Managing Compensation The Challenges of Human Resources Management

Managing Compensation The Challenges of Human Resources Management © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password protected website for classroom use. 1– 1

Chapter Objectives After studying this chapter, you should be able to LEARNING OUTCOME 1 Explain how to formulate a strategic compensation program. LEARNING OUTCOME 2 Indicate how pay is determined. LEARNING OUTCOME 3 Know how to effectively perform a job evaluation. LEARNING OUTCOME 4 Explain the purpose of a wage survey. LEARNING OUTCOME 5 LEARNING OUTCOME 6 LEARNING OUTCOME 7 Define the wage curve, pay grades, and rate ranges as parts of the compensation structure. Understand the importance of using a compensation scorecard. Identify the major provisions of the federal laws affecting compensation. © 2012 Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in except useexcept as © 2012 Cengage Learning. All Rights Reserved. May not be copied, or duplicated, in part, whole or infor part, for use as permitted distributed with a certain product or service or otherwise on a password protected website for classroom use. permittedinina alicense distributed a certain product or service or otherwise on a password protected website for 2 of 51 36

Compensation • Pay is a statement of an employee’s worth by an employer. • Pay is a perception of worth by an employee. © 2012 Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in except useexcept as © 2012 Cengage Learning. All Rights Reserved. May not be copied, or duplicated, in part, whole or infor part, for use as permitted distributed with a certain product or service or otherwise on a password protected website for classroom use. permittedinina alicense distributed a certain product or service or otherwise on a password protected website for 3 of 51 36

Compensation Management and Other HRM Functions Aid or impair recruitment Recruitment Supply of applicants affects wage rates Pay rates affect selectivity Selection standards affect level of pay required Pay can motivate training Training and Development Increased knowledge leads to higher pay Training and development may lead to higher pay Compensation Management A basis for determining employee’s rate of pay Low pay encourages unionization Labor Relations Pay rates determined through negotiation © 2012 Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in except useexcept as © 2012 Cengage Learning. All Rights Reserved. May not be copied, or duplicated, in part, whole or infor part, for use as permitted distributed with a certain product or service or otherwise on a password protected website for classroom use. permittedinina alicense distributed a certain product or service or otherwise on a password protected website for 4 of 51 36

Total Compensation Direct Wages / Salaries Commissions Indirect Time Not Worked • Vacations • Breaks • Holidays Insurance Plans Bonuses Gainsharing • Medical • Dental • Life Security Plans • Pensions Employee Services • Educational assistance • Recreational programs © 2012 Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in except useexcept as © 2012 Cengage Learning. All Rights Reserved. May not be copied, or duplicated, in part, whole or infor part, for use as permitted distributed with a certain product or service or otherwise on a password protected website for classroom use. permittedinina alicense distributed a certain product or service or otherwise on a password protected website for 5 of 51 36

Compensation Components © 2012 Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in except useexcept as © 2012 Cengage Learning. All Rights Reserved. May not be copied, or duplicated, in part, whole or infor part, for use as permitted distributed with a certain product or service or otherwise on a password protected website for classroom use. permittedinina alicense distributed a certain product or service or otherwise on a password protected website for 6 of 51 36

Compensation Alignment © 2012 Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in except useexcept as © 2012 Cengage Learning. All Rights Reserved. May not be copied, or duplicated, in part, whole or infor part, for use as permitted distributed with a certain product or service or otherwise on a password protected website for classroom use. permittedinina alicense distributed a certain product or service or otherwise on a password protected website for 7 of 51 36

Strategic Compensation • Strategic Compensation § Links the compensation of employees to the mission, objectives, philosophies, and culture of the organization. § Serves to mesh the monetary payments made to employees with specific functions of the HR program in establishing a pay for performance standard. § Seeks to motivate employees through compensation. © 2012 Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in except useexcept as © 2012 Cengage Learning. All Rights Reserved. May not be copied, or duplicated, in part, whole or infor part, for use as permitted distributed with a certain product or service or otherwise on a password protected website for classroom use. permittedinina alicense distributed a certain product or service or otherwise on a password protected website for 8 of 51 36

