1. 10-1 Copyright ©2010 Pearson Education, Inc. publishing as Prentice Hall Managing Compensation Chapter 10

2. 10-2 Copyright ©2010 Pearson Education, Inc. publishing as Prentice Hall  What is compensation?  Defined  Components  Designing a Compensation System  Compensation tools  Job-Based Compensation  Skill-Based Compensation  Legal Environment and Pay System Governance Chapter 10 Overview

3. 10-3 Copyright ©2010 Pearson Education, Inc. publishing as Prentice Hall  Total Compensation  Sum total of quantifiable rewards  Received for an employee’s labor What Is Compensation?  Pay Mix—proportion of each of:  Base compensation  Pay incentives  Indirect compensation (benefits) o Perquisites— “perks”

4. 10-4 Copyright ©2010 Pearson Education, Inc. publishing as Prentice Hall  Compensation System— want design that:  Enables firm to achieve its strategic objectives  Is molded to unique characteristics of firm  Nine features in compensation systems Compensation System Design  Equity— perceived fairness of the design  Internal—pay structure within a firm  External—what other employers are paying  Individual—of individual pay decisions

5. 10-5 Copyright ©2010 Pearson Education, Inc. publishing as Prentice Hall Compensation Systems: Equity  Distributive Justice Model  Perceptions of fairness within the firm  Compare themselves to other employees o What they bring and what they receive  Labor Market Model  Wage rate determined by supply and demand

6. 10-6 Copyright ©2010 Pearson Education, Inc. publishing as Prentice Hall Compensation System Design  Balancing Equity  To improve external equity  Use alternate forms of compensation  E.g. bonuses, add-ons, counteroffers

7. 10-7 Copyright ©2010 Pearson Education, Inc. publishing as Prentice Hall Compensation System Design  Fixed vs. Variable Pay  Performance vs. Membership

8. 10-8 Copyright ©2010 Pearson Education, Inc. publishing as Prentice Hall Job versus Individual Pay  Job-Based Pay— best when:  Jobs and technology are stable  Much training required to learn a given job  Turnover is relatively low  Individual-Based Pay— best when:  Company and environment is dynamic  Workforce is relatively educated  And willing and ability to learn different jobs  Participation and teamwork are encouraged  Are opportunities to learn new skills

9. 10-9 Copyright ©2010 Pearson Education, Inc. publishing as Prentice Hall  Egalitarian pay system— same pay system  For most employees  Reduces barriers between workers  Easier to deploy workers to other jobs Egalitarianism vs. Elitism  Elitist pay system— different pay systems  For employees or groups at different organizational levels  Result in more stable workforce

10. 10-10 Copyright ©2010 Pearson Education, Inc. publishing as Prentice Hall  Above vs. Below-market  Above-market—minimizes turnover  Below-market—save money Compensation System Design  Monetary vs. Nonmonetary rewards  Monetary—emphasis on achievement  Nonmonetary—reinforce organization commitment

11. 10-11 Copyright ©2010 Pearson Education, Inc. publishing as Prentice Hall  Open vs. Secret pay  Open—fosters trust and commitment o Forces managers to be fair administering  Secret—leads to dissatisfaction with pay Compensation System Design  Centralized vs. Decentralized pay Decisions  Centralized—maximizes internal equity o But doesn’t handle external equity issues well  Decentralized—better for large, diverse organizations

12. 10-12 Copyright ©2010 Pearson Education, Inc. publishing as Prentice Hall  Job-based compensation plans —three parts:  Achieving internal equity  Achieving external equity  Achieving individual equity Compensation Tools: Job-Based Plans  Job evaluation— to achieve internal equity  Six steps  Provide rational, orderly judgment of importance of each job to the firm

13. 10-13 Copyright ©2010 Pearson Education, Inc. publishing as Prentice Hall  Step 1: Conduct job analysis Steps to Achieving Internal Equity  Step 2: Write job description  Step 3: Determine job specifications  Characteristics needed to perform job  Step 4: Rate worth of all jobs  Point Factor System most commonly used  Uses Compensable Factors to rate jobs

14. 10-14 Copyright ©2010 Pearson Education, Inc. publishing as Prentice Hall  Step 5: Create a job hierarchy  Job listing by relative value Steps to Achieving Internal Equity  Step 6: Classify jobs by grade levels

15. 10-15 Copyright ©2010 Pearson Education, Inc. publishing as Prentice Hall Achieving External Equity  Step 1: Identify benchmark or key jobs  Check salary surveys  Step 2: Establish pay policy  Lead, lag, or pay market rate

16. 10-16 Copyright ©2010 Pearson Education, Inc. publishing as Prentice Hall Market Salary Data for Selected Benchmark Office Jobs

17. 10-17 Copyright ©2010 Pearson Education, Inc. publishing as Prentice Hall  Individual assigned pay within a range Achieving Individual Equity  Within-pay-range positioning criteria:  Previous experience  Seniority  Performance appraisal ratings

18. 10-18 Copyright ©2010 Pearson Education, Inc. publishing as Prentice Hall Compensation Tools: Job-Based Plans  Advantages:  Rational, objective, systematic  Relatively easy to administer  Drawbacks:  Do not account for nature of business  Job descriptions often too general  Wage and salary data not definitive  Job-based plans tend to be bureaucratic, mechanistic and inflexible

19. 10-19 Copyright ©2010 Pearson Education, Inc. publishing as Prentice Hall Compensation Tools: Skill-Based Plans  Skill mastery increases pay  Three types of skills:  Depth skills—specialized area  Breadth Skills—jobs/tasks in firm  Vertical skills—self-management  Workforce is more flexible  Higher training costs  Skills can become “rusty”

20. 10-20 Copyright ©2010 Pearson Education, Inc. publishing as Prentice Hall  The Fair Labor Standards Act (1938)  Exempt/Non-exempt employees  Minimum wage and Overtime The Legal Environment and Pay Systems Governance  The Equal Pay Act (1963)  Exemptions: seniority, job performance, or other factors (e.g. shift differential)  Comparable worth  Office of Federal Contract Compliance

21. 10-21 Copyright ©2010 Pearson Education, Inc. publishing as Prentice Hall  Compensation: base, incentives, and benefits Summary and Conclusions  Effective compensation systems:  Help firm to achieve strategic objectives  Suited to organization’s unique characteristics  Fits organization’s environment  Don’t forget:  Employee input in job evaluation process  Legal environment