1. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc. All rights reserved. 10 - 1

2. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc. All rights reserved. 10 - 2 Compensation: An Overview chapter 10

3. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc. All rights reserved. 10 - 3 Compensation Deals with every type of reward individuals receive in exchange for performing organizational tasks Major cost of doing business Chief reason why most individuals seek employment An exchange relationship

4. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc. All rights reserved. 10 - 4 Financial Compensation Direct Financial Compensation Consists of the pay an employee receives in the form of: wages salaries bonuses commissions Indirect Financial Compensation Consists of all financial rewards not included in direct financial compensation – i.e., benefits: pensions insurance paid time off employee services

5. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc. All rights reserved. 10 - 5 Objective of Compensation To create a system of rewards that is equitable to the employer and employee alike The desired outcome is an employee who is: Attracted to the work Motivated to do a good job for the employer

6. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc. All rights reserved. 10 - 6 A Compensation system should be: (* focus of this chapter) Adequate* Equitable* Balanced Cost-effective Secure Incentive- providing* Acceptable to the employee

7. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc. All rights reserved. 10 - 7 Labor Market Economy Government Unions External Influences on Compensation

8. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc. All rights reserved. 10 - 8 Compensation and an International Labor Force Issues that affect the compensation strategies of organizations competing in a global market: Global wage differentials verging on the extreme Moving American employees to foreign locations Employing local (foreign) managers and workers Moving foreign workers to the United States for training or work assignments

9. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc. All rights reserved. 10 - 9 Government Influences: Wage Controls and Guidelines: (1 of 2) Wage Stabilization Act (1942) Defense Production Act (1950) Economic Stabilization Act (1970)

10. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc. All rights reserved. 10 - 10 Government Influences: Wage Controls and Guidelines: (2 of 2) Wage freezes – forbid wage increases Wage controls – limit the size of wage increases Wage guidelines – voluntary limits on wage increases

11. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc. All rights reserved. 10 - 11 Government Influences: Wage and Hour Regulations Fair Labor Standards Act (FLSA) of 1938 minimum wage overtime exempt workers nonexempt workers child labor recordkeeping requirements Equal Pay Act of 1963

12. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc. All rights reserved. 10 - 12 Equal Pay Act of 1963 Established the concept of equal pay for equal work Prohibits wage differentials based on gender between men and women performing essentially the same work in organizations skill effort responsibility working conditions

13. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc. All rights reserved. 10 - 13 Comparable Worth Attempts to prove that employers systematically discriminate by paying women less than their work is intrinsically worth, versus what they pay men who work in comparable (equally valuable) positions – and to remedy this situation.

14. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc. All rights reserved. 10 - 14 Civil Rights Act (1964) Age Discrimination Act (1967) Federal Wage Garnishment Act (1970) Davis-Bacon Act (1931) Service Contract Act (1965) Walsh-Healy Act (1936) Government Influence: Other Pay Legislation

15. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc. All rights reserved. 10 - 15 Internal Influences on Compensation Organization Size Organization Age Labor Budget Who Makes Compensation Decisions

16. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc. All rights reserved. 10 - 16 Pay and Motivation Motivation – set of attitudes and values that predisposes a person to act in a specific, goal-directed manner: the direction of behavior (working to reach a goal) the strength of behavior (how hard or strongly the individual will work)

17. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc. All rights reserved. 10 - 17 Social Comparison Theories Expectancy Theory Reinforcement Theories Needs Theories Herzbergs Two-Factor Theory Theories of Motivation

18. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc. All rights reserved. 10 - 18 Pay and Employees Satisfaction Pay Satisfaction – refers to an employees liking for or dislike of the employers compensation package (including pay and benefits) Lawlers Model – the distinction between the amount employees receive and the amount they think others are receiving is the immediate cause of pay satisfaction or dissatisfaction

19. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc. All rights reserved. 10 - 19 Pay dissatisfaction is a function of six important judgments: 1. A discrepancy between what employees want and what they receive 2. A discrepancy between a comparison outcome and what they get 3. Past expectations of receiving more rewards 4. Low expectations for the future 5. A feeling of deserving or being entitled to more than they are getting 6. A feeling that they are not personally responsible for poor results

20. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc. All rights reserved. 10 - 20 Pay and Employees Productivity Studies indicate that if pay is tied to performance, the employee produces a higher quality and quantity of work The key to making compensation systems more effective is to be sure that they are directly connected to expected behaviors

21. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc. All rights reserved. 10 - 21 Compensation Decisions (1 of 3) Pay-Level Decision Examines pay relative to employees working on similar jobs in other organizations Objective is to keep the organization competitive in the labor market Pay survey is the major tool used in this decision

22. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc. All rights reserved. 10 - 22 Compensation Decisions (2 of 3) Pay-Structure Decision Examines pay relative to employees working on different jobs within the organization Involves setting a value on each job within the organization relative to all other jobs Job evaluation is the approach used

23. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc. All rights reserved. 10 - 23 Compensation Decisions (3 of 3) Individual Pay Determination Examines pay relative to employees working on the same job within the organization

24. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc. All rights reserved. 10 - 24 Pay-Level Strategies High-Pay Strategy Low-Pay Strategy Comparable-Pay Strategy

25. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc. All rights reserved. 10 - 25 Factors Affecting the Choice of Pay Strategy The motivation and attitudes held by management The ethical and moral attitude of management The degree to which an organization can attract and retain personnel The organizations ability to pay

26. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc. All rights reserved. 10 - 26 Pay Surveys Techniques and instruments used to collect data about compensation paid to employees in: a geographic area an industry an occupational group Obtaining valid, reliable information about pay is critical to creating a compensation system that supports corporate goals

27. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc. All rights reserved. 10 - 27 Government Sources Professional and Trade Organizations Surveys Conducted by Other Organizations Surveys by Journals Sources of Pay Surveys

28. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc. All rights reserved. 10 - 28 Critical Issues Determining the Usefulness of Pay Surveys: 1. The jobs covered 2. Who will be surveyed 3. The method used 4. The information gathered

29. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc. All rights reserved. 10 - 29 Pay Structure Decision An internal pay hierarchy Based on a systematic comparison between the worth of one job and the worth of another Job Evaluation – the formal process by which the relative worth of various jobs in the organization is determined for pay purposes

30. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc. All rights reserved. 10 - 30 Comparison of Job Evaluation Systems Comparison BasisNon-Quantitative Comparison (Job as Whole) Quantitative Comparison (Parts of Factors of Jobs) Job versus jobJob rankingFactor comparison Job versus scaleJob grading or classification Point system

31. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc. All rights reserved. 10 - 31 Degrees of Factor Example of Evaluation Points for Insurance Clerical Job (500-point system)

32. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc. All rights reserved. 10 - 32 PAY Job Evaluation Points 100150200 250 300 350 monthly salary (000) 8765432187654321 I II III IV V Pay Classes Pay Curve Pay Classes and Pay Curve

33. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc. All rights reserved. 10 - 33 PAY Job Evaluation Points 80120160 200 240 280 320 monthly salary ($000) 8765432187654321 40 I II III IV V VI VII Pay Classes Pay Class Graph with Range of Pay

34. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc. All rights reserved. 10 - 34 Delayering and Broadbanding Delayering A reduction of the total number of jobs Results in a flatter job structure Can increase flexibility Employees can move among a wider range of jobs without adjusting pay with each move Broadbanding Collapses multiple salary grades and ranges into a few wide bands The number of salary ranges is significantly reduced Creates a smaller number of broad salary ranges Places more emphasis on basing salary increases on individual performance

35. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc. All rights reserved. 10 - 35 Summary (1 of 2) The objective of the compensation function is to create a system of rewards that is equitable to the employer and employee alike Compensation should be adequate, equitable, cost-effective, secure, incentive-providing, and acceptable to the employee The pay-structure decision involves comparing jobs within the organization to determine their relative worth

36. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc. All rights reserved. 10 - 36 Summary (2 of 2) Determining the worth of a job is difficult because it involves measurement and subjective decisions Using systematic job evaluation procedures is one way to determine net worth