Linking Compensation to Organizational Objectives • Many managers believe that compensation programs have not always achieved their intended purpose. • Strategic compensation planning attempts to link employee rewards to specific orga nizational goals. That is, this planning should facilitate the effective use of employees. • Value added Compensation – Evaluating the individual components of the compensation program (pay and benefits) to see if they advance the needs of employees and the goals of the organization. • “How does this compensation practice benefit the organization? ” • “Does the benefit offset the administrative cost? ” 9– 9 © 2010 Learning. South Western, a part of. May Cengage Learning. Allorrights © 2012 All Rights Reserved. be copied, scanned, duplicated, in whole or in except useexcept as © 2012 Cengage Learning. All Rights Reserved. not May not be copied, or duplicated, in part, whole or infor part, for use as reserved. permitted in a license distributed with a certain product or service or otherwise on a password protected website for classroom use. 9 of 51 36

Common Strategic Compensation Goals 1. 2. 3. 4. To reward employees’ past performance To remain competitive in the labor market To maintain salary equity among employees To mesh employees’ future performance with organizational goals 5. To control the compensation budget 6. To attract new employees 7. To reduce unnecessary turnover © 2012 Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in except useexcept as © 2012 Cengage Learning. All Rights Reserved. May not be copied, or duplicated, in part, whole or infor part, for use as permitted distributed with a certain product or service or otherwise on a password protected website for classroom use. permittedinina alicense distributed a certain product or service or otherwise on a password protected website for 11 of 51 36

Strategic Compensation Policy Concerns 1. The rate of pay within the organization and whether it is to be above, below, or at the prevailing community rate. 2. The ability of the pay program to gain employee acceptance while motivating employees to perform to the best of their abilities. 3. The pay level at which employees may be recruited and the pay differential between new and more senior employees. 4. The intervals at which pay raises are to be granted and the extent to which merit and/or seniority will influence the raises. 5. The pay levels needed to facilitate the achievement of a sound financial position in relation to the products or services offered. © 2012 Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in except useexcept as © 2012 Cengage Learning. All Rights Reserved. May not be copied, or duplicated, in part, whole or infor part, for use as permitted distributed with a certain product or service or otherwise on a password protected website for classroom use. permittedinina alicense distributed a certain product or service or otherwise on a password protected website for 12 of 51 36

The Pay-for-Performance Standard • Pay for Performance Standard § The standard by which managers tie compensation to employee effort and performance. § Refers to a wide range of compensation options, including merit based pay, bonuses, salary commissions, job and pay banding, team/group incentives, and various gainsharing programs. © 2012 Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in except useexcept as © 2012 Cengage Learning. All Rights Reserved. May not be copied, or duplicated, in part, whole or infor part, for use as permitted distributed with a certain product or service or otherwise on a password protected website for classroom use. permittedinina alicense distributed a certain product or service or otherwise on a password protected website for 13 of 51 36

Designing a Pay-for-Performance System • How will performance be measured? • How will monies to be allocated for compensation increases. • Which employees will be eligible? • How will payouts be made? • How often will payouts occur? • How large will the payouts be? • Will employees perceive the rewards as valued? © 2012 Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in except useexcept as © 2012 Cengage Learning. All Rights Reserved. May not be copied, or duplicated, in part, whole or infor part, for use as permitted distributed with a certain product or service or otherwise on a password protected website for classroom use. permittedinina alicense distributed a certain product or service or otherwise on a password protected website for 14 of 51 36

Motivating Employees through Compensation • Pay Equity (also Distributive Fairness) § An employee’s perception that compensation received is equal to the value of the work performed. § A motivation theory that explains how people respond to situations in which they feel they have received less (or more) than they deserve. – Individuals form a ratio of their inputs to outcomes in their job and then compare the value of that ratio with the value of the ratio for other individuals in similar jobs. © 2012 Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in except useexcept as © 2012 Cengage Learning. All Rights Reserved. May not be copied, or duplicated, in part, whole or infor part, for use as permitted distributed with a certain product or service or otherwise on a password protected website for classroom use. permittedinina alicense distributed a certain product or service or otherwise on a password protected website for 15 of 51 36

Relationship between Pay Equity and Motivation © 2012 Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in except useexcept as © 2012 Cengage Learning. All Rights Reserved. May not be copied, or duplicated, in part, whole or infor part, for use as permitted distributed with a certain product or service or otherwise on a password protected website for classroom use. permittedinina alicense distributed a certain product or service or otherwise on a password protected website for 16 of 51 36

Motivating Employees through Compensation • There are 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. © 2012 Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in except useexcept as © 2012 Cengage Learning. All Rights Reserved. May not be copied, or duplicated, in part, whole or infor part, for use as permitted distributed with a certain product or service or otherwise on a password protected website for classroom use. permittedinina alicense distributed a certain product or service or otherwise on a password protected website for 17 of 51 36

