1. Copyright Atomic Dog Publishing, 2004 Chapter 9 Determining Pay and Benefits

2. Copyright Atomic Dog Publishing, 2004 Outline 9-1 Gaining Competitive Advantage 9-2 HRM Issues and Practices 9-3 The Manager’s Guide

3. Copyright Atomic Dog Publishing, 2004 9-1 Gaining Competitive Advantage Linking pay and benefits to competitive advantage  Improving cost efficiency  Achieving legal compliance  Enhancing the success of recruitment efforts  Reducing morale and turnover problems

4. Copyright Atomic Dog Publishing, 2004 9-2 HRM Issues and Practices— Equity Theory Formulated by J. Stacy Adams People form equity beliefs based on two factors:  Inputs (I) -Refer to the perceptions that people have concerning what they contribute to the job (e.g., skill and effort)  Outputs (O) -Refer to the perceptions that people have regarding the returns they get (e.g., pay) for the work they perform Comparison person is referred to as one’s “referent other”

5. Copyright Atomic Dog Publishing, 2004 Equity Theory Inequity  Occurs when the ratio of outputs to inputs is perceived to be unequal  When employees’ O/I ratios are less than that of their referent others they feel they are being underpaid  When employees’ O/I ratios are greater, they feel they are being overpaid Equity  Occurs when the ratio of outputs to inputs is perceived to be equal

6. Copyright Atomic Dog Publishing, 2004 Impact of Equity Perceptions on Employee Behavior Responses to feeling underpaid  Decrease inputs  Escape the situation  Absenteeism  Turnover  Decrease amount of effort exerted on the job Responses to feeling overpaid  As satisfying as equity  May be somewhat dissatisfying -Not nearly as dissatisfying as underpayment

7. Copyright Atomic Dog Publishing, 2004 Establishing Pay Rates with an Organization Achieving internal consistency Achieving external competitiveness Recognizing employee contributions

8. Copyright Atomic Dog Publishing, 2004 Achieving Internal Consistency Standards for job evaluation  Consistency  Freedom from bias  Correctability  Representativeness  Accuracy of information Assigning jobs to pay grades

9. Copyright Atomic Dog Publishing, 2004 Point-Factor Method Steps Step 1: Select and carefully define the compensable factors that will be used to determine job worth Step 2: Determine the number of levels or degrees for each factor Step 3: Carefully define each degree level Step 4: Weight each compensable factor in terms of its relative importance Step 5: Assign point values to the degrees associated with each compensable factor

10. Copyright Atomic Dog Publishing, 2004 Assigning Jobs to Pay Grades Jobs are grouped into pay grades based on the total number of points received Job with the same or similar point values are grouped together Administrators use pay grades

11. Copyright Atomic Dog Publishing, 2004 Achieving External Competitiveness Collecting salary survey information  Provides information on pay rates offered by a firm’s competitors for certain benchmark jobs Establishing a pay policy  Stipulates how well a company will pay its employees relative to the market Establishing pay rates  Market rates identified by salary surveys are used for benchmark jobs  Non-benchmark job pay rates are calculated by a pay policy line -Pay policy line is figured out by using a statistical analysis of the benchmark job data

12. Copyright Atomic Dog Publishing, 2004 Recognizing Employee Contributions Equity is achieved when employees believe that their pay fairly reflects their contribution An organization must establish a pay range for each pay grade Each employee must then be placed within that range based on their contribution to the organization

13. Copyright Atomic Dog Publishing, 2004 Establishing a Pay Range Pay range  Specifies the minimum and maximum pay rates for all jobs within a grade Market rate usually serves as the midpoint of the range Different ranges have different spreads  Office and production work—10 to 25 percent  Professional and lower-level management—35 to 60 percent  Top-level management—60 to 120 percent

14. Copyright Atomic Dog Publishing, 2004 Skill-Based Pay Based on the assumption that workers who acquire additional skills can make a greater contribution to the organization Pay increases are given to employees who acquire new, job-related skills

15. Copyright Atomic Dog Publishing, 2004 Implementing a Skill-Based Pay Program Step 1: Identify tasks that need to be performed Step 2: Determine what skills are needed to perform the tasks Step 3: Develop tests or measures to determine whether an individual has learned the skills Step 4: Price each skill based on its value to the organization Step 5: Communicate to employees the skills they can learn and how much they will be paid for learning them

16. Copyright Atomic Dog Publishing, 2004 Skill-Based Pay Strengths & Weaknesses Strengths  Financial incentive to improve skills  Broadened skills which lead to a wider perspective  Better communication skills  Flexibility in staffing/scheduling  Commitment to the organization Weaknesses  Additional labor costs  May lead to inequity perceptions  Not cost effective if company does not use the acquired skills  Problems determining the skill levels of different employees  Possible administrative burden to develop additional training programs

17. Copyright Atomic Dog Publishing, 2004 Legal Constraints on Pay Practices Minimum wage and overtime Pay and discrimination Workers’ compensation Unemployment compensation Social security Insurance Pensions

18. Copyright Atomic Dog Publishing, 2004 Minimum Wage and Overtime Primary law regulating minimum wage and overtime  Fair Labor Standards Act (FLSA) Exempt employees  Not governed by minimum wage and overtime requirements  Employees consist of those holding executive, administrative, professional, and outside sales jobs Nonexempt employees  Governed by minimum wage and overtime requirements  Consists of all employees not considered exempt

19. Copyright Atomic Dog Publishing, 2004 Minimum Wage and Overtime Provisions Minimum wage provisions  Raised to $5.15 an hour by Congress in 1996  Training wage of $4.25 an hour for teenagers in the first 90 days of a job  If a states minimum wage level differs from the federal minimum wage level, the employer must pay the higher of the two rates Overtime provisions  Applies to nonexempt employees who work in excess of 40 hours/week  Overtime pay rate must be no less than 1.5 times the employees regular pay rate

