1. Total Rewards & Compensation MN 301 – Human Resource Management Craig W. Fontaine, Ph.D. Pine Manor College Fall 2014

2. Total Rewards and Compensation Total rewards: Monetary and non-monetary rewards provided to attract, motivate, and retain employees Strategic decisions that guide the design of compensation practices: Legal compliance with all applicable laws and regulations Cost-effectiveness for the organization Internal and external equity for employees

3. Nature of Total Rewards and Compensation Optimal mix of compensation components Performance enhancement for the organization Performance recognition and talent management for employees Enhanced recruitment, involvement, and retention of employees Optimal mix of compensation components Performance enhancement for the organization Performance recognition and talent management for employees Enhanced recruitment, involvement, and retention of employees

4. Legal Constraints On Pay Systems  Fair Labor Standards Act (FLSA) - Primary federal law affecting compensation which is enforced by the Wage and Hour Division of the U.S. Department of Labor  Provisions focus on the areas covering:  Minimum wage  Limits on the use of child labor  Overtime provisions (exempt and nonexempt statuses)

5. Areas Under FSLA  Minimum wage - Set by FLSA to be paid to a broad spectrum of covered employees  Congressional action is the only way to change it  Child labor provisions - FLSA set the minimum age for employment with unlimited hours at 16 years  For hazardous occupations, the minimum is 18 years of age  Individuals 14 to 15 years old may work outside school hours with certain limitations

6. Components of Compensation ComponentsDescription Tangible rewardsElements of compensation that can be quantitatively measured and compared between organizations Intangible rewards Elements of compensation that cannot be as easily measured or calculated Base payBasic compensation that an employee receives, usually as a wage or salary WagesPayments calculated directly from the amount of time worked by employees SalaryConsistent payments made each period regardless of the number of hours worked Variable payCompensation linked directly to individual, team, or organizational performance BenefitIndirect reward given to an employee or group of employees as part of membership in the organization

7. Total Rewards Components

8. Elements of Total Rewards Source: Adapted from WorldatWork (http://www.worldatwork.org).

9. Determining Exempt Status

10. Additional Laws Affecting Compensation  Prevailing wage : An hourly wage determined by a formula that considers the rate paid for a job by majority of the employers in the appropriate geographic area  Garnishment : A court order that directs an employer to set aside a portion of an employee’s wages t o pay a debt owed to a creditor

11. Continuum of Compensation Philosophies

12. Strategic Compensation Decisions Communicating pay philosophy - Helps employees recognize: Value of the total reward package How their job performance might affect their compensation

13. Joint Responsibilities Compensation responsibilities HR specialists develop and administer the organizational compensation system They ensure pay practices comply with all legal requirements Line managers evaluate employee performance and participate in pay decisions

14. Payroll Administration Assure compliance with compensation laws To maintain positive employee relations Payroll staff report to: HR function Accounting function Liability for legal compliance remains with the company Even if the payroll process is outsourced

15. Motivation Theories and Compensation Expectancy theory: Employees’ motivation is based on the probability that: Their efforts will lead to an expected level of performance that is linked to a valued reward

16. Figure 11.7 - Expectancy Theory

17. Motivation Theories and Compensation Equity theory: Individuals judge fairness in compensation by comparing their inputs and outcomes against the inputs and outcomes of referent others Referent others - Workers that the individual uses as a reference point to make these comparisons

18. Equity Theory Source: Adams, 1965.* *Adapted from John Stacey Adams, J. S. (1965). “Inequity in social exchange.” Advances in Experimental Social Psychology. Volume 62, 1965, 335–343.