Expectancy Theory and Pay • Expectancy Theory § A theory of motivation that holds that employees should exert greater work effort if they have reason to expect that it will result in a reward that they value. § Employees also must believe that good performance is valued by their employer and will result in their receiving the expected reward. © 2012 Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in except useexcept as © 2012 Cengage Learning. All Rights Reserved. May not be copied, or duplicated, in part, whole or infor part, for use as permitted distributed with a certain product or service or otherwise on a password protected website for classroom use. permittedinina alicense distributed a certain product or service or otherwise on a password protected website for 18 of 51 36

Pay-for-Performance and Expectancy Theory © 2012 Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in except useexcept as © 2012 Cengage Learning. All Rights Reserved. May not be copied, or duplicated, in part, whole or infor part, for use as permitted distributed with a certain product or service or otherwise on a password protected website for classroom use. permittedinina alicense distributed a certain product or service or otherwise on a password protected website for 19 of 51 36

Motivating Employees through Compensation • Pay Secrecy § An organizational policy prohibiting employees from revealing their compensation information to anyone. – Creates misperceptions and distrust of compensation fairness and pay for performance standards. § Arguments against secrecy: – Knowledge of base pay is the strongest predictor of pay satisfaction, which is highly associated with work engagement – Knowledge of base pay more strongly predicts pay satisfaction than does the actual amount of pay received by employees. © 2012 Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in except useexcept as © 2012 Cengage Learning. All Rights Reserved. May not be copied, or duplicated, in part, whole or infor part, for use as permitted distributed with a certain product or service or otherwise on a password protected website for classroom use. permittedinina alicense distributed a certain product or service or otherwise on a password protected website for 20 of 51 36

The Bases for Compensation • Hourly Work § Work paid on an hourly basis. • Piecework § Work paid according to the number of units produced. • Salary Workers § Employees whose compensation is computed on the basis of weekly, biweekly, or monthly pay periods. © 2012 Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in except useexcept as © 2012 Cengage Learning. All Rights Reserved. May not be copied, or duplicated, in part, whole or infor part, for use as permitted distributed with a certain product or service or otherwise on a password protected website for classroom use. permittedinina alicense distributed a certain product or service or otherwise on a password protected website for 21 of 51 36

The Bases for Compensation (cont. ) • Nonexempt Employees § Employees covered by the overtime provisions of the Fair Labor Standards Act. § They must be paid time and one half their regular pay for all work performed after forty regular hours of work in a workweek. • Exempt Employees § Employees who not covered in the overtime provisions of the Fair Labor Standards Act. § Managers, supervisors, and white collar professional employees are exempted on the basis of their exercise of independent judgment and other criteria. © 2012 Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in except useexcept as © 2012 Cengage Learning. All Rights Reserved. May not be copied, or duplicated, in part, whole or infor part, for use as permitted distributed with a certain product or service or otherwise on a password protected website for classroom use. permittedinina alicense distributed a certain product or service or otherwise on a password protected website for 22 of 51 36

The Pay Mix • Internal and external factors combine to influence what jobs will be paid. • The combination of these factors is called the “wage mix. ” 9– 23 © 2010 Learning. South Western, a part of. May Cengage Learning. Allorrights © 2012 All Rights Reserved. be copied, scanned, duplicated, in whole or in except useexcept as © 2012 Cengage Learning. All Rights Reserved. not May not be copied, or duplicated, in part, whole or infor part, for use as reserved. permitted in a license distributed with a certain product or service or otherwise on a password protected website for classroom use. 23 of 51 36

Factors Affecting the Pay Mix © 2012 Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in except useexcept as © 2012 Cengage Learning. All Rights Reserved. May not be copied, or duplicated, in part, whole or infor part, for use as permitted distributed with a certain product or service or otherwise on a password protected website for classroom use. permittedinina alicense distributed a certain product or service or otherwise on a password protected website for 24 of 51 36

The Wage Mix—Internal Factors • Employer’s Compensation Strategy § Establishes the internal wage relationship among jobs and skill levels § Sets organization compensation policy to lead, lag, or match competitors’ pay. § Rewards employee performance § Guides administrative decisions concerning elements of the pay system such as overtime premiums, payment periods, and short term or long term incentives. © 2012 Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in except useexcept as © 2012 Cengage Learning. All Rights Reserved. May not be copied, or duplicated, in part, whole or infor part, for use as permitted distributed with a certain product or service or otherwise on a password protected website for classroom use. permittedinina alicense distributed a certain product or service or otherwise on a password protected website for 25 of 51 36

