CompensationCompensation

Cash, Bonuses, Insurance, Cash, Bonuses, Insurance, Vacation, HolidaysVacation, HolidaysPerks, RecognitionPerks, Recognition

What does What does compensation (what compensation (what you receive for your you receive for your

services) mean to you?services) mean to you?

A Definition . . .A Definition . . .

• All forms of – financial return, – tangible services and – benefits

• that employees receive as part of their employment relationship

Components of a Total Components of a Total Compensation Program - 1Compensation Program - 1

• FinancialFinancial• Direct

– wages, salaries, commissions, bonuses

• Indirect– insurance plans

• life, health, dental, disability

– social assistance benefits• retirement plans, social security, workers’ comp

– paid absences•vacations, holidays, sick leave

Components of a Total Components of a Total Compensation Program - 2Compensation Program - 2

• Non-FinancialNon-Financial• The Job

– interesting, challenging, responsible– opportunity for recognition, advancement– feeling of achievement

• Job Environment– policies, supervision, co-workers, status

symbols, working conditions, flextime, compressed work week, job sharing, telecommuting, flexible benefits programs

Factors that Influence Wage Factors that Influence Wage LevelsLevels

WAGEMIX

Conditions ofLabor Market

Area WageRates

Cost ofLiving

CollectiveBargaining

LegalRequirements

CompensationPolicy of

Organization

Worth ofJob

Employee’sRelative Worth

Employer’sAbility to Pay

Designing a Compensation Designing a Compensation SystemSystem

Steps in the Decision Process

Step 1 - Establish General Step 1 - Establish General Wage Level for OrganizationWage Level for Organization

• Factors to consider:Factors to consider:• Other firm’s rates• Union demands• Cost-of-living changes• Firm’s ability to pay

Step 2 - Establish Wage Step 2 - Establish Wage Structure (The Pay for Each Structure (The Pay for Each

Job)Job)• Employ a job evaluation systemEmploy a job evaluation system

– Ranking– Job Classification– Point System– Factor Comparison

• Results:Results:– pay grades– rate ranges

Step 3 - Establish Pay for Each Step 3 - Establish Pay for Each Individual on Each JobIndividual on Each Job

• Inputs:Inputs:• Performance appraisal

information• Seniority system

A Pay Model -- 3 Basic A Pay Model -- 3 Basic ComponentsComponents

• I. Compensation Objectives• II. Foundation Concepts• III. Techniques for

Management

A Pay Model A Pay Model I. Compensation Objectives - 1I. Compensation Objectives - 1

• Organization Performance• Labor Costs• Attitudes and Behaviors• Laws and Regulations

A Pay Model A Pay Model I. Compensation Objectives - 2I. Compensation Objectives - 2

• Influence forms & procedures• For example:

– if objective is pay for performance, emphasize incentives, merit pay plans

– if objective is stable, experienced workforce, emphasize seniority-based pay

A Pay Model A Pay Model II. Foundation ConceptsII. Foundation Concepts

• EquityEquity• External EquityExternal Equity• Comparison: outside organization• Internal EquityInternal Equity• Comparison: inside organization,

among jobs• Employee EquityEmployee Equity• Comparison: individuals doing same

job for same organization

Equity TheoryEquity Theory

I = InputsI = Inputseffort, ability, experienceeffort, ability, experience

O = OutcomesO = Outcomespay, benefits, perkspay, benefits, perks

EquityEquityOOpp/I/Ipp = O = Ooo/I/Ioo

Under-reward InequityUnder-reward InequityOOpp/I/Ipp < O < Ooo/I/Ioo

Over-reward InequityOver-reward InequityOOpp/I/Ipp > O > Ooo/I/Ioo

pp = personal, = personal, oo = comparison other= comparison other

Why does Equity Matter?Why does Equity Matter?

What Behaviors are Likely to What Behaviors are Likely to Occur when Inequity is Felt?Occur when Inequity is Felt?

A Pay ModelA Pay ModelIII. Techniques for ManagementIII. Techniques for Management

• A. Pay Level• B. Pay Structure• C. Individual Pay Rates

A Pay ModelA Pay ModelIII. Techniques for ManagementIII. Techniques for Management

A. Pay LevelA. Pay Level• Defined: average rates paid by

employer• Applicable concept: External Equity• 3 Pure Alternatives

– lead competition– match competition– lag competition

• Mechanism used: Market Wage Survey

Market Wage and Salary Market Wage and Salary SurveysSurveys

Select key jobs.Determine relevant labor market.Select organizations.Decide on information to collect:

wages/benefits/pay policies.Compile data received.Determine wages and benefits to

pay.

