1. Chapter 10: Developing an Overall Approach to Compensation Jackson and Schuler © 2003 South-Western College Publishing. All rights reserved. Eighth edition

2. © 2003 South-Western College Publishing. All rights reserved.10–2 Chapter Outline  Total Compensation  The Strategic Importance of Total Compensation  Role of the External Environment  Involving the HR Triad in Managing Total Compensation  Establishing the Value of Jobs  Using Market Data to Set Pay Rates  Designing the Internal Pay Structure

3. © 2003 South-Western College Publishing. All rights reserved.10–3 Chapter Outline (cont’d)  Balancing Internal and External Equity  Compensation in Context of Globalization

4. © 2003 South-Western College Publishing. All rights reserved.10–4 Total Compensation System MonetaryNonmonetary OrganizationMembership Individual or Team Attributes Job or Position Mandatory & voluntary insurance Mandatory & voluntary insurance Company status Alt. work arrangements Company status Alt. work arrangements Performance-, skill- or tenure- based pay Performance-, skill- or tenure- based pay Recognition Career opportunities Recognition Career opportunities Wages, salary or shift pay Wages, salary or shift pay Status, task enjoyment, social rewards Status, task enjoyment, social rewards

5. © 2003 South-Western College Publishing. All rights reserved.10–5 Compensation within the HR System Other HR Activities FairnessFairness Job AnalysisJob Analysis RecruitmentRecruitment Global Environment Organizational Environment Objectives for Total Compensation Communicate ValuesCommunicate Values Support ObjectivesSupport Objectives Attract, retain, motivateAttract, retain, motivate Contain costsContain costs Total Compensation: Base pay – Performance-based pay - Benefits Key Design Choices for Base Pay Pay mixPay mix Job vs skill- basedJob vs skill- based How involve mgrs, employeesHow involve mgrs, employees Relevant labor marketRelevant labor marketOutcomes AttitudesAttitudes SkillsSkills BehaviorBehavior PerformancePerformance AdvancementAdvancement RetentionRetention Evaluate and Revise

6. © 2003 South-Western College Publishing. All rights reserved.10–6 Pay Mixes for the Stages of the Organizational Life Cycle Innovation, attract key contributors HighHigh Stock Bonus Stock Options (Broad Participation) Stock Options (Broad Participation) Below market level Recruit, Train ModerateModerate Cash Bonus Stock Options (Limited participation) Stock Options (Limited participation) At market level Below market level HR Management Focus Risk Profile Short-Term Incentives Long-Term Incentives Base Salary Benefits Start-UpGrowth

7. © 2003 South-Western College Publishing. All rights reserved.10–7 Pay Mixes for the Stages of the Organizational Life Cycle (cont’d) Retention, Consistency Low Profit Sharing Cash Bonus Stock Purchase At or above market level level Cutting back, cost control Moderate to High Unlikely Unlikely At or below market level level MaturityDecline HR Management Focus Risk Profile Short-Term Incentives Long-Term Incentives Base Salary Benefits

8. © 2003 South-Western College Publishing. All rights reserved.10–8 The Strategic Importance of Total Compensation  Three important objectives:  Attracting and retaining the talent required for sustainable competitive advantage  Focusing the energy of employees on implementing the organization’s competitive strategy  Controlling costs

9. © 2003 South-Western College Publishing. All rights reserved.10–9 The Strategic Importance of Total Compensation  Objective No. 1:  Attracting and Retaining Talent  Three sensitive practices:  Low pay  Pay secrecy  Pay gaps

10. © 2003 South-Western College Publishing. All rights reserved.10–10 Pay Fairness  Pay fairness  What people believe they deserve to be paid in relation to what others deserve to be paid.  Equity  Perceptions based on comparisons between an individual’s ratio of inputs and outcomes and the ratios of others doing similar work. Inputs: What an employee gives to the jobInputs: What an employee gives to the job Outcomes: What people get out of doing the jobOutcomes: What people get out of doing the job

11. © 2003 South-Western College Publishing. All rights reserved.10–11 Equity Perceptions

12. © 2003 South-Western College Publishing. All rights reserved.10–12 How Employees Reduce Inequity  Increase inputs (time, effort) to justify higher rewards when they feel overrewarded  Decrease inputs when feeling underrewarded  Change the compensation they receive  Form a union  File a grievance  Leave work early  Choose a different comparison “other”  Rationalize that inequities are justified  Leave the situation by quitting

13. © 2003 South-Western College Publishing. All rights reserved.10–13 Low Pay  Companies decide to lead, lag, or match market pay rates  External equity  Fairness relative to the external market (outside the organization)  May be difficult to make comparisons when companies mix several forms of pay (e.g. salary, bonus, benefits)

14. © 2003 South-Western College Publishing. All rights reserved.10–14 Low Pay Cont’d)  Dissatisfied employees may  Leave the company  Perform poorly  Steal from the company

15. © 2003 South-Western College Publishing. All rights reserved.10–15 Pay Secrecy  Secrecy is the norm  Employees may have inaccurate information  Companies can benefit from  Involving employees in system design  Implement pay systems fairly and provide due process

16. © 2003 South-Western College Publishing. All rights reserved.10–16 Pay Gaps

17. © 2003 South-Western College Publishing. All rights reserved.10–17 Pay Gaps  “In the U.S., even lower level executives make far more than their counterparts in other advanced economies, while average workers make comparatively less.”

