Part 4: Compensating Human ResourcesChapter 10: Compensation Strategies and PracticesPrepared by Linda Eligh, University of Western Ontario

Learning ObjectivesAfter you have read this chapter, you should be able to:Identify the two general types of compensation and the components of each.Discuss four issues associated with strategic compensation design.Describe the various pieces of legislation that impact on compensation strategies and practices.Describe the two means of valuing jobs using job evaluation and market pricing.Outline the process of building a base pay system.Explain two ways individual pay increases are determined.

Nature of CompensationTypes of RewardsIntrinsicIntangible, psychological, and social effects of compensationExtrinsicTangible, monetary, and non-monetary effects of compensationTypes of CompensationDirect compensationThe employer exchanges monetary rewards for work done.Indirect compensationEmployer-provided benefitslike health insurancethat are provide employees for being a member of the organization.

Components of a Compensation System Fig. 10-1

Typical Division of HR Responsibilities: Compensation Fig. 10-2

Strategic CompensationObjectives of a Strategically Supportive Compensation System:Legal compliance with all appropriate laws and regulationsCost effectiveness for the organizationInternal, external, and individual equity for employeesPerformance enhancement for the organization

Compensation PhilosophiesEntitlement PhilosophyAssumes that individuals who have worked another year are entitled to pay increases, with little regard for performance differences.

Pay-for-Performance PhilosophyRequires that compensation changes reflect individual performance differences.

Continuum of Compensation Philosophies Fig. 10-3

Compensation Approaches Fig. 10-4

HR Metrics for Compensation Fig. 10-5

Compensation System Design IssuesExpatriatesHost-Country NationalsThird-Country NationalsGlobal Compensation Issues

Typical Components of Expatriate Compensation Fig. 10-6

Global Compensation ApproachesBalance Sheet ApproachCompensation plan that equalizes cost differences between identical international and home-country assignments.Global Market ApproachCompensation plan that attempts to be more comprehensive in providing base pay, incentives, benefits, and relocation expenses regardless of the country to which the employee is assigned.Tax Equalization PlanCompensation plan used to protect expatriates from negative tax consequences.

Compensation Quartile Strategies Fig. 10-8

Market Competitiveness and Compensation

Competency-Based PayMaintenance of CompetenciesLimitations (How many?)Pricing CompetenciesTrainingCompetency-Based Pay Systems KBP/SBP

Individual vs. Team RewardsDistribute variable rewards at the team levelMake system simple and understandable.Using Team-Based Reward SystemsUse skill-based pay for the base.Use variable pay based on business entity performanceMaintain a high degree of employee involvement

Perceptions of Pay FairnessEquityInternal EquityExternal EquityThe perceived fairness between what a person does (inputs) and what the person receives (outcomes).Employee compensation viewed as equitable in relation to the compensation of employees performing similar jobs in other organizations.Employees receive compensation in relation to the knowledge, skills, and abilities they use in their jobs as well as their responsibilities and accomplishments.Procedural JusticePerceived fairness of the process and proceduresused to make decisions about employees.Distributive JusticePerceived fairness in the distribution of outcomes.Pay Openness/ SecrecyThe degree of openness or secrecy that an organization allows regarding its pay system.

Equity Considerations in Compensation Fig. 10-10

Employment Standards Acts(ESA)Provisions of the Act Minimum wage requirement sets wage floorRequires overtime payments for non-exempt employeesChild labour is prohibitedEstablishes hours of workRegulates definition of Independent Contractors

Independent Contractor RegulationsFour Factor Test:Control Test: Considers how much say an employer has over the individuals completion of work.Integration testIs concerned with how integral the assignment is to normal running of the business.Economic Reality TestLooks at the risk of profit or loss to the individual.Specified Result TestDetermines how much control the individual has over completion of the task.

