Dessler Ch7Compensating Employees

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    Copyright 2009 Pearson Education, Inc.

    Publishing as Prentice Hall 7- 1

    A Framework for Human Resource

    Management,

    5th ed.

    Gary Dessler

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    Compensating Employees

    Ch 7

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    When you finish studying this chapter,

    you should be able to:

    Explain each of the five basic steps inestablishing pay rates.

    Discuss four basic factors determining pay

    rates. Compare andcontrast piecework and

    team or group incentive plans.

    List anddescribe each of the basicbenefits most employers might beexpected to offer.

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    Introduction

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

    employees and arising from their employment

    - direct financial payments- indirect payments

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    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

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    Pay Factors

    1. Legal2. Union

    3. Policy

    4. Equity

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    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 ofU.S. workers

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    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 equivalentwork

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    Some Important Compensation Laws(cont.)

    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 employmentbecause of race, color, religion, sex, ornational origin

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    Some Important Compensation Laws (cont.)

    Age Discrimination in Employment Act Americans with Disabilities Act

    Family and Medical Leave Act

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    How Unions Influence CompensationDecisions

    National Labor Relations Act (NLRA) of1935

    - granted employees the right to organize and

    to bargain collectively

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    Compensation Policies

    A hospital might have a policy of startingnurses at a wage at least 20% above theprevailing market wage.

    The average base pay for an executivesecretary 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).

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    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

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    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

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    How Employers Establish Pay Rates

    1. Conduct a salary survey2. Employee committeedetermines the

    worth of each job

    3. Group similar jobs into pay grades4. Price each pay grade by using wage

    curves

    5. Develop rate ranges

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    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

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    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 jobcontent, establish how the jobs compare toeach other, and set the compensation paid foreach job

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    Job Evaluation Methods

    Ranking method- ranks each job relative to all other jobs

    Job classification

    - manager categorizes jobs into groups basedon their similarity in terms of compensablefactors such as skills and responsibility

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    Ranking Method of Job Evaluation

    1. Obtain job information2. Select raters and jobs to be rated

    3. Select compensable factors

    4. Rank jobs

    5. Combine ratings

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    Job Evaluation Methods

    Point method- involves identifying several compensable

    factors, each having several degrees, and

    then assigning points based on the number ofdegrees, to come up with an actual number ofpoints for each job

    St 3 G Si il J b i t P

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    Step 3: Group Similar Jobs into PayGrades

    Pay grade- comprises jobs of approximately equal

    difficulty or importance as determined by job

    evaluation

    St 4 P i E h P G d W

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    Step 4: Price Each Pay GradeWageCurves

    Wage curve- shows the average pay rates currently being

    paid for jobs in each pay grade

    Purpose of a wage curve is to show therelationship between (1) the value of the job asdetermined by one of the job evaluationmethods and (2) the current average pay rates

    for the grades

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    Plotting a Wage Curve

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    Step 5: Develop Rate Ranges

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

    Employer may fine-tune pay rates toaccount for any unique circumstances

    P i i M i l d

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    Pricing Managerial andProfessional Jobs

    Emphasize nonquantifiable factors suchas judgment and problem solving

    Tendency is to pay managers and

    professionals based on their performance

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    Executive Compensation Variance

    Three main factors Job complexity

    Ability to pay

    Human capital

    Pricing Managerial and

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    Pricing Managerial andProfessional Jobs

    Four main components: Base salary

    Short-term incentives

    Long-term incentives

    Executive benefits and perks

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    Strategy and Executive Pay

    Identify the company's strategic direction,and translate this into specific businessgoals

    List the skills and competencies yourprofessional employees should have toaccomplish these goals

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    Strategy and Executive Pay (cont.)

    Evaluate the extent to which the existingpay plan produces these skills andcompetencies

    Design and implement the new pay plan

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    Current Trends in Compensation

    CompetencySkill-based pay- employee is paid for the range, depth, and

    types of skills and knowledge he is capable ofusing rather than for the responsibilities of the

    job currently held

    Competencies

    - demonstrable personal characteristics suchas knowledge, skills, and behaviors

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    Current Trends in Compensation (cont.)

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

    method for determining the persons pay

    based on his or her skill competencies

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    Current Trends in Compensation (cont.)

    Broadbanding- collapsing salary grades and ranges into just

    a few wide levels or bands, each of whichcontains a relatively wide range of jobs andsalary levels

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    Board Oversight of Executive Pay

    Has our compensation committee thoroughlyidentified its duties and processes?

    Is our compensation committee beingappropriately advised?

    Are there particular executive compensationissues that our committee should address?

    Do our procedures demonstrate diligence and

    independence? Is our committee appropriately communicating

    its decisions?