18. © 2003 South-Western College Publishing. All rights reserved.10–18 Importance of Total Compensation  Objective 2:  Focusing employee energy on implementing the competitive strategy  Strategy changes  Mergers and acquisitions  Organizational life cycle

19. © 2003 South-Western College Publishing. All rights reserved.10–19 Changing Compensation to Match Changes in Strategy  Egalitarian pay systems may facilitate a quality-driven, customer-focused strategy  Today, performance-based pay and rewards for teamwork, quality, and new skills have replaced pay based on job title and seniority

20. © 2003 South-Western College Publishing. All rights reserved.10–20 Compensation After Mergers and Acquisitions Contrasting Cultures and Compensation Systems Preference for risk taking vs. risk aversionPreference for risk taking vs. risk aversion Flexibility & informality vs. rigidity & formalityFlexibility & informality vs. rigidity & formality Decentralized vs. centralizedDecentralized vs. centralized Concern for results vs. concern for peopleConcern for results vs. concern for people Team focus vs. focus on individual starsTeam focus vs. focus on individual stars Portfolio Approach Blending Approach New System Approach

21. © 2003 South-Western College Publishing. All rights reserved.10–21 Importance of Total Compensation  Objective 3:  Increasing Productivity Gainsharing programs link financial rewards to performance improvements in a plant or facilityGainsharing programs link financial rewards to performance improvements in a plant or facility Incentive pay programs link rewards to individual or team performanceIncentive pay programs link rewards to individual or team performance

22. © 2003 South-Western College Publishing. All rights reserved.10–22 Role of the External Environment LaborMarketLaborMarket Legal and Social Considerations Considerations Labor Unions Pay levelPay level Pay mixPay mix LegislationLegislation Comparable worthComparable worth Wage clausesWage clauses

23. © 2003 South-Western College Publishing. All rights reserved.10–23 Pay Mix for Different Categories of Employees 0% 20% 40% 60% 80% 100% Base Salary Short-term incentives Long-term incentives Benefits and services Entry Professionals Managerial Executive CEO

24. © 2003 South-Western College Publishing. All rights reserved.10–24 Legal Constraints  Davis-Bacon (1931) and Walsh-Healy Acts (1936):  Federal construction contractors required to pay prevailing wages to laborers & mechanics  Fair Labor Standards Act (1938)  Set minimum wage  Requires overtime for nonexempt workers  Establishes child labor standards

25. © 2003 South-Western College Publishing. All rights reserved.10–25 Exempt Employees Under FLSA  Not covered by overtime and minimum wage provisions  Includes executives, managers, professionals, administrators  Must be paid fixed salary and meet criteria for job content (e.g. “professionals” must exercise independent judgment and do nonroutine work)

26. © 2003 South-Western College Publishing. All rights reserved.10–26 Legal Constraints  Living Wage Laws:  Enacted by some local governments to ensure pay reflects cost of living  Equal Pay Act (1963)  Amendment to FLSA that prohibits gender discrimination for “substantially” equal jobs  Comparable Worth  Based on gender differences in “true worth” of nonidentical jobs  Implemented by some state and local governments and some unions

27. © 2003 South-Western College Publishing. All rights reserved.10–27 Impact of Unions on Pay  Presence of union in private-sector firm may increase wages by 10-15% and benefits by 20-30%  Union effects on productivity not clear

28. © 2003 South-Western College Publishing. All rights reserved.10–28 The HR Triad and Total Compensation Line Managers With HR, align pay system with strategic objectives Help HR determine value of jobs and people Communicate and abide by pay system principles Make and communicate pay and benefit decisions Fairly administer compensation HR Professionals With line managers, align pay system with strategic objectives Assess employees’ preferences and reactions to pay Design processes to measure skills, performance, evaluate jobs Help managers to communicate and set pay Ensure employee due process Employees Take responsibility for understanding compensation system Indicate preferences for forms of pay Participate in job evaluation Actively manage indirect plans and accounts Provide input into pay decisions and appeals Register complaints