Legislation on Equal Pay and Pay EquityPay Equity Legislation Enacted in Canada in 1987 to address the historical wage gap between men and womenGoverned by the Canadian Human Rights Act and the Equal Wages GuidelineThree important but different ideas to consider:Equal Pay for Equal WorkEqual Pay for Work of Equal ValuePay Equity Laws

Development of a Base Pay SystemJob EvaluationFormal, systematic means to identify the relative worth of jobs within an organization. Evaluating every job in the organization on:Skills, Effort, Responsibility and Working ConditionsJob Evaluation Committees Committees whose task is to conduct job evaluations as may be required and/or to determine compensable factors. Most often chaired by key compensation officials from human resources. Membership should be a diverse as possible to ensure widespread input.

Compensation Administration Process Fig. 10-13

Job EvaluationFactor ComparisonRankingClassificationPoint MethodJob Evaluation Methods

Paired-Comparison Job Ranking Table Fig. 10-14

Compensable Factor Weights, Points and Degrees Fig. 10-15

Example of Defined Degrees of Subfactor: Responsibility for Financial Resources Fig. 10-16

Valuing Jobs Using Market PricingMarket PricingUse of pay survey data to identify the relative value of jobs based on what other employers pay for similar jobs.Advantages of Market PricingTies organizational pay levels to what is actually occurring in the market, without being distorted by internal job evaluation.Communicates to employees that the compensation system is market linked, rather than distorted by internal issues.

Valuing Jobs Using Market Pricing (contd)Disadvantages of Market PricingIt relies on market survey data that is limited or may have been gathered in methodologically sound ways.The responsibilities of a specific job in a company may be somewhat different from those of the matching job identified in the survey.The market datas scope (range of sources) is another concern.Tying pay levels to market data can lead to wide fluctuations based on market conditions.

Pay SurveysPay SurveyCollection of data on compensation rates for workers performing similar jobs in other organizations.Benchmark JobsJobs found in many organizations and performed by several individuals who have similar duties that are relatively stable and require similar KSAs.Internet-Based Pay SurveysPay survey questionnaires are distributed electronically rather than as printed copies.

Using Pay SurveysMethodologyParticipantsBroad-basedTimelinessSurvey Data RelevanceJob Matches

Pay StructuresJob FamilyA group of jobs having common organizational characteristics.Common Pay StructuresHourly and salariedOffice, plant, technical, professional, managerialClerical, information technology, professional, supervisory, management, and executivePay GradesGroupings of individual jobs having approximately the same job worth.

Establishing Pay Structures Fig. 10-18

Pay Structures (contd)Market BandingGrouping jobs into pay grades based on similar market survey amounts.Market LineGraph line that shows the relationship between job value as determined by job evaluation points and job value as determined by pay survey rates.Shows the distribution of pay for the surveyed jobs, allowing a linear trend line to be developed by the least-squares regression method.

Market-Banded Pay Grades for Local Bank Fig. 10-19*Computed by averaging the pay survey summary data for the jobs in each pay grade.

Pay RangesBroadbandingThe practice of using fewer pay grades having broader pay ranges that in traditional systems.BenefitsEncourages horizontal movement of employeesIs consistent with trend towards flatter organizationsCreates a more flexible organizationEncourages competency developmentEmphasizes career development

Example of Pay Grades and Pay Ranges Fig. 10-20

Individual PayRates Out of Range Red-Circled EmployeesAn incumbent (current jobholder) who is paid above the range set for the job.

Green-Circled EmployeesAn incumbent who is paid below the range set for the job.Pay CompressionA situation in which pay differences among individuals with different levels of experience and performance in the organization becomes small.

Determining Pay IncreasesPerformance and Merit IncreasesMerit PayMerit pay programs reward employees with permanent incrses to base pay according to differences in performance.Just noticeable difference (JND)The minimum pay increase that employees will see as making a substantial change in compensation. Sometimes referred to as just-meaningful pay.

Pay Adjustment MatrixCompa-ratioThe pay level divided by the midpoint of the pay range.

Pay Adjustment Matrix Fig. 10-21

Determining Pay Increases (contd)SeniorityTime spent in an organization or on a particular job that is used to determine eligibility for organizational rewards and benefits.Cost-of-Living Adjustments (COLA)A percentage increase in wages to maintain real wages in a period of economic inflation.Adjustments are tied to changes in an economic measure (e.g., the Consumer Price Index).Lump-Sum Increases (LSI)A one-time payment of all or part of a yearly pay increase that does not increase base wages.