terms of lost production are high

18. 10-18 Compensation Decisions: Relative to Three Groups Same or similar jobs within the organization (Individual pay determination) Different jobs within the organization (Pay-structure) Similar jobs in other organizations (Pay-level)

19. 10-19 Compensation Decisions: Pay Surveys  Techniques used to collect local, regional, national or international compensation data  Sources for competitive data range from existing surveys to conducting your own  Pay survey issues include:  Usefulness of surveys  Who will be surveyed  The method used  Information gathered

20. 10-20 Compensation Decisions: Job Evaluation  Formal process for determining the relative worth of various jobs  Essential steps include  Involving employees  Selecting and weighing criteria (compensable factors)  Frequently used methods include  Job ranking  Classification or grading systems (See exhibit 10-7)  Point system (See exhibit 10-8)  Factor comparison

21. 10-21 Compensation Decisions: Job Evaluation  Formal process for determining the relative worth of various jobs  Essential steps include  Involving employees  Selecting and weighing criteria (compensable factors)  Frequently used methods include  Job ranking  Classification or grading systems (See exhibit 10-7)  Point system (See exhibit 10-8)  Factor comparison

22. 10-22 Contemporary Pay Classifications  Reduction of the number of job levels  Can result in fewer pay grades and greater worker flexibility  Reduction in the number of salary ranges  Creates a smaller number of broad salary ranges  More emphasis on basing salary increases on performance DELAYERING BROADBANDING

23. 10-23 Pay Structure of a Large Restaurant Developed Using a Job-Based Approach Jobs Number of Positions Pay GRADE 6 GRADE 5 GRADE 4 GRADE 3 GRADE 2 GRADE 1 Chef Manager Sous-Chef Assistant Manager Lead Cook Office Manager General Cook Short Order Cook Assistant to Lead Cook Clerk Server Hostess Cashier Kitchen Helper Dishwasher Janitor Busser Security Guard 2 1 2 1 5 2 1 45 4 2 3 2 6 2 $20.00-$31.00/hr. $11.50-$21/hr. $7.50-$12.00/hr. $6.50-$8.00/hr. $6.00-$7.00/hr. $5.50-$6.25/hr.

24. 10-24 Pay Schedule of a Large Restaurant Designed Using a Skill-Based Approach Skill s 543543 Create new items for menu Find different uses for leftovers (e.g., hot dishes, buffets) Coordinate and control work of all employees upon manager’s absence Cook existing menu items following recipe Supervise kitchen help Prepare payroll Ensure quality of food and adherence to standards Schedule servers and assign workstations Conduct inventory Organize work flow on restaurant floor $23.00/hr. $17.00/hr $10.50/hr PaySkill Block

25. 10-25 Pay Schedule of a Large Restaurant Designed Using a Skill-Based Approach (cont.) Skill s 2121 Greet customers and organize tables Take orders from customers Bring food to tables Assist in kitchen with food preparations Perform security checks Help with delivery Use dishwashing equipment Use chemicals/disinfectants to clean premises Use vacuum cleaner, mop, waxer, and other cleaning equipment Clean and set up tables Perform routine kitchen chores (e.g., making coffee) $7.50/hr. $6.00/hr. PaySkill Block

26. 10-26 The Key Steps in Creating Job-Based Compensation Plans © 1998 by Prentice Hall 1. Job Analysis Job Evaluation for Internal Equity 2. Job Descriptions Identify Compensable Factors 3. Job Specifications 4. Rate Worth of All Jobs Using a Predetermined System 5. Job Hierarchy 7. Establish Final Pay Policy Individual Pay Assignment 6. Classify Jobs by Grade Levels 1. Check Market Value Using Benchmark or Key Jobs Market Surveys for External Equity Within-Pay-Range Positioning Criteria for Individual Equity Criteria for Pay Positioning Within Range for Each Job Experience Seniority Performance © 2001 by Prentice Hall 10-26

27. 10-27 MAA National Position Evaluation Plan 1st Degree Skill 1. Knowledge 2. Experience 3. Initiative and Ingenuity Effort 4. Physical Demand 5. Mental or Visual Demand Responsibility 6. Equipment or Process 7. Material or Product 8. Safety of Others 9. Work of Others Job Conditions 10. Working Conditions 11. Hazards 14 22 14 10 5 10 5 Factor 2nd Degree 28 44 28 20 10 20 10 3rd Degree 42 66 42 30 15 30 15 4th Degree 56 88 56 40 20 40 20 5th Degree 70 110 70 50 25 50 25 Points Assigned to Factor Degrees

28. 10-28 Hierarchy of Clerical Jobs, Pay Grades, and Weekly Pay Range for a Hypothetical Office 1 Points 2 Grade 3 Weekly Pay Range 300 298 290 230 225 220 175 170 165 160 125 120 115 95 80 60 5432154321 $500-$650 $450-$550 $425-$475 $390-$430 $350-$400 Customer Service Rep. Executive Secretary/Admin. Asst. Senior Secretary Secretary Senior General Clerk Credit and Collection Accounting Clerk General Clerk Legal Secretary/Assistant Senior Word Processing Operator Work Processing Operator Purchasing Clerk Payroll Clerk Clerk-Typist File Clerk Mail Clerk Personnel Clerk Receptionist

29. 10-29 Market Salary Data for Selected Benchmark Office Jobs Weekly Pay Percentile 1. Customer Service Rep. 2. Credit and Collection Clerk 3. Accounting Clerk 4. Word Processing Operator 5. Clerk-Typist 25th Weekly Pay Average $400 $370 $380 $330 50th75th $500 $450 $425 $390 $350 $650 $550 $475 $430 $400 $495 $455 $423 $394 $343 Benchmark Jobs

30. 10-30 Drawbacks of Job-based Compensation Programs  Job-based compensation plans do not take into account the nature of the business and its unique problems.  The process of establishing job-based compensation plans is much more subjective and arbitrary than its proponents suggest.  Job-based systems are less appropriate at higher levels of an organization.  As the economy has become more service oriented and the manufacturing sector has continued to shrink, jobs have become more broadly defined.  Job-based compensation plans tend to be bureaucratic, mechanistic, and inflexible.  The job-evaluation process is biased against those occupations traditionally filled by women.  Wage and salary data obtained from market surveys are not definitive.  In determining internal and external equity, it is the employees’ perceptions of equity that count, not the assessments of job-evaluation committees.

31. 10-31 Suggestions for Implementing Job-based Compensation Plans  Think strategically in making policy decisions concerning pay.  Secure employee input.  Increase each job’s range of pay while expanding its scope of responsibility.  Expand the proportion of employees’ pay that is variable (bonuses, stock plans, and so forth).  Establish dual-career ladders for different types of employees so that moving into management ranks or up the organizational hierarchy is not the only way to receive a substantial increase in pay.

32. 10-32 Example of a Dual-Career Ladder ManagerialIndividual Contributor Band President Executive Vice President Assistant Vice President Director Senior Manager Manager 13 12 11 10 9 8 7 6 5 4 3 2 1 Executive Consultant Senior Consultant Consultant Senior Adviser Adviser Senior Specialist Specialist Senior Technician Senior Administrative Support, Technician Administrative Support, Senior Manufacturing Associate Clerical Support, Manufacturing Associate