COMPENSATION 1 Compensation An Overview Compensation Total of

COMPENSATION 1

Compensation: An Overview Compensation - Total of all rewards provided employees in return for services § Direct financial compensation - Pay received in the form of wages, salaries, bonuses, and commissions § Indirect financial compensation - All financial rewards not included in direct compensation § Nonfinancial compensation - Satisfaction a person receives from job itself or from work environment § 2

Components of a Total Compensation Program External Environment Internal Environment Compensation Financial Non-Financial Direct Indirect (Benefits) The Job Environment Wages Salaries Commissions Bonuses Legally Required Benefits Skill Variety Social Security Task Identify Unemployment Compensation Task Workers’ Significance Compensation Family Autonomy & Medical Leave Feedback Sound Policies Competent Employees Congenial Coworkers Suitable Status Symbols Working Conditions Voluntary Benefits Payment for Time Not Worked Health Care Life Insurance Retirement Plans Employee Stock Option Plans Supplemental Unemployment Benefits Employee Services Premium Pay Unique Benefits Workplace Flexibility Flextime Compressed Work Week Job Sharing Flexible Compensation Telecommuting Part-time Work Modified Retirement 3

Equity Theory § Input: Outcome ratio for self § Input: Outcome ratio for referen § Perception of ratios affects future performance 4

Equity in Financial Compensation Equity - Fair pay treatment for employees § External equity - Firm's employees are paid comparably to workers who perform similar jobs in other firms § Internal equity - Exists when employees are paid according to relative value of their jobs within same organization § 5

Equity in Financial Compensation (Continued) Employee equity - Individuals performing similar jobs for same firm are paid according to factors unique to employee, such as performance level or seniority § Team equity - More productive teams are rewarded more than less productive groups § 6

Determinants of Individual Financial Compensation Organization § Labor market § Job § Employee § 7

Compensation Policies Pay leaders – pay higher wages and salaries § Market rate, or going rate – pay what most employers pay for same job § Pay followers – pay below market rate because poor financial condition or believe they do not require highly capable employees § 8

The Labor Market as a Determinant of Financial Compensation § Compensation surveys § Expediency § Cost of living § Labor unions § Society § Economy § Legislation 9

Determining internal equity 10

The Job as a Determinant of Financial Compensation Job itself continues to be a factor, especially in those firms that have internal pay equity as a primary consideration § Organizations pay for value they attach to certain duties, responsibilities, and other job-related factors such as working conditions § 11

Job Analysis and Job Descriptions Before organization can determine relative difficulty or value of jobs, must first define content § This is done by analyzing jobs § 12

Job Evaluation § Firm determines the relative value of one job in relation to another § Point factor system most widely used § Determine compensible factors § Set weights for each § Assign points § Decide pay classifications 13

Job Pricing Placing a dollar value on worth of a job § Pay grades - Grouping of similar jobs to simplify pricing jobs § Wage curve - Fitting of plotted points to create a smooth progression between pay grades § Pay ranges - Minimum and maximum pay rate with enough variance between the two to allow for a significant pay difference § 14

Job Pricing (Continued) Broadbanding – Collapses many pay grades into a few wide bands or improve effectiveness § Single rate system - Pay ranges are not appropriate for some workplace conditions such as some assembly line § Adjusting pay rates - Overpaid and underpaid jobs § 15

Scatter Diagram of Evaluated Jobs Illustrating the Wage Curve, Pay Grades, and Pay Ranges Average Pay per Hour (Current Rates or Market Rates) $19. 80 5 18. 50 4 17. 20 3 ve r u 15. 90 14. 60 14. 00 13. 30 12. 90 12. 00 W 100 1 Summary Evaluated Points 0 - 99 100 -199 200 -299 300 -399 400 -500 C ge Pay Ranges for Pay Grades 2 a 1 200 300 400 500 Evaluated Points 2 3 4 5 Pay Grades Pay Grade 1 2 3 4 5 Minimum $12. 00 13. 30 14. 60 15. 90 17. 20 Midpoint $13. 30 14. 60 15. 90 17. 20 18. 50 Maximum $14. 60 15. 90 17. 20 18. 50 16 19. 80

Average Pay Per Hour Broadbanding and Its Relationship to Traditional Pay Grades and Ranges Grade 5 Grade 4 Grade 3 Band B Grade 2 Grade 1 Band A Low High Job Worth 17

Employee as a Determinant of Financial Compensation Performance-based Pay § Skilled-based Pay § Competency-based Pay § Seniority § Experience § Membership in the organization § Potential § Political Influence § Luck § 18

Primary Determinants of Individual Financial Compensation The Organization Compensation Policies Organizational Politics Ability to Pay The Employee Job Performance Merit Pay Variable Pay Competency-Based Pay Seniority Experience Organization Membership Potential Political Influence Luck Job Individual Financial Compensation Pricing The Labor Market Compensation Surveys Expediency Cost of Living Labor Unions Society The Economy Legislation The Job Analysis Job Descriptions Job Evaluation Collective Bargaining 19

Performance-Based Pay Merit pay - Pay increase given to employees based on their level of performance as indicated in the appraisal § Variable pay - Compensation based on performance (bonus) § Piecework – Employees paid for each unit they produce § 20

Skill-Based Pay Compensates on basis of job-related skills and knowledge § Employees and departments benefit when employees obtain additional skills § Appropriate where work tends to be routine and less varied § Must provide adequate training opportunities or system becomes a demotivator 21

Competency-Based Pay Compensates on basis of demonstrated expertise 22

Seniority Length of time an employee has been associated with the company, division, department, or job § Labor unions tend to favor seniority § 23

Experience Regardless of nature of job, very few factors have a more significant impact on performance than experience 24

Membership in the Organization Some components of individual financial compensation are given to employees regardless of particular job they perform or their level of productivity § Intended to maintain a high degree of stability in the workforce and to recognize loyalty § 25

More factors affecting individual pay § § § Membership in the organization Potential Political influence Luck Compensation for special groups Team-based pay 26

Group-based pay for performance Profit sharing – distribution of predetermined percentage of firm’s profits to employees § Gainsharing – incentive payment based upon improved company performance § § Scanlon plan – reward to employees for savings in labor costs resulting from employees’ suggestions 27

Executive Compensation Critical factor in attracting and retaining best managers 28

Determining Executive Compensation Firms typically prefer to relate salary growth for the highest-level managers to overall corporate performance 29

Types of Executive Compensation § § § § Base salary Short-term (annual) incentives or bonuses Long-term incentives and capital appreciation plans Stock option plans Indexed stock option plans Executive benefits (Perks) Golden parachutes 30

HR’s Role in Executive Compensation HR executives who know their company’s business must play key role in assuring reasonable and ethical behavior 31