Objectives After studying this chapter, you should be able to:

1. Explain employer concerns in developing a strategic compensation program. 2. Objectives of compensation. 3. Indicate the various factors that influence the setting of wages. 4. Differentiate the mechanics of each of the major job evaluation systems.

Compensation
Pay is a statement of an employees worth by an employer. Pay is a perception of worth by an employee.

Total Compensation

Direct Wages / Salaries Commissions Bonuses Gainsharing

Indirect Time Not Worked

Vacations Breaks Holidays

Insurance Plans
Medical Dental Life

Security Plans
Pensions

Employee Services
Educational assistance Recreational programs
Presentation Slide 91

Issues in Developing Benefits Plans

Benefits to be offered. Coverage of retirees in the plan Denial of benefits to employees during initial probationary periods Financing of benefits. Benefit choices to give employees. Cost containment procedures to use. Communicating benefits options to employees.
4

Compensation Management and Other HRM Functions

Aid or impair recruitment

Recruitment

Supply of applicants affects wage rates Selection standards affect level of pay required Increased knowledge leads to higher pay A basis for determining employees rate of pay Pay rates determined through negotiation

Pay rates affect selectivity

Selection Training and Development Compensation Management Labor Relations

Pay can motivate training Training and development may lead to higher pay Low pay encourages unionization

Presentation Slide 92

Strategic Compensation Planning

Strategic Compensation Planning
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-forperformance standard. Seeks to motivate employees through compensation.
6

Significant Goals Driving Pay and Reward Changes

Source: Towers Perrin and Duncan Brown, Reward Strategies for Real: Moving from Intent to Impact, WorldatWork Journal 10, no. 3 (Third Quarter 2001): 43. Used with permission.

Figure 9.1

Linking Compensation to Organizational Objectives

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?

Common Strategic Compensation Goals

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 To control the compensation budget To attract new employees To reduce unnecessary turnover
9

Strategic Compensation Policy Concerns

The rate of pay within the organization and whether it is to be above, below, or at the prevailing community rate. The ability of the pay program to gain employee acceptance while motivating employees to perform to the best of their abilities. The pay level at which employees may be recruited and the pay differential between new and more senior employees. The intervals at which pay raises are to be granted and the extent to which merit and/or seniority will influence the raises. The pay levels needed to facilitate the achievement of a sound financial position in relation to the products or services offered.

10

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 gain sharing programs.
11

Designing a Pay-forPerformance 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?
12

Motivating Employees through Compensation

Pay Equity (also Distributive Fairness)
An employees 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.

13

Relationship between Pay Equity and Motivation

The greater the perceived disparity between my input/output ratio and the comparison persons input/output ratio, the greater my motivation to reduce the inequity.
Figure 9.2

14

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.

15

Pay-for-Performance and Expectancy Theory

Figure 9.3

16

Motivating Employees through Compensation

Pay Secrecy
An organizational policy requiring that compensation levels and decisions about employee compensation be kept secret and, usually, prohibiting employees from revealing their compensation information to anyone.
Can create employee misperceptions and distrust of compensation fairness and pay-forperformance standards. 17

Components of the Wage Mix

Labor Market Conditions Area Wage Rates Cost of Living Compensation Strategy of the Organization

Worth of the Job

WAGE MIX

Employees Relative Worth Employers Ability to Pay

Presentation Slide 93

Collective Bargaining Legal Requirements

18

Factors Affecting the Wage Mix

Figure 9.4

19

The Wage MixInternal Factors

Compensation Strategy
Setting organization compensation policy to lead, lag, or match competitors pay.

Worth of a Job
Establishing the internal wage relationship among jobs and skill levels.

Relative Worth of an Employee

Rewarding individual employee performance

Ability-to-Pay
Having the resources and profits to pay employees.
20

The Wage MixExternal 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 firms formal wage structure of rates is influenced by those being paid by other area employers for comparable jobs.
21

The Wage MixExternal Factors

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.

22

The Wage MixExternal Factors

Collective Bargaining
Escalator clauses in labor agreements that provide for quarterly upward cost-of-living 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.
23

Job Evaluation
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.

24

Different Job Evaluation Systems

SCOPE OF COMPARISON JOB AS A WHOLE
(NONQUANTITATIVE)

BASIS FOR COMPARISON

JOB PARTS OR FACTORS

(QUANTITATIVE)

Job vs. job

Job ranking system Job classification system

Factor comparison system Point system

Job vs. scale

Figure 9.5

25

Job Evaluation Systems

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 jobs worth. Final job rankings indicate the relative importance of jobs, not extent of differences between jobs. Method can used to consider only a reasonably small number of jobs. 26

Paired-Comparison Job Ranking Table

Directions: Place an X in the cell where the value of a row job is higher than that of a column job.
Figure 9.6

27

Job Evaluation Systems

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.

28

Point System
Point System
A quantitative job evaluation procedure that determines the relative value of a job by the total points assigned to it. Permits jobs to be evaluated quantitatively on the basis of factors or elements compensable factorsthat constitute the job.

Point Manual
A handbook that contains a description of the compensable factors and the degrees to which these factors may exist within the jobs.29

Factor Comparison System

Factor Comparison System
A job evaluation system that permits the evaluation process to be accomplished on a factor-by-factor basis by developing a factor comparison scale. The compensable factors of a job evaluated are compared against the compensable factors of key jobs within the organization that serve as the job evaluation scale.
30

Characteristics of Key Jobs

Key Jobs
Jobs that are important for wage-setting purposes and are widely known in the labor market.

Characteristics of Key Jobs

They are important to employees and the organization. They vary in terms of job requirements. They have relatively stable job content. They are used in salary surveys for wage determination.
Presentation Slide 31 94

References
Managing Human Resources Bohlander and Snell Human Resources Management DeCenzo and Robbins

32