The Pay Mix—Internal Factors • Some jobs are worth more to the organization than other jobs. • For example, the job of marketing analyst probably has more impact on the success of the organization than the job of a janitor. • Therefore, most persons would argue that the more important jobs should be paid more than the less important jobs. 9– 26 © 2010 Learning. South Western, a part of. May Cengage Learning. Allorrights © 2012 All Rights Reserved. be copied, scanned, duplicated, in whole or in except useexcept as © 2012 Cengage Learning. All Rights Reserved. not May not be copied, or duplicated, in part, whole or infor part, for use as reserved. permitted in a license distributed with a certain product or service or otherwise on a password protected website for classroom use. 26 of 51 36

The Wage Mix—Internal Factors (cont. ) • Worth of a Job § § A current approach to determining the worth of a job is to judge the job’s total value to the organization. Establishing the internal wage relationship among jobs and skill levels. • Employee’s Relative Worth § § Rewarding individual employee performance Employees can improve their worth to the organization by working smarter or harder or by acquiring advanced skills or job knowledge. • Employer’s Ability to Pay § § Having the resources and profits to pay employees. National or regional economic conditions, competition from domestic or foreign competitors, and strong or poor managerial policies and practices can influence the employer’s ability to grant pay increases. © 2012 Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in except useexcept as © 2012 Cengage Learning. All Rights Reserved. May not be copied, or duplicated, in part, whole or infor part, for use as permitted distributed with a certain product or service or otherwise on a password protected website for classroom use. permittedinina alicense distributed a certain product or service or otherwise on a password protected website for 27 of 51 36

Comparison of Compensation Strategies © 2012 Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in except useexcept as © 2012 Cengage Learning. All Rights Reserved. May not be copied, or duplicated, in part, whole or infor part, for use as permitted distributed with a certain product or service or otherwise on a password protected website for classroom use. permittedinina alicense distributed a certain product or service or otherwise on a password protected website for 28 of 51 36

The Wage Mix—External Factors • Labor Market Conditions § Availability and quality of potential employees is affected by economic conditions, government regulations and policies, and the presence of unions. • Area Wage Rates § A firm’s formal wage structure of rates is influenced by those being paid by other area employers for comparable jobs. © 2012 Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in except useexcept as © 2012 Cengage Learning. All Rights Reserved. May not be copied, or duplicated, in part, whole or infor part, for use as permitted distributed with a certain product or service or otherwise on a password protected website for classroom use. permittedinina alicense distributed a certain product or service or otherwise on a password protected website for 29 of 51 36

The Wage Mix—External Factors (cont. ) • Cost of Living § Local housing and environmental conditions can cause wide variations in the cost of living for employees. § Inflation can require that compensation rates be adjusted upward periodically to help employees maintain their purchasing power. § Consumer Price Index (CPI) – A Bureau of Labor Statistics measure of the average change in prices over time in a fixed “market basket” of goods and services © 2012 Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in except useexcept as © 2012 Cengage Learning. All Rights Reserved. May not be copied, or duplicated, in part, whole or infor part, for use as permitted distributed with a certain product or service or otherwise on a password protected website for classroom use. permittedinina alicense distributed a certain product or service or otherwise on a password protected website for 30 of 51 36

The Wage Mix—External Factors (cont. ) • Collective Bargaining § Escalator clauses in labor agreements provide for quarterly upward cost of living (COLA) wage adjustments for inflation to protect employees’ purchasing power. § Unions bargain for real wage increases that raise the standard of living for their members. § Real wages are increases larger than rises in the consumer price index; that is, the real earning power of wages. © 2012 Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in except useexcept as © 2012 Cengage Learning. All Rights Reserved. May not be copied, or duplicated, in part, whole or infor part, for use as permitted distributed with a certain product or service or otherwise on a password protected website for classroom use. permittedinina alicense distributed a certain product or service or otherwise on a password protected website for 31 of 51 36

Job Evaluation Systems • Job Evaluation § § § The systematic process of determining the relative worth of jobs in order to establish which jobs should be paid more than others within an organization. Job evaluation helps establish internal equity between various jobs. 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 how much they are linked to organizational objectives. © 2012 Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in except useexcept as © 2012 Cengage Learning. All Rights Reserved. May not be copied, or duplicated, in part, whole or infor part, for use as permitted distributed with a certain product or service or otherwise on a password protected website for classroom use. permittedinina alicense distributed a certain product or service or otherwise on a password protected website for 32 of 51 36

