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1. Chapter 9 Managing Compensation

2. Learning Outcomes After studying this chapter, you should be able to Distinguish a strategic compensation program from one that is non-strategic. Determine how to design pay systems. Estimate whether or not a pay system is consistent within the firm as well as comparable to industry standards and government laws. Design a compensation scorecard.

3. Discussion Starter #1 The #Fightfor15 movement on Twitter and in the streets, many Americans advocated a minimum wage increase of $15 per hour. Do you think the minimum wage should be raised to $15 per hour? Explain your position. What potential benefits and problems could occur if the minimum wage was raised to $15 per hour ?

4. Figure 9.1: Compensation Components

5. Figure 9.2: Compensation Alignment

6. 9.2 Strategic Compensation Strategic compensation is the compensation of employees in ways that enhance motivation and growth, while at the same time aligning their efforts with the objectives of the organization. Steps in developing a compensation strategy: Analyze the organizational objectives. Decide what types of behaviors and skills will be rewarded. Decide on the compensation base most appropriate for the types of jobs in your company. Strategic compensation should purposefully link compensation to the organization’s mission and general business objectives. Strategic compensation serves to mesh the monetary payments made to employees with other HR initiatives, such as recruitment, selection, training, retention, and performance appraisal.

7. 9.2a Linking Compensation to Organizational Objectives The new compensation landscape requires that managers be more strategic about their compensation decisions. Managers must first and foremost understand the strategic objectives of the organization in relation to the industry in which it operates. Managers need to move away from paying for a specific position or job title to rewarding employees on the basis of their individual competencies or work contributions to the organizational objectives.

8. 9.2b The Pay-for-Performance Standard (slide 1 of 3) Pay-for-performance standard – A standard by which managers tie compensation to employee effort and performance The term “pay-for-performance” refers to a wide range of compensation options, including: M erit-based pay Bonuses Salary commissions Job and pay banding Team/group incentives Various gainsharing programs

9. 9.2b The Pay-for-Performance Standard (slide 2 of 3) Pay Equity Pay equity – An employee’s perception that compensation received is equal to the value of the work performed Three kinds of pay equity: External equity People in similar jobs compare themselves to what others are making in different organizations. Internal equity People compare themselves to peers in different jobs in the same organization. Individual equity People compare themselves to others in their organization with the same job .

10. 9.2b The Pay-for-Performance Standard (slide 3 of 3) Expectancy Theory and Pay The expectancy theory of motivation predicts that one’s level of motivation depends on the attractiveness of the rewards sought and the probability of obtaining those rewards. Expectancy theory holds that employees should exert greater work effort if they have reason to expect that it will result in a reward that is valued. Employees also must believe that good performance is valued by their employer and will result in their receiving the expected reward. How employees view compensation can be an important factor in determining the motivational value of compensation.

11. Figure 9.3: Pay-for-Performance and Expectancy Theory

12. Video Highlight #1 This news article and accompanying video discuss how many companies in Japan are abandoning their decades-old seniority-based pay system and instituting a pay system based on employee performance. “Japan Seeks Alternatives to Its Pay System”

13. 9.2c The Bases for Compensation (slide 1 of 2) Employees classified as hourly employees, or wage earners, are normally paid only for the time they work. Hourly work – Work paid on an hourly basis Piecework compensation is another kind of compensation. Piecework – Work paid according to the number of units produced Those whose compensation is computed on the basis of weekly, biweekly, or monthly pay periods are classified as salaried employees. Salaried employees, unlike hourly employees, are generally paid the same for each pay period, even though they occasionally may work more hours or fewer than the regular number of hours in a period. They also usually receive certain benefits not provided to hourly employees.

14. 9.2c The Bases for Compensation (slide 2 of 2) Another basis for compensation centers on whether employees are classified as nonexempt or exempt under the Fair Labor Standards Act. Nonexempt employees – Employees covered by the overtime provisions of the Fair Labor Standards Act Nonexempt employees must be paid at a rate of one and a half times their regular pay rate worked in excess of 40 hours in their workweek. Exempt employees – Employees not covered by the overtime provisions of the Fair Labor Standards Act

15. Figure 9.4: Excluded Employee Groups

16. Figure 9.5: Factors Affecting the Pay Mix

17. Discussion Starter #2 Since employees may differ in terms of their job performance, would it not be more feasible to determine the wage rate for each employee on the basis of his or her relative worth to the organization? Explain.

18. 9.4 Job Evaluation Systems Job evaluation – A systematic process of determining the relative worth of jobs to establish which jobs should be paid more than others within an organization The relative worth of a job may be determined by comparing it with others within the organization or by comparing it with a scale that has been constructed for this purpose. Three traditional methods of comparison provide the basis for the principal systems of job evaluation: Rank the value of jobs from highest to lowest. Classify jobs so they can be benchmarked internally and externally. Award points to each job based on its link to organizational objectives.

19. 9.4a Job Ranking System Job ranking system – The simplest and oldest system of job evaluation by which jobs are arrayed on the basis of their relative worth Advantage: Simplicity Disadvantages: Is not a very precise measure of each job’s worth Can only be used on a small number of jobs Only indicates the relative importance of the job, not the differences in the degree of importance that may exist between jobs

20. 9.4b Job Classification System Job classification system – A system of job evaluation in which jobs are classified and grouped according to a series of predetermined wage grades

21. 9.4c Point System (slide 1 of 2) Point system – A quantitative job evaluation procedure that determines the relative value of a job by the total points assigned to it The principal advantage of the point system is that it provides a more refined basis for making judgments than either the ranking or classification system and thereby can produce results that are more valid and less easy to manipulate. The point system permits jobs to be evaluated quantitatively on the basis of factors or elements—commonly called compensable factors—that constitute the job. Once selected, compensable factors are assigned weights according to their relative importance to the organization, then each factor is divided into a number of degrees. Degrees represent different levels of difficulty associated with each factor.