20. Copyright Atomic Dog Publishing, 2004 Pay and Discrimination The Equal Pay Act The gender pay gap Comparable worth and the law

21. Copyright Atomic Dog Publishing, 2004 The Equal Pay Act Passed as an amendment to the FLSA in 1963 Prohibits sex discrimination in pay Unequal pay is allowed for equal work under circumstances that are based on differences in:  Seniority  Productivity  Merit  Or any factor other than sex

22. Copyright Atomic Dog Publishing, 2004 The Gender Pay Gap Women only earn $0.72 for every $1 that men earn at the EPA Those who espouse the “market factor” of the pay gap attribute the differences to the following factors:  Many more women than men work part-time  Women tend to stay in the workforce for shorter periods of time -This means that women have less seniority  Women voluntarily choose to enter lower paying career fields

23. Copyright Atomic Dog Publishing, 2004 Comparable Worth and the Law To win a comparable worth case:  Plaintiffs must prove disparate impact caused by intentional discrimination When arguing a comparable worth case under Title VII:  Employees must demonstrate that significant salary differences exist between workers in male- and female- dominated jobs of comparable worth Employers can still win a case if they can prove that pay differences are not the result of intentional discrimination

24. Copyright Atomic Dog Publishing, 2004 Workers’ Compensation Designed to provide financial protection for individuals injured on the job Compensation is provided for:  Medical expenses  Lost wages  Death, dismemberment, or permanent disability

25. Copyright Atomic Dog Publishing, 2004 Unemployment Compensation Provide income to unemployed individuals who have lost a job through no fault of their own Eligible workers receive weekly stipends for 26 weeks Disqualifications for receiving benefits:  Quitting one’s job without good cause  Being discharged for misconduct connected with work  Refusing suitable work while unemployed

26. Copyright Atomic Dog Publishing, 2004 Social Security Provides monthly benefits to retired workers who are at least 62 years of age, disabled workers, and their eligible spouses and dependents Financed by contributions made by the employee and matched by the employer Computed as a percentage of the employee’s earnings Act also provides Medicare coverage for anyone who is entitled to retirement benefits

27. Copyright Atomic Dog Publishing, 2004 Continuation of Health Benefits Consolidated Omnibus Budget Reconciliation Act (COBRA)  Provides continuation of health insurance coverage for a period of up to three years for employees who leave a company through no fault of their own  Employees are required to pay premiums at the company’s group rate

28. Copyright Atomic Dog Publishing, 2004 Insurance Health insurance Long-term disability (LTD) insurance Life insurance

29. Copyright Atomic Dog Publishing, 2004 Health Insurance Types of health insurance programs  Traditional  Health maintenance organizations (HMOs)  Preferred provider organizations (PPOs)  Point-of-service plans (POS)  Self-insured medical coverage

30. Copyright Atomic Dog Publishing, 2004 Long-Term Disability Insurance Provides replacement income for an employee who cannot return to work for an extended period of time due to illness or injury Program may be temporary or permanent Benefits are customarily set between 50 and 67 percent of that person’s income

31. Copyright Atomic Dog Publishing, 2004 Life Insurance Life insurance plans cover 94 percent of all full-time employees Premiums are usually paid by the employers Employee contributions, if required, are typically a set amount per $1,000 coverage based on age Employees are often given the opportunity to expand their coverage by purchasing additional insurance

32. Copyright Atomic Dog Publishing, 2004 Pensions May be the largest single benefit employees receive Defined benefit plans  Specify the amount of pension a worker will receive on retirement Defined contribution plans  Specify the rate of employer and employee contributions Employee Retirement Income Security Act of 1974  Ensures that employees will receive the pension benefits due to them, even if the company goes bankrupt or merges with another firm

33. Copyright Atomic Dog Publishing, 2004 Perquisites and Services Employee perquisites  Reimbursement for educational expenses  Discount on company products or services Employee services  Wellness programs  Employee assistance programs Executive perquisites  Stock options  Company cars

34. Copyright Atomic Dog Publishing, 2004 Flexible Benefit Plans Also known as cafeteria plans Allow employees to choose among various benefits and levels of coverage Employees may choose to receive cash or purchase benefits from among the options provided under the plan Such plans are now being offered by nearly one-third of all U.S. companies

35. Copyright Atomic Dog Publishing, 2004 Cost Containment Contains worker’s compensation costs Delete benefits Implement utilization review programs Choose the right health insurance carrier Increase the attractiveness of benefits

36. Copyright Atomic Dog Publishing, 2004 9-3 The Manager’s Guide— Compensation & the Manager’s Job Manager’s responsibilities regarding pay Manager’s responsibilities regarding benefits How the HRM department can help

37. Copyright Atomic Dog Publishing, 2004 Manager’s Responsibilities Regarding Pay Evaluating the worth of jobs Negotiating starting salaries Recommending pay raises and promotions Compliance with the FLSA Notifying the HRM department of job changes

38. Copyright Atomic Dog Publishing, 2004 Manager’s Responsibilities Regarding Benefits Dealing with employees on workers’ compensation leave Helping to contain unemployment compensation costs

39. Copyright Atomic Dog Publishing, 2004 How the HRM Department Can Help Pay-related responsibilities  Establish rates of pay  Establish procedures for administering pay plans  Ensuring compliance with antidiscrimination laws Benefit-related responsibilities  Selecting and administering the organization’s benefit options  Communicates benefits-related information to employees