Job Evaluation Systems (cont. ) • Job Ranking System § Oldest system of job evaluation by which jobs are arrayed on the basis of their relative worth. § Disadvantages – Does not provide a precise measure of each job’s worth. – Final job rankings indicate the relative importance of jobs, not the extent of differences between jobs. – Method can used to consider only a reasonably small number of jobs. © 2012 Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in except useexcept as © 2012 Cengage Learning. All Rights Reserved. May not be copied, or duplicated, in part, whole or infor part, for use as permitted distributed with a certain product or service or otherwise on a password protected website for classroom use. permittedinina alicense distributed a certain product or service or otherwise on a password protected website for 33 of 51 36

Paired-Comparison Job Ranking Table © 2010 South Western, a part of Cengage Learning. All rights Directions: Place an X in the cell where the value of a row job is higher than that of a column job. reserved. 9– 34 © 2012 Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in except useexcept as © 2012 Cengage Learning. All Rights Reserved. May not be copied, or duplicated, in part, whole or infor part, for use as permitted distributed with a certain product or service or otherwise on a password protected website for classroom use. permittedinina alicense distributed a certain product or service or otherwise on a password protected website for 34 of 51 36

Job Evaluation Systems (cont. ) • Job Classification System § A system of job evaluation in which jobs are classified and grouped according to a series of predetermined wage grades. § Successive grades require increasing amounts of job responsibility, skill, knowledge, ability, or other factors selected to compare jobs. § Used primarily by governments © 2012 Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in except useexcept as © 2012 Cengage Learning. All Rights Reserved. May not be copied, or duplicated, in part, whole or infor part, for use as permitted distributed with a certain product or service or otherwise on a password protected website for classroom use. permittedinina alicense distributed a certain product or service or otherwise on a password protected website for 35 of 51 36

Point System • Point System § § A quantitative job evaluation procedure that determines the relative value of a job by the total points assigned to it. Provides a more refined basis for making judgments that either the ranking or classification systems. Permits jobs to be evaluated quantitatively on the basis of factors or elements—compensable factors—that constitute the job. Common compensable factors are the skills, efforts, responsibilities and working conditions of a job. • The Point Manual § A handbook that contains a description of the compensable factors and the degrees to which these factors may exist within the jobs. © 2012 Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in except useexcept as © 2012 Cengage Learning. All Rights Reserved. May not be copied, or duplicated, in part, whole or infor part, for use as permitted distributed with a certain product or service or otherwise on a password protected website for classroom use. permittedinina alicense distributed a certain product or service or otherwise on a password protected website for 36 of 51 36

Point Values for Job Factors of the American Association of Industrial Management 9– 37 © 2010 Learning. South Western, a part of. May Cengage Learning. Allorrights © 2012 All Rights Reserved. be copied, scanned, duplicated, in whole or in except useexcept as © 2012 Cengage Learning. All Rights Reserved. not May not be copied, or duplicated, in part, whole or infor part, for use as reserved. permitted in a license distributed with a certain product or service or otherwise on a password protected website for classroom use. 37 of 51 36

Description of Education Factor and Degrees of the American Association of Industrial Management 1. EDUCATION This factor measures the basic trades training, knowledge or “scholastic contact” essential as background or training preliminary to learning the job duties. This job knowledge or background may have been acquired either by formal education or by training on jobs of lesser degree or by any combination of these approaches. 1 st Degree 14 points Requires the use of simple writing, adding, subtracting, whole numbers and the carrying out of instructions; and the use of fixed gauges and direct reading instruments and devices in which interpretation is not required. 2 nd Degree 28 points Requires the use of commercial English, grammar and arithmetic such as addition, subtraction, multiplication and division, including decimals and fractions; simple use of formulas, charts, tables, drawings, specifications, schedules, wiring diagrams, together with the use of adjustable measuring instruments, graduates and the like requiring interpretation in their various applications; or the posting, preparation, interpretation, use and checking of reports, forms, records and comparable data. 3 rd Degree 42 points Requires the use of shop mathematics together with the use of complicated drawings, specifications, charts, tables, various types of adjustable measuring instruments and the training generally applicable in a particular or specialized occupation. Equivalent to 1 to 3 years applied trades training. 4 th Degree 56 points Requires the use of advanced shop mathematics, together with the use of complicated drawings, specifications, charts, tables, handbook formulas, all varieties of adjustable measuring instruments and the uses of broad training in a recognized trade or craft. Equivalent to complete, accredited, indentured apprenticeship or equivalent to high school plus a 2 year technical college education. 5 th Degree 70 points Requires the use of higher mathematics involved in the application of engineering principles and the performance of related, practical operations, together with a comprehensive knowledge of theories and practices of mechanical, electrical, chemical, civil or like engineering field. Equivalent to complete 4 years of technical college or university education. 9– 38 © 2010 Learning. South Western, a part of. May Cengage Learning. Allorrights © 2012 All Rights Reserved. be copied, scanned, duplicated, in whole or in except useexcept as © 2012 Cengage Learning. All Rights Reserved. not May not be copied, or duplicated, in part, whole or infor part, for use as reserved. permitted in a license distributed with a certain product or service or otherwise on a password protected website for classroom use. 38 of 51 36

