1. OS 352 3/25/08 I. Compensation Systems (chapter 11) A. Types of pay B. Job evaluation and job structure. C. Market pricing. D. The big picture II. Syllabus Shift: A. Tues., 4/1. Compensation Ch. 12 and Exam II review. B. Pay secrecy discussion has been moved to Tues., 4/8, after Exam II. Read and bring to class: “When Salaries Aren’t Secret”

2. Designing a Compensation System [an art and a science] Incentives for computer bugs (Dilbert, p. 395) Teacher and principal cheating (p. 414)

3. Total Rewards All returns to ees, including: Monetary compensation Status and recognition Work design Job Characteristics Workload Social Interaction Advancement opportunities Work environment Hazards Colleagues

4. Total Compensation The complete monetary pay package for employees: Base pay Bonuses Benefits Services Stock

5. Forms of Cash Compensation Base wage or salary Across the board / Cost of living increase Performance-based Merit pay Lump sum bonus Individual incentive (e.g., commissions) Success-sharing plans Risk Sharing plans Attraction and retention bonuses

6. Pay System Goals  Support strategic objectives  Attract, retain, motivate  Fairness  Compliance

7. Pay Structure The pay policy resulting from job structure and pay level decisions. The relative pay for different jobs in the organization The average amount the organization pays for a particular job.

8. Job Evaluation An administrative procedure for measuring the relative internal worth of the organization’s jobs. Note that job evaluation is not the same thing as performance evaluation.

9. Two Common Job Evaluation Methods Ranking Method Compare one job with the others Simplest and quickest job evaluation approach Most useful for a small number of jobs May not capture important differences in jobs May appear arbitrary Point method Assigns a numeric score to a job based upon levels of compensable factors in job Highly stable, valid over time Defensible to ees, courts Requires much time, effort, resources

10. Compensable Factors T he characteristics of a job that the organization values and chooses to pay for. Examples:  Degree of responsibility  Years of schooling or experience  Discretion in performing work

11. The End Result: A Job Structure A ranking of jobs in the organization from most important to least important Why? Internal equity: the perceived fairness of the pay system w/in the firm Unique jobs New jobs 1. Pilot 2. Attorney 3. Crisis Manager 4. Flight attendant 5. Accountant I 6. Reservation agent, baggage handler 7. Administrative Assistant

12. External Equity / Competitiveness Defined: the organization’s pay rates relative to market rates. 3 strategic decisions related to external equity: 1) Lead, lag, or meet the market (competitive position) 2) Emphasis on external or internal systems. 3) Emphasis on product market or labor market competitors.

13. “The Market” No single wage exists in the market for a particular job. Instead, organizations look to estimate wages paid for a job by looking at the pay of... 1) Labor market competitors 2) Product market competitors

14. Market Pay Survey The systematic process of collecting and making judgments about the compensation paid by other employers. Public data Third-party surveys Company administered survey

15. Two Markets Labor Market Look at relevant labor market Look at alternative employers Note that differs by occupation and skill level Product Market Look at firms in primary industry Look at firms with similar technology Look at firms of similar size

16. Your Turn: Market Pricing Labor Market 1. 2. 3. Product Market 1. 2. 3. Name 3 labor market competitors (name the employers) and 3 product market competitors for the job of professor at Clarkson University.

17. Matching Internal and External Systems (creating a pay line) OLS Regression Y = B 1 X 1 + a Y = market pay information for each key job X 1 = job evaluation points or grade number, for each key job B 1 = slope of pay line a = intercept R 2 = fit of model; 0 … +1

18. Creating the Pay Structure Market Rank/gradewages 1. Admin. Assistant28000 3. Accountant37000 4. Flight Attendant40000 6. Attorney70000 7. Pilot68000

19. Terms You Should Know Total Compensation Merit Pay Job Evaluation Job Structure Market Pay Survey Pay Level Pay Structure

20. You Should be Able To … Describe how a base salary system is designed. Conduct a job evaluation and create a job structure. Describe the difference between product market and labor market competitors. Discuss strategic decisions involved in external competitiveness efforts.