22. 9.4c Point System (slide 2 of 2) The Point Manual The point manual is, in effect, a handbook that contains a description of the compensable factors and the degrees to which these factors may exist within the jobs. The point value assigned to a job represents the sum of the numerical degree values of each compensable factor that the job possesses. Using the Point Manual Job evaluation under the point system is accomplished by comparing the job descriptions and job specifications, factor by factor, against the various factor-degree descriptions contained in the manual. Each factor within the job being evaluated is then assigned the number of points specified in the manual. When the points for each factor have been determined from the manual, the total point value for the job as a whole can be calculated.

23. 9.4d Work Valuation Work valuation – A job evaluation system that seeks to measure a job’s worth through its value to the organization

24. 9.4e Job Evaluation for Management Positions Hay profile method – A job evaluation technique using three factors—knowledge, mental activity, and accountability—to evaluate executive and managerial positions

25. Figure 9.6: Hay Evaluation Profile

26. 9.5 Compensation Implementation—Pay Tools Compensation design systems, such as job evaluations, provide for internal equity and serve as the basis for pay rate determination; they do not in themselves determine the pay rate. The evaluated worth of each job in terms of its rank, class, points, or monetary worth must be implemented into an hourly, daily, weekly, or monthly pay rate. To appropriately implement compensation, specific tools must be incorporated. The primary compensation tool used to set pay is the wage and salary survey.

27. 9.5a Wage and Salary Surveys Wage and salary survey – A survey of the wages paid to employees of other employers in the surveying organization’s relevant labor market The labor market is frequently defined as the area from which employers obtain certain types of workers. When job evaluation and wage salary data are used jointly, they link the likelihood of both internal and external equity. Collecting Survey Data The Bureau of Labor Statistics (BLS) is the major publisher of wage and salary data.

28. 9.5b The Wage Curve Wage curve – A curve in a scattergram representing the relationship between relative worth of jobs and pay rates

29. Figure 9.7: Freehand Wage Curve

30. 9.5c Pay Grades Pay grades – Groups of jobs within a particular class that are paid the same rate

31. Figure 9.8: Single Rate Structure

32. 9.5d Rate Ranges Although a single rate may be created for each pay grade, it is more common to provide a range of rates for each pay grade. The rate ranges may be the same for each grade or proportionately greater for each successive grade.

33. Figure 9.9: Rate Range Structure

34. 9.5e Competence-Based Pay Competence-based pay – Pay based on an employee’s skill level, variety of skills possessed, or increased job knowledge These pay plans encourage employees to earn higher base wages by learning and performing a wider variety of skills (or jobs). Benefits: Greater productivity Increased employee learning and commitment to work Improved staffing flexibility to meet production or service demands Reduced efforts of absenteeism and turnover Challenges: May include a limit of the amount of compensation employees can earn, thus discouraging them from continuing their educational training Difficulty in developing appropriate measures

35. 9.6 Government Regulation of Compensation (slide 1 of 3) Wage and Hour Provisions

36. 9.6 Government Regulation of Compensation (slide 2 of 3) Minimum Wage and Pay Compression Pay rate compression – Compression of pay between new and experienced employees caused by the higher starting salaries of new employees; also the differential between hourly workers and their managers Organizations wishing to minimize pay rate compression may incorporate the following ideas into their pay policies: Reward high-performance and merit-worthy employees with large pay increases. Design the pay structure to allow a wide spread between hourly and supervisory employees. Prepare high-performing employees for promotions to jobs with higher salary levels. Provide equity adjustments for selected employees hardest hit by pay compression.

37. 9.6 Government Regulation of Compensation (slide 3 of 3) Child Labor Provisions Another concern with the minimum wage is that the “floor” it imposes makes it more difficult for high school students and young adults to find jobs. Age 16 is the basic minimum age required for employment. Pay Equity Provisions Laws exist to protect employees against pay discrimination. Yet, pay discrimination is still found in many companies today.

38. Video Highlight #2 A news article and accompanying video detail how Apple now pays all of its U.S. employees in similar roles and performance equally, regardless of their sex or race. “Apple Says It Now Pays All U.S. Employees Equally, Regardless of Sex or Race”

39. Figure 9.10: Race and Gender Pay Inequality

40. Activity Step 1: Imagine yourself as a compensation specialist and design a pay system. Before you begin designing, identify key decision points when considering pay for performance and determine the factors that conclude about organizational readiness for pay performance. Step 2: A class discussion should follow. In the discussion, evaluate one another’s design and make suggestions about how employees should be rewarded, as well as identify limitations that you encountered while designing.

41. 9.7 Compensation Assessment Once it has been implemented, assessing the effectiveness of your compensation system is vitally important to linking compensation with strategy. With the right measures, you can: Help the company detect potential compensation problems Make compensation decisions more transparent Improve the alignment of compensation decisions with organizational objectives Compensation scorecard – Displays the results for all the measures that a company uses to monitor and compare compensation among internal departments or units

42. Figure 9.11: Sample Compensation Scorecard

43. Discussion Starter #3 What is a compensation scorecard and how does it align a company’s strategy with its compensation system?