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    Incentive Plans

    Individual incentive programs- give performance-based pay to individual

    employees who meet their individualperformance standards

    Variable pay

    - refers to group pay plans that tie payments to

    productivity

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    Piecework Plans

    Piecework- pay is tied directly to what the worker

    produces

    - paid a piece rate for each unit he or sheproduces

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    Team or Group Incentive Plans

    Companies often want to pay groups onan incentive basis, such as when theywant to encourage teamwork

    Main disadvantage is that each workers

    rewards are not based just on his own

    efforts

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    Incentives for Managers and Executives

    Stock option- the right to purchase a specific number of

    shares of company stock at a specific priceduring a period of time

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    Incentives for Salespeople

    Most companies pay their salespeople acombination of salary and commissions

    Typically a 70% base salary/30% incentivemix

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    Auto-dealers Compensation

    Compensation for car salespeople rangesfrom a high of 100% commission to asmall base salary with commission

    Commission is generally based on the netprofit on the car

    It encourages the salesperson to hold firm

    on the retail price, and to push after-saleproducts

    Non-Tangible and Recognized-Based

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    Non-Tangible and Recognized-BasedAwards

    Studies show that recognition has apositive impact on performance, eitheralone or in conjunction with financial

    rewards

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    Online Award Programs

    Recognition programs are expensive toadminister

    Firms partner with online incentive firms to

    expedite process

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    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

    companys annual profits

    I i Pl

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    Incentive Plans

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

    stockor cash to be used to purchase suchstockto a trust established to purchaseshares of the firms stock for employees

    B d b d St k O ti

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    Broad-based Stock Options

    With companies now having to show stockoptions as an expense when awarded,some firms feel awarding stock instead of

    stock options is a more direct andimmediate way of linking pay toperformance

    I ti Pl

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    Incentive Plans

    Gainsharing plans- want to encourage improved employee

    productivity by sharing resulting financialgains with employees

    S l Pl

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    Scanlon Plan

    1. Philosophy of cooperation2. Identity

    3. Competence

    4. Involvement system

    5. Sharing of benefits formula

    E i t Ri k P Pl

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    Earnings-at-Risk Pay Plans

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

    at risk

    HRIS d P d ti it

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    HRIS and Productivity

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

    E l B fit

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    Employee Benefits

    Benefits- defined as all the indirect monetary and

    nonmonetary payments an employee receivesfor continuing to work for the company

    P f Ti N t W k d

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    Pay for Time Not Worked

    Supplemental pay benefits- typically one of an employers most expensive

    benefits

    - holidays, vacations, sick leave, and jury duty

    P f Ti N t W k d ( t )

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    Pay for Time Not Worked (cont.)

    Severance pay- a one-time separation payment

    Worker Adjustment and Retraining Act of

    1989

    I B fit

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    Insurance Benefits

    Workers compensation- aimed at providing sure, prompt income and

    medical benefits to work-related accidentvictims or their dependents

    The Pregnanc Discrimination Act

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    The Pregnancy Discrimination Act

    Pregnancy Discrimination Act- requires employers to treat women affected

    by pregnancy, childbirth, or related medicalconditions the same as any employee notable to work, with respect to all benefits,including sick leave and disability benefits,and health and medical insurance

    Insurance Benefits

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    Insurance Benefits

    COBRA Comprehensive OmnibusBudget Reconciliation Act

    - requires most employers to make available to

    terminated employees continued healthbenefits for a period of time

    Cost Control

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    Cost Control

    Cost containment specialists Online administration

    Defined benefits

    Deductibles Outsourcing

    Wellness programs

    Claims audits Medical tourism

    Long-term care

    Retirement Benefits

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    Retirement Benefits

    Social Security Retirement benefits

    Death benefits

    Disability payments

    Pension Plans

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    Pension Plans

    Defined benefit pension plan- contains a formula for determining retirement

    benefits so that the actual benefits to bereceived are defined ahead of time

    Pension Plans

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    Pension Plans

    Defined contribution plan- specifies what contribution the employer will

    make to a retirement or savings fund set upfor the employee

    Employee Service Benefits

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    Employee Service Benefits

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

    employees with counseling and advisoryservices

    Employee Services and Family-Friendly

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    p y y yBenefits

    Flexible benefits plans- initially called cafeteria plans because

    employees could spend their benefitsallowances on a choice of benefits options

    Employee Leasing

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    Employee Leasing

    Employee leasing- leasing firm becomes the legal employer and

    handles all employee-related paperwork

    Strategy and HR

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    Strategy and HR

    Employers today want to ensure that theircompensation plans (1) add value in termsof (2) promoting the employee

    performance that is required for (3)achieving the firms strategic goals.

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