10

Managing Compensation
2001 by Prentice Hall 10-1

Goals of Compensation System

Internal Equityassure that jobs are objectively and consistently valued in relation to one another External Equityassure that the company is able to attract and retain the knowledge and skills needed to meet its objectives Individual Equityassure that individual employees are compensated in a manner that is fair in relation to the work they do and value they bring to the organization Strategic impactmaximize productivity and effectiveness in achieving organizations strategic goals

2001 by Prentice Hall

10-2

Challenges
Identify the compensation policies and practices that are most appropriate for a particular firm. Weigh the strategic advantages and disadvantages of the different compensation options. Establish a job-based compensation scheme that is internally consistent and linked to the labor market. Understand the difference between a compensation system in which employees are paid for the skills they use and one in which they are paid of the job they hold. Make compensation decisions that comply with the legal framework.

2001 by Prentice Hall

10-3

Total Compensation
The package of quantifiable rewards an employee receives for his or her labors. Includes three components: base compensation, pay incentives, and indirect compensation/benefits
2001 by Prentice Hall 10-4

The Elements of Total Compensation

Total Compensation

Base Compensation

Pay Incentives

Indirect Compensation/ Benefits

2001 by Prentice Hall

10-5

The Nine Criteria for Developing a Compensation Plan

1. Internal versus External Equity Will the compensation plan be perceived as fair within the company, or will it be perceived as fair relative to what other employers are paying for the same type of labor? 2. Fixed versus Variable Pay Will compensation be paid monthly on a fixed basis through base salaries or will it fluctuate depending on such preestablished criteria as performance and company profits? 3. Performance versus Membership Will compensation emphasize performance and tie pay to individual or group contributions, or will it emphasize membership in the organization logging in a prescribed number of hours each week and progressing up the organizational ladder?
2001 by Prentice Hall 10-6

The Nine Criteria for Developing a Compensation Plan (cont.)

4. Job versus Individual Pay Will compensation be based on how the company values a particular job, or will it be based on how much skill and knowledge an employee brings to that job? 5. Egalitarianism versus Elitism Will the compensation plan place most employees under the same compensation system (egalitarianism), or will it establish different plans by organizational level and/or employee group (elitism)? 6. Below-Market versus Above-Market Compensation Will employees be compensated at below-market levels, at market levels, or at above-market levels?

2001 by Prentice Hall

10-7

The Nine Criteria for Developing a Compensation Plan (cont.)

7. Monetary versus Nonmonetary Awards Will the compensation plan emphasize motivating employees through monetary rewards like pay and stock options, or will it stress nonmonetary rewards such as interesting work and job security? 8. Open versus Secret Pay Will employees have access to information about other workers compensation levels and how compensation decisions are made (open pay) or will this knowledge be withheld from employees (secret pay)? 9. Centralization versus Decentralization of Pay Decisions Will compensation decisions be made in a tightly controlled central location, or will they be delegated to managers of the firms units?
2001 by Prentice Hall 10-8

The Key Steps in Creating Job-Based Compensation Plans

Job Evaluation for Internal Equity
2. Job Descriptions Identify Compensable Factors 4. Rate Worth of All Jobs Using a Predetermined System 5. Job Hierarchy 6. Classify Jobs by Grade Levels 1. Job Analysis 3. Job Specifications

Market Surveys for External Equity

1. Check Market Value Using Benchmark or Key Jobs

Criteria for Pay Positioning Within Range for Each Job Experience Seniority Performance 1998 by Prentice Hall

Within-Pay-Range Positioning Criteria for Individual Equity

2001 by Prentice Hall

7. Establish Final Pay Policy Individual Pay Assignment

10-9

Hierarchy of Clerical Jobs, Pay Grades, and Weekly Pay Range for a Hypothetical Office
1 Points
Customer Service Rep. Executive Secretary/Admin. Asst. Senior Secretary Secretary Senior General Clerk Credit and Collection Accounting Clerk General Clerk Legal Secretary/Assistant Senior Word Processing Operator Work Processing Operator Purchasing Clerk Payroll Clerk Clerk-Typist File Clerk Mail Clerk Personnel Clerk Receptionist
2001 by Prentice Hall

