Copyright © 2009 Pearson Education, Inc. Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 7- 1 A Framework for Human Resource Management,

7- 1Copyright © 2009 Pearson Education, Inc. Copyright © 2009 Pearson Education, Inc.

Publishing as Prentice HallPublishing as Prentice Hall

A Framework for Human Resource A Framework for Human Resource Management, Management, 55thth ed. ed.

Gary DesslerGary Dessler



Compensating Employees

Ch 11 & 12



When you finish studying this chapter, you should be able to:

• Explain each of the five basic steps in establishing pay rates.

• Discuss four basic factors determining pay rates.

• Compare and contrast piecework and team or group incentive plans.

• List and describe each of the basic benefits most employers might be expected to offer.



Introduction

• Employee compensation - refers to all forms of pay or rewards going to

employees and arising from their employment- direct financial payments- indirect payments



Employee Compensation

• Direct financial payments - payments in the form of wages, salaries,

incentives, commissions, and bonuses

• Indirect payments - payments in the form of financial benefits like

employer-paid insurance and vacations



Pay Factors

1. Legal

2. Union

3. Policy

4. Equity



Some Important Compensation Laws

• Fair Labor Standards Act - contains minimum wage, maximum hours,

overtime pay, equal pay, record-keeping, and child labor provisions covering the majority of U.S. workers





Some Important Compensation Laws (cont.)

• Equal Pay Act - employees of one sex may not be paid wages

at a rate lower than that paid to employees of the opposite sex for doing roughly equivalent work




• Title VII of the Civil Rights Act - makes it an unlawful practice for an employer

to discriminate against any individual with respect to hiring, compensation, terms, conditions, or privileges of employment because of race, color, religion, sex, or national origin




• Age Discrimination in Employment Act• Americans with Disabilities Act • Family and Medical Leave Act



How Unions Influence Compensation Decisions

• National Labor Relations Act (NLRA) of 1935 - granted employees the right to organize and

to bargain collectively



Compensation Policies

• A hospital might have a policy of starting nurses at a wage at least 20% above the prevailing market wage.

• The average base pay for an executive secretary ranges from $37,300 in Albuquerque New Mexico to $41,900 (Tampa, Florida), $59,800 (New York, New York), and $60,100 (San Francisco, California).



Equity and Its Impact on Pay Rates

• External equity - pay must compare favorably with rates in

other companies, or an employer will find it hard to attract and retain qualified employees



Equity and Its Impact on Pay Rates (cont.)

• Internal equity - each employee should view his or her pay as

equitable given other employees’ pay in the organization



How Employers Establish Pay Rates

1. Conduct a salary survey

2. Employee committee determines the worth of each job

3. Group similar jobs into pay grades

4. Price each pay grade by using wage curves

5. Develop rate ranges



Step 1: Conduct the Salary Survey

• Salary (or compensation) surveys- formal or informal surveys of what other

employers are paying for similar jobs

• Used to price benchmark jobs• Collect data on benefits





Step 2: Determine the Worth of Each Job

• Job evaluation - formal and systematic comparison of jobs to

determine the worth of one job relative to another

• Compensable factors - factors that determine your definition of job

content, establish how the jobs compare to each other, and set the compensation paid for each job



Job Evaluation Methods

• Ranking method - ranks each job relative to all other jobs

• Job classification - manager categorizes jobs into groups based

on their similarity in terms of compensable factors such as skills and responsibility



Ranking Method of Job Evaluation

1. Obtain job information

2. Select raters and jobs to be rated

3. Select compensable factors

4. Rank jobs

5. Combine ratings



Job Evaluation Methods

• Point method - involves identifying several compensable

factors, each having several degrees, and then assigning points based on the number of degrees, to come up with an actual number of points for each job



Step 3: Group Similar Jobs into Pay Grades

• Pay grade - comprises jobs of approximately equal

difficulty or importance as determined by job evaluation



Step 4: Price Each Pay Grade—Wage Curves

• Wage curve - shows the average pay rates currently being

paid for jobs in each pay grade

• Purpose of a wage curve is to show the relationship between (1) the value of the job as determined by one of the job evaluation methods and (2) the current average pay rates for the grades



Plotting a Wage Curve



Step 5: Develop Rate Ranges

• May be 10 levels or steps and 10 corresponding pay rates within each pay grade

• Employer may fine-tune pay rates to account for any unique circumstances



Pricing Managerial and Professional Jobs

• Emphasize nonquantifiable factors such as judgment and problem solving

• Tendency is to pay managers and professionals based on their performance



Executive Compensation Variance

Three main factors

• Job complexity

• Ability to pay

• Human capital



Pricing Managerial and Professional Jobs

Four main components:

• Base salary

• Short-term incentives

• Long-term incentives

• Executive benefits and perks



Strategy and Executive Pay

• Identify the company's strategic direction, and translate this into specific business goals

• List the skills and competencies your professional employees should have to accomplish these goals



Strategy and Executive Pay (cont.)

• Evaluate the extent to which the existing pay plan produces these skills and competencies

• Design and implement the new pay plan



Current Trends in Compensation

• Competency–Skill-based pay - employee is paid for the range, depth, and

types of skills and knowledge he is capable of using rather than for the responsibilities of the job currently held

• Competencies - demonstrable personal characteristics such

as knowledge, skills, and behaviors



Current Trends in Compensation (cont.)

