Total Rewards & Compensation

MN 301 – Human Resource Management

Craig W. Fontaine, Ph.D.Pine Manor College

Fall 2014

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 for the organization

• Internal and external equity for employees

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

• Optimal mix of compensation components

• Performance enhancement for the organization

• Performance recognition and talent management for employees

• Enhanced recruitment, involvement, and retention of employees

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)

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 hazardous occupations, the minimum is 18 years of age Individuals 14 to 15 years old may work outside school hours

with certain limitations

Components of CompensationComponents 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

Total Rewards Components

Elements of Total Rewards

Source: Adapted from WorldatWork (http://www.worldatwork.org).

Determining Exempt Status

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

Continuum of Compensation Philosophies

Strategic Compensation Decisions

• Communicating pay philosophy - Helps employees recognize:• Value of the total reward package• How their job performance might affect their compensation

Joint Responsibilities • 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

Payroll Administration • Assure compliance with compensation laws

• To maintain positive employee relations• Payroll staff report to:

• HR function • Accounting function

• Liability for legal compliance remains with the company• Even if the payroll process is outsourced

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

Figure 11.7 - Expectancy Theory

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

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.

Compensation Fairness and Equity

Compensation Fairness and Equity

External equity

Internal equity

Procedural JusticeDistributive

Justice

Pay secrecy vs.

openness

Compensation Quartile Strategies

Market Competitive Compensation

• Used when the employer is experiencing financial difficulties and when an abundance of workers is available

Lag-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

Lead-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

Match-the-Market Strategy

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

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 increases as they learn to do other jobs

Gain additional skills and knowledge Become more valuable to the employer

Compensation System Design Issues

Team

How to develop compensation programs that support the team

concept

Individual

How to compensate individuals whose

performance may be a result of team efforts and achievements

Individual versus Team Rewards

Staffing Categories for International Assignees at Multinational Enterprise (MNE)

Source: Adapted from McPhail, Fisher, Harvey, & Moeller, 2012 and Isidor, Schwens, & Kabst, 2011.

Compensating Expatriates

• Maintain an expatriate’s standard of living in the home country

Home-Country-Based Approach

• Compensate the expatriate at the same level as workers from the host country

Host-Country-Based Approach

Compensation Administration Process

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

Job Evaluation Methods

Job Evaluation Methods

Point factorMethod

Ranking method

Classification method

Factor-comparison method

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

Job Evaluation Methods

Advantages Disadvantages

• Ties organizational pay levels to the external job market, without internal job evaluation distortion

• Communicates to employees that the compensation system is market linked

• Relies on market survey data

• 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

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

Using Pay Surveys

Survey Data Relevance

and Validity

ParticipantsBroad-based

Timeliness

Job matches Details provided

Methodology

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

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

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

Market Pay Line and Job Evaluation Points

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

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

Pay Adjustment Matrix

Source: Adapted from Payscale’s 2012 Compensation Best Practices report.

Standardized Pay Adjustments

Standardized Pay

Increases

SeniorityCost-of-Living Adjustments

(COLA)

Across-the-Board

Increases

Lump-Sum Increases

(LSI)

Compensation Challenges