2 Grade
5 4 3

3 Weekly Pay Range

$500-$650 $450-$550 $425-$475

300 298 290 230 225 220 175 170 165 160 125 120 120 115 95 80 80 60

$390-$430

$350-$400

10-10

Market Salary Data for Selected Benchmark Office Jobs

Benchmark Jobs 1. Customer Service Rep. 2. Credit and Collection Clerk 3. Accounting Clerk 4. Word Processing Operator 5. Clerk-Typist Weekly Pay Percentile 25th 50th 75th $400 $400 $370 $380 $330 $500 $450 $425 $390 $350 $650 $550 $475 $430 $400

Weekly Pay Average

$495 $455 $423 $394 $343

2001 by Prentice Hall

10-11

Job based versus skill based compensation

Skill based establishes pay grades for acquisition of specified skills Advantages:
Develops

more flexible work force Encourages personal skills development

Dangers:
Can

increase costs if excess of skills develop Skills may become rusty May attract/retain employees who are better at playing the game than applying the skills

Used by less than 10% of companies

2001 by Prentice Hall 10-12

Pay Structure of a Large Restaurant Developed Using a Job-Based Approach

Jobs
GRADE 6 GRADE 5 GRADE 4 GRADE 3 Chef Manager Sous-Chef Assistant Manager Lead Cook Office Manager General Cook Short Order Cook Assistant to Lead Cook Clerk Server Hostess Cashier Kitchen Helper Dishwasher Janitor Busser Security Guard

Number of Positions
2 1 1 2 2 1 5 2 2 1 45 4 4 2 3 2 6 2

Pay
$20.00-$31.00/hr. $11.50-$21/hr. $7.50-$12.00/hr. $6.50-$8.00/hr.

GRADE 2 GRADE 1

$6.00-$7.00/hr. $5.50-$6.25/hr.

2001 by Prentice Hall

10-13

Pay Schedule of a Large Restaurant Designed Using a Skill-Based Approach

Skill Block
5

Skill Create news items for menu

Pay
$23.00/hr.

Find different uses for leftovers (e.g., hot dishes, buffets) Coordinate and control work of all employees upon managers absence Cook existing menu items following recipe $17.00/hr Supervise kitchen help Prepare payroll Ensure quality of food and adherence to standards Schedule servers and assign workstations $10.50/hr Conduct inventory Organize work flow on restaurant floor

2001 by Prentice Hall

10-14

Pay Schedule of a Large Restaurant Designed Using a Skill-Based Approach (cont.)

Skill Block
2

Skill s Greet customers and organize tables

Pay
$7.50/hr.

Take orders from customers Bring food to tables Assist in kitchen with food preparations Perform security checks Help with delivery Use dishwashing equipment Use chemicals/disinfectants to clean premises Use vacuum cleaner, mop, waxer, and other cleaning equipment Clean and set up tables Perform routine kitchen chores (e.g., making coffee)

$6.00/hr.

2001 by Prentice Hall

10-15

Suggestions for Implementing Job-based Compensation Plans

Think strategically in making policy decisions concerning pay. Secure employee input. Increase each jobs range of pay while expanding its scope of responsibility. Expand the proportion of employees pay that is variable (bonuses, stock plans, and so forth). Establish dual-career ladders for different types of employees so that moving into management ranks or up the organizational hierarchy is not the only way to receive a substantial increase in pay.
2001 by Prentice Hall 10-16

Example of a Dual-Career Ladder

Band 13 12 11 10 9 8 7 6 5 4 3 2 1
2001 by Prentice Hall 10-17

Managerial President Executive Vice President Vice President Assistant Vice President Director Senior Manager Manager

Individual Contributor

Nurse Anesthetist Clinical Nurse Specialist Senior Staff Nurse Staff Nurse LPN CNA