1. COMPENSATION Part I

2. Chapter Objectives Describe the various forms of compensation.
Explain the concept of equity in financial compensation.
Identify the determinants of financial compensation.
Discuss compensation legislations
Describe factors that should be considered when the labor market is a determinant of financial compensation.

3. Compensation: An Overview
Compensation - Total of all rewards provided employees in return for services
Direct financial compensation - Pay received in the form of wages, salaries, bonuses, and commissions
Indirect financial compensation - All financial rewards not included in direct compensation
Nonfinancial compensation - Satisfaction a person receives from job itself or from work environment

4. Components of a Total Compensation Program External Environment Internal Environment
Financial
Non-Financial
Direct
Wages Salaries Commissions Bonuses
Indirect (Benefits)
Legally Required Benefits Social Security Unemployment Compensation Workers’ Compensation Family & Medical Leave
Voluntary Benefits Payment for Time Not Worked Health Care Life Insurance Retirement Plans Employee Stock Option Plans Supplemental Unemployment Benefits Employee Services Premium Pay Unique Benefits
The Job
Skill Variety Task Identify Task Significance Autonomy Feedback
Job Environment
Sound Policies Competent Employees Congenial Coworkers Suitable Status Symbols Working Conditions
Workplace Flexibility Flextime Compressed Work Week Job Sharing Flexible Compensation Telecommuting Part-time Work Modified Retirement

5. Equity in Financial Compensation
Equity - Fair pay treatment for employees
External equity - Employees are paid comparably to workers who perform similar jobs in other firms
Internal equity - Employees are paid according to relative value of their jobs within same organization

6. Equity in Financial Compensation (Continued)
Employee equity - Paid according to factors unique to employee, such as performance level or seniority
Team equity – Reward based on teams productivity

7. Primary Determinants of Individual Financial Compensation
The Organization Compensation Policies Organizational Politics Ability to Pay
The Employee Job Performance Merit Pay Variable Pay Competency-Based Pay Seniority Experience Organization Membership Potential Political Influence Luck
Job
Pricing
The Labor Market Compensation Surveys Expediency Cost of Living Labor Unions Society The Economy Legislation
Individual Financial Compensation
The Job Job Analysis Job Descriptions Job Evaluation Collective Bargaining

8. Compensation Policies
Pay leaders – pay higher wages and salaries
Market rate, or going rate – pay what most employers pay for same job
Pay followers – pay below market rate because poor financial condition or believe they do not require highly capable employees

9. The Labor Market as a Determinant of Financial Compensation
Compensation surveys
Expediency
Cost of living
Labor unions
Society
Economy
Legislation

10. Compensation Surveys What are other firms paying?
Geographic area of survey
Specific firms to contact
Jobs to include

11. Expediency There are times when compensation survey data is ignored
High tech environment
In some labor markets where managers must at times be left to their own devices

12. Cost of Living
When prices rise over a period of time and pay does not, real pay is actually lowered
Some firms’ index pay increases to the inflation rate

13. Labor Unions
Mandatory collective bargaining between management and unions as “wages, hours, and other terms and conditions of employment.”
Cost-of-living allowance
Unions may attempt to create, preserve, or even destroy pay differentials.

14. Society
Compensation often affects firm’s pricing of it goods and/or services
Consumers may be interested in compensation decisions

15. The Economy Affects financial compensation decisions
Depressed economy generally increases the labor supply
Cost of living often rises as the economy expands

16. Compensation Legislation
Fair Labor Standards Act of 1938, as Amended
Equal Pay Act of 1963

17. Davis-Bacon Act of 1931 First national law to deal with minimum wages
Federal construction contractors with projects over $2000 to pay at least prevailing wages in area

18. Fair Labor Standards Act of 1938, as Amended
Most significant law affecting compensation
Establishes minimum wage
Requires overtime pay and record keeping
Provides standards for child labor

19. Equal Pay Act of 1963
Prohibits employer from paying employee of one gender less than employee of opposite gender
Both employees must do work that is the same or substantially the same

20. The Job as a Determinant of Financial Compensation
Job itself continues to be a factor, especially in those firms that have internal pay equity as a primary consideration
Organizations pay for value they attach to certain duties, responsibilities, and other job-related factors such as working conditions

21. Job Evaluation
Firm determines the relative value of one job in relation to another
Ranking
Classification
Factor comparison

22. Ranking Method Simplest method Raters examine description of each job
Jobs arranged in order according to value

23. Classification Method
Define number of classes or grades to describe group of jobs
Compare job description with class description
Class description that most closely agrees with job description determines job classification

24. Factor Comparison Method
Mental requirements
Skills
Physical requirements
Responsibilities
Working conditions

25. Job Pricing Placing a dollar value on worth of a job
Pay grades - Grouping of similar jobs to simplify pricing jobs
Pay ranges - Minimum and maximum pay rate with enough variance between the two to allow for a significant pay difference
Broadbanding – Collapses many pay grades into a few wide bands or improve effectiveness
Adjusting pay rates - Overpaid and underpaid jobs

26. Pay Ranges for Pay Grades
Scatter Diagram of Evaluated Jobs Illustrating the Wage Curve, Pay Grades, and Pay Ranges
Average Pay per Hour (Current Rates or Market Rates)
$19.80 5
18.50 4
17.20 3
15.90
Wage Curve
Pay Ranges for Pay Grades 2
14.60
14.00 1
13.30
12.90
12.00
100
200
300
400
500
Evaluated Points 1 2 3 4 5
Pay Grades
Summary
Evaluated Points Pay Grade Minimum Midpoint Maximum
$ $ $

27. Broadbanding
Technique that collapses many pay grades (salary grades) into a few wide bands to improve organizational effectiveness
Lateral employee development
Develop employee skills and encourage team focus
Employee attention directed away from vertical promotional opportunities

28. Broadbanding and Its Relationship to Traditional Pay Grades and Ranges
Average Pay Per Hour
Grade 3
Grade 2
Band B
Grade 1
Band A
Low
High
Job Worth

29. Employee as a Determinant of Financial Compensation
Performance-based Pay
Skilled-based Pay
Competency-based Pay
Seniority
Experience
Potential
Political Influence
Luck

30. Skill-Based Pay
Compensates on basis of job-related skills and knowledge
Employees and departments benefit when employees obtain additional skills
Appropriate where work tends to be routine and less varied
Must provide adequate training opportunities or system becomes a demotivator

31. Performance-Based Pay
Merit pay - Pay increase given to employees based on their level of performance as indicated in the appraisal
Variable pay - Compensation based on performance (bonus)
Piecework – Employees paid for each unit they produce

32. Skill-Based Pay Compensates on basis of job-related skills and
knowledge
Employees and departments benefit when employees obtain additional skills
Appropriate where work tends to be routine and less varied
Must provide adequate training opportunities or system becomes a demotivator

33. Competency-Based Pay
Compensates on basis of demonstrated expertise

34. Seniority
Length of time an employee has been associated with the company, division, department, or job
Labor unions tend to favor seniority

35. Experience
Regardless of nature of job, very few factors have a more significant impact on performance than experience

36. Potential
Organizations do pay some individuals based on their potential
Many young employees are paid well because of their potential

37. Political Influence
Should not be used to determine financial compensation
To deny its existence would be unrealistic
A person's pull or political influence may sway pay and promotion decisions

38. Luck
“It certainly helps to be in the right place at the right time.”