Company A’s Wage Level

Company A’s Wage Level

Market Wage LevelsMarket Wage Levels

Company B’s Wage Level

Company B’s Wage Level

Market Wage Level

Market Wage Level

•Which company is leading the market?Which company is leading the market?•Which company is lagging the market?Which company is lagging the market?•What would the wage level line look like for a company What would the wage level line look like for a company that was meeting/matching the market?that was meeting/matching the market?

A Pay ModelA Pay ModelIII. Techniques for ManagementIII. Techniques for Management

B. Pay StructureB. Pay Structure• Defined: pay rates for different jobs

within a single organization• Applicable concept: Internal Equity• Pay more for jobs with

– greater qualifications– less desirable working conditions– more valuable output

• Mechanism used: Job Analysis & Job Evaluation

Job EvaluationJob Evaluation• defined: the systematic evaluation of

job descriptions• outcome: a hierarchy of organizational

jobs according to their content and value to the organization

• Methods: – ranking– classification– factor comparison– point method

Job Ranking SystemJob Ranking System

Simplest and oldest system of job

evaluation by which jobs are arrayed

on the basis of their relative worth

Job Classification SystemJob Classification System

System of job evaluation by which jobs

are classified and grouped according

to a series of predetermined wage grades

Point SystemPoint System

Quantitative job evaluation procedure

that determines the relative value of a job

by the total points assigned to it

Factor Comparison SystemFactor Comparison System

Job evaluation system that permits the

evaluation process to be accomplished

on a factor-by-factor basis by developing

a factor comparison scale

Hay Profile MethodHay Profile Method

Job evaluation technique using three

factors – knowledge, mental activity,

and accountability – to evaluate

executive and managerial positions

A Pay ModelA Pay ModelIII. Techniques for ManagementIII. Techniques for Management

C. Individual Pay RatesC. Individual Pay Rates• Defined: pay rates for different

individuals doing the same job within an organization

• Applicable concept: Employee Equity• 2 Techniques

– Flat Rate– Pay Ranges

• Mechanisms used: Performance or Seniority

Wage CurveWage Curve

Curve in a scattergram representing

the relationship between relative worth

of jobs and wage rates

Components of the Wage StructureComponents of the Wage Structure

Pay GradesPay Grades

Groups of jobs within a particular class

that are paid the same rate or rate range

Elements of the Rate RangeElements of the Rate Range

Common Pay Grade RangesCommon Pay Grade Ranges

• Laborers & Trades, up to 20%• Clerical, Technical, Para-

professional, 15-49%• First Level Supervisors,

Professionals 30-50%• Middle and Senior Level

Management, 40-100%

Monitoring Compensation Monitoring Compensation CostsCosts

• Compra-Ratio• Formula:

• A compra ratio < 1 indicates lag• A compra-ratio > indicates excess

Actual Average Pay for GradeActual Average Pay for Grade

Midpoint Pay for GradeMidpoint Pay for Grade

How Would You Handle Outliers?How Would You Handle Outliers?An individual whose current pay is beyond An individual whose current pay is beyond the maximum of the pay grade for his/her the maximum of the pay grade for his/her jobjob

An individual whose current pay is An individual whose current pay is below the minimum of the pay grade below the minimum of the pay grade for his/her jobfor his/her job

Federal Wage LawsFederal Wage Laws

Davis-Beacon Act of 1931

Walsh-Healy Act of 1936

Fair Labor Standards Act of

1938

Nonexempt EmployeesNonexempt Employees

Employees covered by the overtime

provisions of the Fair Labor Standards Act

Exempt EmployeesExempt Employees

Employees not covered by the overtime

provisions of the Fair Labor Standards Act

Comparable WorthComparable Worth

The concept that male and female jobs

that are dissimilar, but equal in terms

of value or worth to the employer,

should be paid the same

Wage-Rate CompressionWage-Rate Compression

Compression of differentials between

job classes, particularly the differential

between hourly workers and their managers