Work Valuation Methods • Work Valuation § A job evaluation system that seeks to measure a job’s worth through its value to the organization. § Jobs are be valued relative to financial, operational, or customer service objectives of the organization. – Considers that work should be valued relative to the business goals of the organization rather than by an internally applied point factor job evaluation system. § Work valuation serves to direct compensation dollars to the type of work pivotal to organizational goals. © 2012 Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in except useexcept as © 2012 Cengage Learning. All Rights Reserved. May not be copied, or duplicated, in part, whole or infor part, for use as permitted distributed with a certain product or service or otherwise on a password protected website for classroom use. permittedinina alicense distributed a certain product or service or otherwise on a password protected website for 39 of 51 36

Job Evaluation for Management Positions • Hay Profile Method § Job evaluation technique using three factors— knowledge(know how), mental activity(problem solving), and accountability. —to evaluate executive and managerial positions. © 2012 Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in except useexcept as © 2012 Cengage Learning. All Rights Reserved. May not be copied, or duplicated, in part, whole or infor part, for use as permitted distributed with a certain product or service or otherwise on a password protected website for classroom use. permittedinina alicense distributed a certain product or service or otherwise on a password protected website for 40 of 51 36

Compensation Implementation – Pay Tools • Wage and Salary Survey § § A survey of the wages paid to employees of other employers in the surveying organization’s relevant labor market. Helps maintain internal and external pay equity for employees. • Labor Market § The area from which employers obtain certain types of workers. © 2012 Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in except useexcept as © 2012 Cengage Learning. All Rights Reserved. May not be copied, or duplicated, in part, whole or infor part, for use as permitted distributed with a certain product or service or otherwise on a password protected website for classroom use. permittedinina alicense distributed a certain product or service or otherwise on a password protected website for 41 of 51 36

Collecting Survey Data • Outside Sources of Data § Bureau of Labor Statistics (BLS) – National Compensation Survey § § State and local wage surveys Online survey data • Problems with Surveys § § They are not always compatible with the user’s jobs The user cannot specify what specific data to collect. © 2012 Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in except useexcept as © 2012 Cengage Learning. All Rights Reserved. May not be copied, or duplicated, in part, whole or infor part, for use as permitted distributed with a certain product or service or otherwise on a password protected website for classroom use. permittedinina alicense distributed a certain product or service or otherwise on a password protected website for 42 of 51 36

Bureau of Labor Statistics National Compensation Survey © 2012 Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in except useexcept as © 2012 Cengage Learning. All Rights Reserved. May not be copied, or duplicated, in part, whole or infor part, for use as permitted distributed with a certain product or service or otherwise on a password protected website for classroom use. permittedinina alicense distributed a certain product or service or otherwise on a password protected website for 43 of 51 36

Bureau of Labor Statistics National Compensation Survey (cont. ) © 2012 Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in except useexcept as © 2012 Cengage Learning. All Rights Reserved. May not be copied, or duplicated, in part, whole or infor part, for use as permitted distributed with a certain product or service or otherwise on a password protected website for classroom use. permittedinina alicense distributed a certain product or service or otherwise on a password protected website for 44 of 51 36

The Wage Curve • Wage Curve § A curve in a scatter gram representing the relationship between relative worth of jobs and wage rates. • Pay Grades § Groups of jobs within a particular class that are paid the same rate. • Rate Ranges § A range of rates for each pay grade that may be the same for each grade or proportionately greater for each successive grade. • Red Circle Rates § Payment rates above the maximum of the pay range. © 2012 Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in except useexcept as © 2012 Cengage Learning. All Rights Reserved. May not be copied, or duplicated, in part, whole or infor part, for use as permitted distributed with a certain product or service or otherwise on a password protected website for classroom use. permittedinina alicense distributed a certain product or service or otherwise on a password protected website for 46 of 51 36

