HRM10eChap12- Compensation Strategies and Practices

7/30/2019 HRM10eChap12- Compensation Strategies and Practices

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Human Resource

ManagementTENTH EDITON

2003 Southwestern College Publishing. All rights reserved. PowerPoint Presentationby Charlie Cook

Compensation Strategies

and Practices

Chapter 12

SECTION 4Compensating

Human

Resources

Robert L. Mathis John H. Jackson


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2002 Southwestern College Publishing. All rights reserved. 122

Learning Objectives

After you have read this chapter, you should beable to:

Identify two general types of compensation and thecomponents of each.

Give examples of two different compensationphilosophies in organizations.

Discuss four strategic compensation design issues.

Describe three considerations affecting perceptionsof pay fairness.

Identify the basic provisions of the Fair LaborStandards Act (FLSA).


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Learning Objectives (contd)

Definejob evaluationand discuss four methods forof performing it.

Outline the process of building a wage and salaryadministration system.

Discuss how to establish a pay-for-performancesystem.


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Compensation Systems

Objectives of an Effective CompensationSystem:

Legal compliance with all appropriate laws andregulations

Cost effectiveness for the organization Internal, external, and individual equity for

employees

Performance enhancement for the organization


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Nature of Compensation

Types of Rewards Intrinsic

Intangible, psychological and social effects of

compensation

Extrinsic Tangible, monetary and nonmonetary effects of

compensation


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Components of A Compensation Program

Figure 121


7/42 2002 Southwestern College Publishing. All rights reserved. 127

Direct Compensation

Compensation Type

Base Pay The basic monetary compensation that anemployee receives, usually as a wage orsalary.

Wages Payments calculated on the amount of time

worked.

Salary Consistent payments made each periodregardless of the number of hours worked inthe period.

Variable Pay Compensation linked to individual, team, ororganizational performance.

Benefit An indirect reward given to an employee orgroup of employees as a part oforganizational membership.



Typical Division of HR Responsib i l i t ies:

Compensat ion

Figure 122



Cont inuum of Compensat ion Phi losophies

Figure 123



Compensation App roaches

Figure 124


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Compensation Quart i le Strategies

Figure 125


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Decisions About Compensation Levels

Compensation Strategies

Above-Market Paying for higher qualified, more productiveworkers.

Middle-Market Attempting to balance of employer costs and

need to attract and retain employees.

Below-Market Paying all that the firm can affordTaking advantage of the abundant supply ofpotential employees in a loose labor market.


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Competency-Based Pay

Maintenance ofCompetencies

Limitations(How many?)

PricingCompetencies

Training

Competency-Based PaySystemsKBP/SBP


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Competency -Based Systems Outcomes

Figure 126


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Individual vs. Team Rewards

Distribute variable rewards at the team level

Make system simple and understandable.

Using Team-Based Reward Systems

Use skill-based pay for the base.

Use variable pay based on business entity performance

Maintain a high degree of employee involvement


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Perceptions of Pay Fairness

Equity The perceived fairness between what a persondoes (inputs) and what the person receives(outcomes).

Procedural Justice The perceived fairness of the process andprocedures use to make decisions about

employees

Distributive Justice The perceived fairness in the distribution ofoutcomes.

Pay Openness The degree of openness or secrecy that anorganization allows regarding its pay system.

External Equity The perception that the organization providesemployees with compensation that comparableto the compensation of employees with similarjobs in other organizations.


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Equi ty Considerat ions in Compensat ion

Figure 127


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Fair Labor Standards Act (FSLA) of 1938

Provisions of the Act

Minimum wage requirement sets wage floor

Child labor (under 14 years old) is prohibited

Requires overtime payments for non-exempt employees

Exempts highly-paid computer workers

Requires overtime (1) pay for hours over 40 hours

Requires compensatory time at overtime (1) pay rates


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Wage/Hour Status Under Fair Labo r Standards Act

Figure 128a


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Figure 128b


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Figure 128c


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The IRS Test fo r Employees and

Independent Contracto rs

Figure 129Source: U.S. Internal Revenue Service.


