1. Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall Managing Compensation 10-1 Chapter 10

2. Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall Chapter 10 Objectives  Identify the compensation policies and practices that are most appropriate for a particular firm.  Weigh the strategic advantages and disadvantages of the different compensation options.  Establish a job-based compensation scheme that is internally consistent and linked to the labor market. 10-2

3. Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall Chapter 10 Objectives  Understand the differences between a compensation system in which employees are paid for the skills they use and one in which they are paid for the job they hold.  Make compensation decisions that comply with the legal framework. 10-3

4. Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall What Is Compensation?  Total Compensation  Sum total of quantifiable rewards  Received for an employee’s labor 10-4  Pay Mix—proportion of each of:  Base compensation  Pay incentives  Indirect compensation (benefits)  Perquisites— “perks ”

5. Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall Compensation System Design  Compensation System should:  Enable the firm to achieve its strategic objectives  Be molded to unique characteristics of firm  Incorporate the nine features in compensation systems 10-5  Equity— perceived fairness of the design  Internal—pay structure within a firm  External—what other employers are paying  Individual—of individual pay decisions

6. Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall Compensation Systems: Equity Distributive Justice Model Perceptions of fairness within the firm Compare themselves to other employees What they bring and what they receive 10-6  Labor Market Model  Wage rate determined by supply and demand

7. Copyright ©2012 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 10-7

8. Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall Compensation System Design  Fixed vs. Variable Pay 10-8  Performance vs. Membership

9. Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall Job versus Individual Pay  Job-Based Pay is best when:  Jobs and technology are stable  Training is required to learn a given job  Turnover is relatively low 10-9  Individual-Based Pay is best when:  Company and environment are dynamic  Workforce is relatively educated  Workforce is able & willing to learn different jobs  Participation and teamwork are encouraged  Opportunities to learn new skills are available.

10. Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall Egalitarianism vs. Elitism  Egalitarian pay system:  Same system for most employees  Reduces barriers between workers  Easier to deploy workers to other jobs 10-10  Elitist pay system:  Different pay systems for employees or groups at different organizational levels  Result in more stable workforce

11. Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall Compensation System Design  Above vs. Below-market  Above-market—minimizes turnover  Below-market—save money 10-11  Monetary vs. Nonmonetary rewards  Monetary—emphasis on achievement  Nonmonetary—reinforce organization commitment

12. Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall Compensation System Design  Open vs. Secret pay  Open—fosters trust and commitment  Secret—leads to dissatisfaction with pay 10-12  Centralized vs. Decentralized pay Decisions  Centralized—maximizes internal equity  Decentralized—better for large, diverse organizations

13. Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall Compensation Tools: Job-Based Plans  Job-based compensation plans :  Achieving internal equity  Achieving external equity  Achieving individual equity 10-13  Job evaluation— achieve internal equity  Six steps  Provide rational, orderly judgment of importance of each job to the firm

14. Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall Steps to Achieving Internal Equity  Step 1: Conduct job analysis 10-14  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

15. Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall Steps to Achieving Internal Equity  Step 5: Create a job hierarchy  Job listing by relative value 10-15  Step 6: Classify jobs by grade levels

16. Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall Achieving External Equity  Step 1: Identify benchmark or key jobs  Check salary surveys 10-16  Step 2: Establish pay policy  Lead, lag, or pay market rate

17. Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall Achieving Individual Equity  Individual assigned pay within a range 10-17  Within-pay-range positioning criteria:  Previous experience  Seniority  Performance appraisal ratings

18. Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall Compensation Tools: Job-Based Plans  Advantages:  Rational, objective, systematic  Relatively easy to administer 10-18  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. Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall Compensation Tools: Skill-Based Plans  Skill mastery increases pay 10-19  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. Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall The Legal Environment and Pay Systems Governance  The Fair Labor Standards Act (1938)  Exempt/Non-exempt employees  Minimum wage and Overtime 10-20  The Equal Pay Act (1963)  Exemptions: seniority, job performance, or other factors (e.g. shift differential)  Comparable worth  Office of Federal Contract Compliance

21. Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall Summary and Conclusions  Compensation: base, incentives, and benefits 10-21  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

22. Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 10-22 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Printed in the United States of America.