Freehand Wage Curve © 2012 Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in except useexcept as © 2012 Cengage Learning. All Rights Reserved. May not be copied, or duplicated, in part, whole or infor part, for use as permitted distributed with a certain product or service or otherwise on a password protected website for classroom use. permittedinina alicense distributed a certain product or service or otherwise on a password protected website for 47 of 51 36

Single Rate Structure © 2012 Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in except useexcept as © 2012 Cengage Learning. All Rights Reserved. May not be copied, or duplicated, in part, whole or infor part, for use as permitted distributed with a certain product or service or otherwise on a password protected website for classroom use. permittedinina alicense distributed a certain product or service or otherwise on a password protected website for 48 of 51 36

The Federal Wage Poster © 2012 Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in except useexcept as © 2012 Cengage Learning. All Rights Reserved. May not be copied, or duplicated, in part, whole or infor part, for use as permitted distributed with a certain product or service or otherwise on a password protected website for classroom use. permittedinina alicense distributed a certain product or service or otherwise on a password protected website for 49 of 51 36

The Wage Curve (cont. ) • Competence based Pay, (also skill based pay or knowledge based pay) § Compensation for the different skills or increased knowledge employees possess rather than for the job they hold in a designated job category. – Greater productivity, increased employee learning and commitment to work, improved staffing flexibility to meet production or service demands, and the reduced effects of absenteeism and turnover, • Broadbanding § Collapses many traditional salary grades into a few wide salary bands. © 2012 Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in except useexcept as © 2012 Cengage Learning. All Rights Reserved. May not be copied, or duplicated, in part, whole or infor part, for use as permitted distributed with a certain product or service or otherwise on a password protected website for classroom use. permittedinina alicense distributed a certain product or service or otherwise on a password protected website for 50 of 51 36

Compensation Assessment • Assessing the effectiveness of your compensation system is vitally important to linking compensation with strategy. • Measures: 1. help the company detect potential compensation problems, 2. make compensation decisions more transparent, and 3. improve the alignment of compensation decisions with organizational objectives. © 2012 Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in except useexcept as © 2012 Cengage Learning. All Rights Reserved. May not be copied, or duplicated, in part, whole or infor part, for use as permitted distributed with a certain product or service or otherwise on a password protected website for classroom use. permittedinina alicense distributed a certain product or service or otherwise on a password protected website for 51 of 51 36

Compensation Assessment (cont. ) • The compensation scorecard collects and displays the results for all the measures that a company uses to monitor and compare compensation among internal departments or units. • The scorecard creates a comparative tool within the organization that can reinforce desired outcomes that are unique to the company’s strategy. © 2012 Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in except useexcept as © 2012 Cengage Learning. All Rights Reserved. May not be copied, or duplicated, in part, whole or infor part, for use as permitted distributed with a certain product or service or otherwise on a password protected website for classroom use. permittedinina alicense distributed a certain product or service or otherwise on a password protected website for 52 of 51 36

Compensation Scorecard © 2012 Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in except useexcept as © 2012 Cengage Learning. All Rights Reserved. May not be copied, or duplicated, in part, whole or infor part, for use as permitted distributed with a certain product or service or otherwise on a password protected website for classroom use. permittedinina alicense distributed a certain product or service or otherwise on a password protected website for 53 of 51 36

Government Regulation of Compensation Davis-Bacon Act (1931) Required minimum wage, prevailing wage rates, 1½ overtime premium payments by federal contractors. Walsh-Healy Act (1936) Required overtime payments after 8 daily or 40 regular work hours for workers on federal contracts. Fair Labor Standards Act (FLSA) 1938 Interstate commerce clause used to cover workers except agricultural and exempted (managerial) employees, child labor (under 16) is prohibited. (as Amended) © 2012 Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in except useexcept as © 2012 Cengage Learning. All Rights Reserved. May not be copied, or duplicated, in part, whole or infor part, for use as permitted distributed with a certain product or service or otherwise on a password protected website for classroom use. permittedinina alicense distributed a certain product or service or otherwise on a password protected website for 54 of 51 36