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Other Laws Affecting Compensation

Davis-Bacon Act of 1931 Required payment of prevailing wage by firms

engaged in federal construction projects.

Walsh-Healy Public Contracts Act and the

Service Contracts Act Extended the payment of prevailing wage to

service contracts

Required overtime payment for any employee hours

worked over eight hours in one day; applies only toto federal contracts, not the private sector.


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Pay and Gender

Equal Pay Act of 1963 Requires that men and women be paid the samefor performing substantially similar jobs with limitednon-gender exceptions (e.g., merit and seniority).

Issue of Pay Equity Similarity in pay for all jobs requiring comparable

level of knowledge, skills, and abilities, even ifactual duties and market rates differ significantly.


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Compensat ion

Administ ra t ion

Process

Figure 1210


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Job Evaluation

Job Evaluation The systematic determination of the relative worthof jobs within an organization.

Benchmark Job

A job found in many organizations and performedby several individuals who have similar duties thatare relatively stable and require similar KSAs.


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Job Evaluation

FactorComparison

Ranking Classification

PointMethod

JobEvaluationMethods


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Job Evaluation Point Chart

Figure 1211


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Legal Issues and Job Evaluation

Americans with Disabilities ActJob evaluations may not identify job functions related to

physical demands as essential

Gender IssuesTraditional job evaluations place less weight on knowledge,skills, and working conditions for female-dominated jobs

Job Evaluation


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Developing Pay Surveys

Select Employers with Comparable Jobs

Determine Jobs to be Surveyed

Decide What Information Is Needed

Conduct Survey


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Pay Structures

Market Line The line on a graph showing the relationshipbetween the job value, as determined by jobevaluation points, and pay survey rates.

Common Pay Structures Hourly and salaried

Office, plant, technical, professional, managerial

Clerical, information technology, professional,

supervisory, management, and executive


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Establ ishing

Pay

Structures

Figure 1212


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Pay Structures (contd)

Pay GradesA grouping of individual jobs having approximatelythe same job worth.

Broadbanding

The practice of using fewer pay grades havingbroader pay ranges that in traditional systems.

Benefits Encourages horizontal movement of employees

Is consistent with trend towards flatter organizations

Creates a more flexible organization

Encourages competency development

Emphasizes career development


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Tradit ional Pay Struc ture vs. Broadbanding

Figure 1213


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Pay Scattergram

Figure 1214


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Typical Pay Range Wid ths

Figure 1215


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Example of

Pay Grades

and PayRanges

Figure 1216


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Pay Rate Issues

Rates Out of Range Red-Circled Employees An incumbent (current jobholder) who is paid above

the range set for the job.

Green-Circled Employees An incumbent who is paid below the range set for the

job.

Pay Compression

A situation in which pay differences amongindividuals with different levels of experience andperformance in the organization becomes small.


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Issues Involving Pay Increases

Seniority Time spent in an organization or on a particular job.

Used to determine eligibility for organizationalrewards and benefits.

Maturity CurveA curve that depicts the relationship between

experience and pay rates.

Assumption is that as experience increases,

proficiency and performance increase.


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Issues Involving Pay Increases

Cost-of-Living Adjustments (COLA)A percentage increase in wages that allowsemployees to maintain the same real wages in aperiod of economic inflation.

Adjustments are tied to changes in an economicmeasure (e.g., the Consumer Price Index).

Lump-Sum Increases (LSI)

A one-time payment of all or part of a yearly pay

increase. Lump-sum payments do not increase base wages


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Pay Ad justment Matr ix

Figure 1217


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Compa-Ratio Example

Compa-ratio The pay level divided by the midpoint of the payrange.

110ratio-Compa100(midpoint)15.00

pay)(current$16.50Employee R

87ratio-Compa100(midpoint)15.00

pay)(current$13.05

Employee J

HRM10eChap12- Compensation Strategies and Practices

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