19. Compensation Fairness and Equity External equity Internal equity Procedural Justice Distributive Justice Pay secrecy vs. openness

20. Compensation Quartile Strategies

21. Market Competitive Compensation Used when the employer is experiencing financial difficulties and when an abundance of workers is available Lag-the-Market Strategy Aggressive approach that enables a company to attract and retain sufficient workers with the required capabilities and be more selective when hiring Lead-the-Market Strategy A ttempts to balance employer cost pressures and the need to attract and retain employees by providing compensation levels that meet the market for the employer’s jobs Match-the-Market Strategy

22. Selecting a Quartile  Deciding which quartile position to target for pay structures is a function of many considerations:  Financial resources available  Competitiveness pressures  Market availability of employees with different capabilities

23. Competency-Based Pay  Rewards individuals for the capabilities they demonstrate and acquire  In knowledge-based pay (KBP) or skill-based pay (SBP) systems employees:  Start at a base level of pay  Receive increases as they learn to do other jobs  Gain additional skills and knowledge  Become more valuable to the employer

24. Compensation System Design Issues Team How to develop compensation programs that support the team concept Individual How to compensate individuals whose performance may be a result of team efforts and achievements Individual versus Team Rewards

25. Staffing Categories for International Assignees at Multinational Enterprise (MNE) Source: Adapted from McPhail, Fisher, Harvey, & Moeller, 2012 and Isidor, Schwens, & Kabst, 2011.

26. Compensating Expatriates Maintain an expatriate’s standard of living in the home country Home-Country-Based Approach Compensate the expatriate at the same level as workers from the host country Host-Country-Based Approach

27. Compensation Administration Process

28. Valuing Jobs with Job Evaluation Methods Job evaluation: Formal, systematic means used to identify the relative worth of jobs within an organization Compensable factor: Job value commonly present throughout a group of jobs within an organization Derived from job analysis Reflect the nature of different types of work performed in the organization

29. Job Evaluation Methods Point factor Method Ranking method Classification method Factor- comparison method

30. Market Pricing Use of market pay data to identify the relative value of jobs based on what other employers pay for similar jobs Identifying relevant market pay data for jobs that are good matches with the employer’s: Jobs Geographic considerations Company strategies and philosophies about desired market competitiveness levels

31. Job Evaluation Methods Advantages Disadvantages Ties organizational pay levels to the external job market, without internal job evaluation distortion Communicates to employees that the compensation system is market linked Relies on market survey data Specific job may differ from a matching job in the survey Market data’s scope is a concern Tying pay levels to market data can lead to wide fluctuations

32. Pay Surveys Collection of data on compensation rates for workers performing similar jobs in other organizations Benchmark jobs: Jobs found in many organizations that can be used for the purposes of comparison Internet-based pay surveys

33. Using Pay Surveys Survey Data Relevance and Validity Participants Broad-based Timeliness Job matches Details provided Methodology

34. Pay Surveys and Legal Issues Conditions to be met by organizations to participate in surveys: Must be administered by a third party Data must be more than three months old Minimum of five employers must participate in the survey No single employer’s data may be worth more than 25 percent of the total All data must be aggregated and stripped of any identifying information

35. Pay Grades Groupings of individual jobs having approximately the same job worth Market line: Graph line that shows the relationship between job value as determined by: Job evaluation points Pay survey rates Market banding: Grouping jobs into pay grades based on similar market survey amounts

36. Pay Ranges Each pay grade pay level can be determined by making the market line the midpoint line of the new pay structure Broadbanding: Practice of using fewer pay grades with much broader pay ranges than in traditional compensation systems

37. Market Pay Line and Job Evaluation Points

38. Individual Pay Red-circled employees: Current jobholder who is paid above the range set for the job Green-circled employees: Incumbent who is paid below the range set for the job Pay compression: Situation in which pay differences among individuals with different levels of experience and performance in the organization becomes small

39. Approaches to Provide Employees With Performance-based Increases Targeting high performers - Focuses on providing the top- performing employees with higher pay raises Pay adjustment matrix - Reflects an employee’s upward movement in a firm Factors considered: Employee’s level of performance as rated in an appraisal Employee’s position in the pay range

40. Pay Adjustment Matrix Source: Adapted from Payscale’s 2012 Compensation Best Practices report.

41. Standardized Pay Adjustments Standardized Pay Increases Seniority Cost-of-Living Adjustments (COLA) Across-the- Board Increases Lump-Sum Increases (LSI)

42. Compensation Challenges