5 Minimum Wage Laws in the States Note: Where Federal and state law have different minimum wage rates, the higher standard applies 9– 55 © 2010 Learning. South Western, a part of. May Cengage Learning. Allorrights © 2012 All Rights Reserved. be copied, scanned, duplicated, in whole or in except useexcept as © 2012 Cengage Learning. All Rights Reserved. not May not be copied, or duplicated, in part, whole or infor part, for use as reserved. permitted in a license distributed with a certain product or service or otherwise on a password protected website for classroom use. 55 of 51 36

The Federal Wage Poster 9– 56 © 2010 Learning. South Western, a part of. May Cengage Learning. Allorrights © 2012 All Rights Reserved. be copied, scanned, duplicated, in whole or in except useexcept as © 2012 Cengage Learning. All Rights Reserved. not May not be copied, or duplicated, in part, whole or infor part, for use as reserved. permitted in a license distributed with a certain product or service or otherwise on a password protected website for classroom use. 56 of 51 36

The Issue of Wage Rate Compression • Wage 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. • Reducing Wage Rate Compression § 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. © 2012 Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in except useexcept as © 2012 Cengage Learning. All Rights Reserved. May not be copied, or duplicated, in part, whole or infor part, for use as permitted distributed with a certain product or service or otherwise on a password protected website for classroom use. permittedinina alicense distributed a certain product or service or otherwise on a password protected website for 57 of 51 36

The Issue of Wage Rate Compression • Child Labor Provisions § The “floor” it imposes makes it more difficult for high school students and young adults to find jobs • Exemption from Overtime Provisions § The FLSA perhaps creates the most confusion in the exemption from overtime requirements for certain groups of employees or from coverage of certain of the act’s provisions • Pay Equity Provisions § § § The Equal Pay Act of 1963 Title VII of the Civil Rights Act of 1964 Age Discrimination Act of 1967 © 2012 Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in except useexcept as © 2012 Cengage Learning. All Rights Reserved. May not be copied, or duplicated, in part, whole or infor part, for use as permitted distributed with a certain product or service or otherwise on a password protected website for classroom use. permittedinina alicense distributed a certain product or service or otherwise on a password protected website for 58 of 51 36

Key Terms • broadbanding • competence based pay • consumer price index (CPI) • escalator clauses • exempt employees • Hay profile method • hourly work • job classification system • job evaluation • job ranking system • nonexempt employees • pay equity • pay for performance standard • pay grades • piecework • point system • real wages • red circle rates • wage and salary survey • wage curve • pay rate compression • work valuation © 2012 Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in except useexcept as © 2012 Cengage Learning. All Rights Reserved. May not be copied, or duplicated, in part, whole or infor part, for use as permitted distributed with a certain product or service or otherwise on a password protected website for classroom use. permittedinina alicense distributed a certain product or service or otherwise on a password protected website for 59 of 51 36

Chapter 9 - Learning Outcomes Learning Outcome Statements Related Outcomes from Body of the Text 1 Explain how to formulate a strategic compensation program. Facebook has over 1, 700 employees and offices in twelve countries. How would you develop a compensation strategy to match Facebook’s business objectives of continual innovation and growth? 2 Indicate how pay is determined. Google’s decision to increase pay by 10 percent was based on many internal and external factors. What specific factors would you say led to Google’s compensation redesign? 3 Know how to effectively perform a job evaluation. During the financial crisis of 2008– 2010, companies had to reassess the value of specific jobs—leading to some unfortunate cuts in salary and benefits. How would you determine the worth of someone’s job to ensure equity? 4 Explain the purpose of a wage survey. Imagine you have been assigned by Delta to decide if the pay being offered to new customer service representatives is consistent with what competitors are paying. What tools would you use to help in your assessment? 5 Define the wage curve, pay grades, and rate ranges as parts of the compensation structure. One of the objections to Google granting wage increases on a percentage basis is that the lowest paid employees, who are having the most trouble “dealing with sky high property prices, mortgages, and those kinds of things, ” get the smallest increase, while the highest paid employees get the largest increase. Is this objection a valid one? 6 Understand the importance of using a compensation scorecard. How do you know if a company’s compensation system is helping to reach its objectives? Identify the major provisions of the federal laws affecting compensation. Federal laws governing compensation raise important issues for both employers and employees. How do regulations influence compensation decisions? How do they protect employees from discrimination? 7 © 2012 Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in except useexcept as © 2012 Cengage Learning. All Rights Reserved. May not be copied, or duplicated, in part, whole or infor part, for use as permitted distributed with a certain product or service or otherwise on a password protected website for classroom use. permittedinina alicense distributed a certain product or service or otherwise on a password protected website for 60 of 51 36