29. © 2003 South-Western College Publishing. All rights reserved.10–29 Establishing the Value of Jobs  Base pay for job-based pay system  Wage or salary, exclusive of incentive pay or benefits  Based on  Information about the job and its relative value within the organization (internal equity) Job Evaluation used to gather this informationJob Evaluation used to gather this information  Market information about what other employers pay (external equity) Salary surveys used to gather this informationSalary surveys used to gather this information

30. © 2003 South-Western College Publishing. All rights reserved.10–30 Job Evaluation Methods  Ranking method  Job classification method  Point rating method  Competency-based job evaluation

31. © 2003 South-Western College Publishing. All rights reserved.10–31 Example of Point Rating Method Compensable Factor 1 st degree 2 nd degree 3 rd degree 4 th degree Job Knowledge 50100150200 Problem Solving 50100150205 Impact60120180240 Working Conditions 103050N/A Supervision Needed 255075100 Supervision Given 306090120

32. © 2003 South-Western College Publishing. All rights reserved.10–32 Example of Compensable Factor and Degree Statements  Factor: Problem Solving  Degree 1: Actions performed in set order according to written or verbal instructions. Problems referred to a supervisor  Degree 2: Routine problems solved and choices made regarding order in which work is performed within standard practices. Information may be obtained from various sources.

33. © 2003 South-Western College Publishing. All rights reserved.10–33 Example of Compensable Factor and Degree Statements (cont’d)  Factor: Problem Solving  Degree 3: Problems are solved that require general knowledge of company policies and procedures applicable within own area of responsibility. Decisions based on choice from established alternatives. Actions expected to be within standards and established procedures.  Degree 4: Analytical judgment, initiative, or innovation required in dealing with complex problems or situations. Evaluation not easy because there is little precedent or information may be incomplete. (See Chapter 10 text for Degree 5)

34. © 2003 South-Western College Publishing. All rights reserved.10–34 Competency-Based Job Evaluation  Emphasizes competencies needed to perform job rather than job duties  Often used with broadbanding approach  Promotes individual development and growth through lateral moves  Hierarchical, bureaucratic and rule-driven corporate cultures may make implementation difficult.

35. © 2003 South-Western College Publishing. All rights reserved.10–35 Job-Based Pay Policy  Three decisions:  Single plan or multiple plans  Job evaluation method  Process to drive the plan

36. © 2003 South-Western College Publishing. All rights reserved.10–36 Skill-Based Pay  Pay based on:  What skills the employee has  What skills could be used, if needed  People are paid according to capabilities, not job assignment

37. © 2003 South-Western College Publishing. All rights reserved.10–37 Using Market Data to Set Pay Rates  To achieve external equity in pay:  Conduct a compensation survey  Set overall market pay policy  Establish an organizational pay policy

38. © 2003 South-Western College Publishing. All rights reserved.10–38 Conducting a Survey to Assess External Market Rates  Define relevant labor market  Identify benchmark jobs:  Jobs that are similar across range of organizations  Collect survey data

39. © 2003 South-Western College Publishing. All rights reserved.10–39 Establishing the Market Pay Policy Line 250 500 750 1,000 Job Evaluation Points * Programmer-Micro Subsystems * Sr. Analyst * SD Engineer $25,000 $50,000 $75,000 $100,000 Average Annual Pay * Sr. Programmer *Intermediate Programmer Based on Exhibit 10.15 in text

40. © 2003 South-Western College Publishing. All rights reserved.10–40 Designing the Internal Pay Structure  Job-Based Pay Grades and Ranges  Pay line is midpoint  Common ranges:  Laborers: Up to 25%  Clerical, technical, paraprofessional: 15-50%  First-level managers. and professionals: 30-50%  Middle and Sr. managers: 40-100%

41. © 2003 South-Western College Publishing. All rights reserved.10–41 Designing the Internal Pay Structure (cont’d)  Competency-Based:  Points assigned to jobs based on competencies required  Skill-Based  Base pay equal regardless of job assignment  Additional pay earned by increasing skills

42. © 2003 South-Western College Publishing. All rights reserved.10–42 Pay Grade Structure for Job-Based System $3,000 $4,000 $5,000 Corporate Policy Line Midpoint 250 350 450 550 650 Job Evaluation Points Maximums Pay Grade Width Monthly Pay

43. © 2003 South-Western College Publishing. All rights reserved.10–43 Balancing Internal and External Equity InternalExternal Pay Equity Pay Differentials Market Shift Pay Compression

44. © 2003 South-Western College Publishing. All rights reserved.10–44 Compensation in the Context of Globalization  Considerations:  Compensation philosophy  Base pay  Relocation premiums  Country differences

45. © 2003 South-Western College Publishing. All rights reserved.10–45 Assessing Compensation  Purposes of assessing compensation:  To attract qualified employees  To motivate employees to work toward corporate goals  To retain qualified employees  To administer pay within legal constraints