Human Resource Management Total Rewards and Compensation CHAPTER

Human Resource Management Total Rewards and Compensation CHAPTER 11 Robert L. Mathis | John H. Jackson | Sean R. Valentine 14 e © 2014 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part.

Learning Objectives Identify the three general components of total rewards and give examples of each Explain the major laws governing employee compensation Outline strategic compensation decisions © 2014 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part.

Learning Objectives Describe the challenges of managing global compensation systems Illustrate the steps in developing a base pay Describe how individual pay rates are set system © 2014 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part.

Nature Of Total Rewards and Compensation Total rewards: Monetary and non-monetary rewards provided to attract, motivate, and retain employees Strategic decisions that guide the design of compensation practices: Legal compliance with all applicable laws and regulations Cost-effectiveness Internal for the organization and external equity for employees © 2014 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part.

Nature Of Total Rewards and Compensation Optimal mix of compensation components Performance enhancement for the organization Performance recognition and talent management for employees Enhanced recruitment, involvement, and retention of employees © 2014 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part.

Figure 11. 1 - Total Rewards Components © 2014 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part.

Figure 11. 2 - Elements of Total Rewards Source: Adapted from Worldat. Work (http: //www. worldatwork. org). © 2014 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part.

Components of Compensation Components Description Tangible rewards Elements of compensation that can be quantitatively measured and compared between organizations Intangible rewards Elements of compensation that cannot be as easily measured or calculated Base pay Basic compensation that an employee receives, usually as a wage or salary Wages Payments calculated directly from the amount of time worked by employees Salary Consistent payments made each period regardless of the number of hours worked Variable pay Compensation linked directly to individual, team, or organizational performance Benefit Indirect reward given to an employee or group of employees as part of membership in the organization © 2014 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part.

Legal Constraints On Pay Systems Fair Labor Standards Act (FLSA) - Primary federal law affecting compensation which is enforced by the Wage and Hour Division of the U. S. Department of Labor Provisions focus on the areas covering: Minimum wage Limits on the use of child labor Overtime provisions (exempt and nonexempt statuses) © 2014 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part.

Areas Under FSLA Minimum wage - Set by FLSA to be paid to a broad spectrum of covered employees Congressional action is the only way to change it Child labor provisions - FLSA set the minimum age for employment with unlimited hours at 16 years For age hazardous occupations, the minimum is 18 years of Individuals 14 to 15 years old may work outside school hours with certain limitations © 2014 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part.

Areas Under FSLA Exempt and nonexempt statuses Exempt employees: Employees who are not paid overtime Nonexempt employees: Employees who must be paid overtime Overtime - FLSA established overtime pay requirements at one and one-half times the regular pay rate for all hours worked over 40 in a week © 2014 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part.

Figure 11. 3 - Determining Exempt Status under the FLSA © 2014 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part.

Common Overtime Issues © 2014 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part.

Acts and Legislation Affecting Compensation © 2014 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part.

Additional Laws Affecting Compensation Prevailing wage: An hourly wage determined by a formula that considers the rate paid for a job by majority of the employers in the appropriate geographic area Garnishment: A court order that directs an employer to set aside a portion of an employee’s wages to pay a debt owed to a creditor © 2014 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part.

Independent Contractor Regulations © 2014 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part.

Figure 11. 5 - Continuum of Compensation Philosophies © 2014 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part.

Strategic Compensation Decisions Communicating pay philosophy - Helps employees recognize: Value of the total reward package How their job performance might affect their compensation © 2014 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part.

Strategic Compensation Decisions Compensation responsibilities HR specialists develop and administer the organizational compensation system They ensure pay practices comply with all legal requirements Line managers evaluate employee performance and participate in pay decisions © 2014 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part.

Payroll Administration Assure To compliance with compensation laws maintain positive employee relations Payroll HR staff report to: function Accounting function Liability for legal compliance remains with the company Even if the payroll process is outsourced © 2014 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part.

Figure 11. 6 - HR Metrics for Compensation © 2014 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part.

Motivation Theories and Compensation Expectancy theory: Employees’ motivation is based on the probability that: Their efforts will lead to an expected level of performance that is linked to a valued reward © 2014 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part.

Figure 11. 7 - Expectancy Theory © 2014 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part.

Motivation Theories and Compensation Equity theory: Individuals judge fairness in compensation by comparing their inputs and outcomes against the inputs and outcomes of referent others Referent others - Workers that the individual uses as a reference point to make these comparisons © 2014 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part.

Figure 11. 8 - Equity Theory Source: Adams, 1965. * *Adapted from John Stacey Adams, J. S. (1965). “Inequity in social exchange. ” Advances in Experimental Social Psychology. Volume 62, 1965, 335– 343. © 2014 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part.

Compensation Fairness and Equity External equity Internal equity Procedural Justice Distributive Justice Pay secrecy vs. openness © 2014 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part.

Figure 11. 9 - Compensation Quartile Strategies © 2014 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part.