• Skill-based pay programs - employer defines specific skills, and has a

method for determining the person’s pay based on his or her skill competencies



Current Trends in Compensation (cont.)

• Broadbanding - collapsing salary grades and ranges into just

a few wide levels or bands, each of which contains a relatively wide range of jobs and salary levels





Board Oversight of Executive Pay

• Has our compensation committee thoroughly identified its duties and processes?

• Is our compensation committee being appropriately advised?

• Are there particular executive compensation issues that our committee should address?

• Do our procedures demonstrate diligence and independence?

• Is our committee appropriately communicating its decisions?



Incentive Plans

• Individual incentive programs - give performance-based pay to individual

employees who meet their individual performance standards

• Variable pay - refers to group pay plans that tie payments to

productivity



Piecework Plans

• Piecework - pay is tied directly to what the worker

produces- paid a “piece rate” for each unit he or she

produces



Team or Group Incentive Plans

• Companies often want to pay groups on an incentive basis, such as when they want to encourage teamwork

• Main disadvantage is that each worker’s rewards are not based just on his own efforts



Incentives for Managers and Executives

• Stock option - the right to purchase a specific number of

shares of company stock at a specific price during a period of time



Incentives for Salespeople

• Most companies pay their salespeople a combination of salary and commissions

• Typically a 70% base salary/30% incentive mix



Auto-dealers Compensation

• Compensation for car salespeople ranges from a high of 100% commission to a small base salary with commission

• Commission is generally based on the net profit on the car

• It encourages the salesperson to hold firm on the retail price, and to push “after-sale products”



Non-Tangible and Recognized-Based Awards

• Studies show that recognition has a positive impact on performance, either alone or in conjunction with financial rewards



Online Award Programs

• Recognition programs are expensive to administer

• Firms partner with online incentive firms to expedite process



Incentive Plans

• Merit pay- any salary increase awarded to an employee

based on his or her individual performance

• Profit-sharing plan - most employees receive a share of the

company’s annual profits



Incentive Plans

• Employee stock ownership plan (ESOP)- a corporation contributes shares of its own

stock—or cash to be used to purchase such stock—to a trust established to purchase shares of the firm’s stock for employees



Broad-based Stock Options

• With companies now having to show stock options as an expense when awarded, some firms feel awarding stock instead of stock options is a more direct and immediate way of linking pay to performance



Incentive Plans

• Gainsharing plans - want to encourage improved employee

productivity by sharing resulting financial gains with employees



Scanlon Plan

1. Philosophy of cooperation

2. Identity

3. Competence

4. Involvement system

5. Sharing of benefits formula



Earnings-at-Risk Pay Plans

• Earnings-at-risk pay plans - some portion of the employee's base salary is

at risk



HRIS and Productivity

• Enterprise Incentive Management (EIM) software is used to automate the planning and management of incentive plans



Employee Benefits

• Benefits - defined as all the indirect monetary and

nonmonetary payments an employee receives for continuing to work for the company



Pay for Time Not Worked

• Supplemental pay benefits - typically one of an employer’s most expensive

benefits- holidays, vacations, sick leave, and jury duty



Pay for Time Not Worked (cont.)

• Severance pay - a one-time separation payment

• Worker Adjustment and Retraining Act of 1989



Insurance Benefits

• Workers’ compensation - aimed at providing sure, prompt income and

medical benefits to work-related accident victims or their dependents



The Pregnancy Discrimination Act

• Pregnancy Discrimination Act - requires employers to treat women affected

by pregnancy, childbirth, or related medical conditions the same as any employee not able to work, with respect to all benefits, including sick leave and disability benefits, and health and medical insurance



Insurance Benefits

• COBRA — Comprehensive Omnibus Budget Reconciliation Act - requires most employers to make available to

terminated employees continued health benefits for a period of time



Cost Control

• Cost containment specialists• Online administration• Defined benefits• Deductibles• Outsourcing• Wellness programs• Claims audits• Medical tourism• Long-term care



Retirement Benefits

Social Security

• Retirement benefits

• Death benefits

• Disability payments



Pension Plans

• Defined benefit pension plan - contains a formula for determining retirement

benefits so that the actual benefits to be received are defined ahead of time



Pension Plans

• Defined contribution plan - specifies what contribution the employer will

make to a retirement or savings fund set up for the employee



Employee Service Benefits

• Employee Assistance Programs (EAPs)- formal employer program for providing

employees with counseling and advisory services



Employee Services and Family-Friendly Benefits

• Flexible benefits plans - initially called cafeteria plans because

employees could spend their benefits allowances on a choice of benefits options



Employee Leasing

• Employee leasing - leasing firm becomes the legal employer and

handles all employee-related paperwork



Strategy and HR

• Employers today want to ensure that their compensation plans (1) add value in terms of (2) promoting the employee performance that is required for (3) achieving the firm’s strategic goals.



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Copyright © 2009 Pearson Education, Inc. Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 7- 1 A Framework for Human Resource Management,