Market Competitive Compensation Lag-the-Market Strategy • Used when the employer is experiencing financial difficulties and when an abundance of workers is available Lead-the-Market Strategy • Aggressive approach that enables a company to attract and retain sufficient workers with the required capabilities and be more selective when hiring Match-the-Market Strategy • Attempts to balance employer cost pressures and the need to attract and retain employees by providing compensation levels that meet the market for the employer’s jobs © 2014 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part.

Selecting a Quartile Deciding which quartile position to target for pay structures is a function of many considerations: Financial resources available Competitiveness pressures Market availability of employees with different capabilities © 2014 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part.

Selecting a Quartile Decisions about compensation mix and competitive position are related Should be addressed as part of a comprehensive total rewards strategy © 2014 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part.

Competency-Based Pay Rewards individuals for the capabilities they demonstrate and acquire In knowledge-based pay (KBP) or skill-based pay (SBP) systems employees: Start at a base level of pay Receive Gain increases as they learn to do other jobs additional skills and knowledge Become more valuable to the employer © 2014 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part.

Compensation System Design Issues Individual versus Team Rewards Team Individual How to develop compensation programs that support the team concept How to compensate individuals whose performance may be a result of team efforts and achievements © 2014 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part.

Figure 11. 11 - Staffing Categories for International Assignees at Multinational Enterprise (MNE) Source: Adapted from Mc. Phail, Fisher, Harvey, & Moeller, 2012 and Isidor, Schwens, & Kabst, 2011. © 2014 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part.

Compensating Expatriates Home-Country-Based Approach • Maintain an expatriate’s standard of living in the home country Host-Country-Based Approach • Compensate the expatriate at the same level as workers from the host country © 2014 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part.

Figure 11. 12 - Compensation Administration Process © 2014 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part.

Valuing Jobs with Job Evaluation Methods Job evaluation: Formal, systematic means used to identify the relative worth of jobs within an organization Compensable factor: Job value commonly present throughout a group of jobs within an organization Derived from job analysis Reflect the nature of different types of work performed in the organization © 2014 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part.

Job Evaluation Methods Point factor Method Ranking method Classification method Factorcomparison method © 2014 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part.

Market Pricing Use of market pay data to identify the relative value of jobs based on what other employers pay for similar jobs Identifying relevant market pay data for jobs that are good matches with the employer’s: Jobs Geographic considerations Company strategies and philosophies about desired market competitiveness levels © 2014 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part.

Job Evaluation Methods Advantages Disadvantages • Ties organizational pay levels to the external job market, without internal job evaluation distortion • Relies on market survey data • Communicates to employees that the compensation system is market linked • Specific job may differ from a matching job in the survey • Market data’s scope is a concern • Tying pay levels to market data can lead to wide fluctuations © 2014 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part.

Pay Surveys Collection of data on compensation rates for workers performing similar jobs in other organizations Benchmark jobs: Jobs found in many organizations that can be used for the purposes of comparison Internet-based pay surveys © 2014 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part.

Using Pay Surveys Broad-based Participants Timeliness Job matches Survey Data Relevance and Validity Methodology Details provided © 2014 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part.

Pay Surveys and Legal Issues Conditions to be met by organizations to participate in surveys: Must be administered by a third party Data must be more than three months old Minimum of five employers must participate in the survey No single employer’s data may be worth more than 25 percent of the total All data must be aggregated and stripped of any identifying information © 2014 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part.

Pay Grades Groupings of individual jobs having approximately the same job worth Market line: Graph line that shows the relationship between job value as determined by: Job evaluation points Pay survey rates Market banding: Grouping jobs into pay grades based on similar market survey amounts © 2014 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part.

Pay Ranges Each pay grade pay level can be determined by making the market line the midpoint line of the new pay structure Broadbanding: Practice of using fewer pay grades with much broader pay ranges than in traditional compensation systems © 2014 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part.

Figure 11. 13 - Market Pay Line and Job Evaluation Points © 2014 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part.

Individual Pay Red-circled employees: Current jobholder who is paid above the range set for the job Green-circled employees: Incumbent who is paid below the range set for the job Pay compression: Situation in which pay differences among individuals with different levels of experience and performance in the organization becomes small © 2014 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part.

Approaches to Provide Employees With Performance-based Increases Targeting high performers - Focuses on providing the top-performing employees with higher pay raises Pay adjustment matrix - Reflects an employee’s upward movement in a firm Factors considered: Employee’s level of performance as rated in an appraisal Employee’s position in the pay range © 2014 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part.

Standardized Pay Adjustments Standardized Pay Increases Seniority Cost-of-Living Adjustments (COLA) Across-the. Board Increases Lump-Sum Increases (LSI) © 2014 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part.

Figure 11. 16 - Pay Adjustment Matrix Source: Adapted from Payscale’s 2012 Compensation Best Practices report. © 2014 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part.

Compensation Challenges © 2014 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part.