CH10: Compensation management

Influences on compensation
 External
• Government (e.g., minimum wage, prevention of discrimination)
• Trade unions (strive to improve working conditions, wages & benefits)
• Economy – economic conditions of the industry (organization’s profitability)
• Labour market (pay higher if few skilled employees are available)
 Organizational
• Size – bigger (generally) means higher pay
• Age – newer (generally) higher pay
• Managerial attitudes
o High pay-level (ability to attract talent, retention, productivity?)
o Comparable pay-level (to going pay at other organizations in given
geographic area)
o Low pay-level (minimum needed to hire enough employees)

J o b A n a ly s is

J o b E v a lu a t io n J o b D e s c r i p t io n J o b S p e c i f i c a t io n s

w C o m p e n s a t io n
w S e le c t io n
w C r i t e r i o n D e v e lo p m e n t w P la c e m e n t
w P e r fo r m a n c e A p p r a is a l
w J o b D e s ig n /R e d e s ig n
w T r a i n in g
Uses of Job Analysis
• Job Classification – Categorize jobs into job families
• Criterion Development & Performance Appraisal – Identifies what the organization defines
as effective work behaviors
• Selection and Placement – Identify KSAOs that are necessary for successful performance
• Job Design and Redesign – Reveal problems and opportunities for better job design
• Training – Identify areas that need training programs to be developed

Job Evaluation
• Technique based on job analysis that determines the value of particular jobs
• Attempts to quantify differences between jobs for compensation purposes
• Typical Approach: Point System
o estimates value of jobs based on points assigned along dimensions or what are
called Compensable Factors

Point System
• Effort
• Skill
• Responsibility
• Working Conditions
• Jobs requiring great effort and skill, in which the EE is provided with tons of responsibility
and working outside in sub-zero temps deserve the most compensation

Point System Process of Job Evaluation

• Managers or SMEs use job analysis to identify compensable factors
• Each job assigned points with respect to degree that each has these compensable factors
• Assigned points are summed across factors to derive total score
• Points used to assign wages with goal of maintaining equity between jobs
• Scores plotted against current wage to determine under, over, or adequate compensation
• Don’t forget the labor market!

Job evaluation methods

• Job ranking method – from simplest to most challenging (in smaller organizations),
difference between adjacent ranks?
• Job classification system – classes (grades) defined, jobs placed into appropriate classes
based on definition of classes
• Factor comparison method – benchmark jobs are selected and other jobs are paid based on
comparison of key factors to the benchmark jobs
• Point system – most widely used, reliable & valid, but time consuming
Comparable Worth
• Equal Pay Act (1963) stipulates that men and women who do equal work must receive equal
pay
o “Equal” means the same jobs
• But, what about men and women who are in different jobs???
• Women are paid considerably less than men for similar work
o Wage gap of 23% between men’s and women’s wages

Incentive (Contingent) Pay

 Salary and salary increases are based on:
• Job performance
 Also called: Pay for Performance
 If not added to base pay, called:
• Variable pay
 Performance management is more effective when rewards are tied to results.
 Incentive Plans force organizations to:
• Clearly define effective performance
• Determine what factors are necessary

Reasons for Incentive pay

• Supervisors and employees are better able to understand what really matters.
• IP plans enhance employee motivation to accomplish goals that match organizational
needs.
• IP plans help to recruit and retain top performers.
• IP plans projects good corporate image

IP Plans Help Improve Motivation When:

• Employees see clear link between their efforts and resulting performance. (Expectancy)
• Employees see clear link between their performance level and rewards received.
(Instrumentality)
• Employees value the rewards available. (Valence)
motivation = expectancy x instrumentality x valence

IP Systems for Different Organizational Cultures

 Traditional organizations
• Piece rate
• Sales commissions
• Group incentives
 Involvement organizations (shared decision making, lateral communication, loosely defined
roles)
• Profit sharing
• Skill-based pay
CP Plans to Enhance Strategic Directions
 Employee development
• Skill-based pay
 Customer service
• Competency-based pay
• Gainsharing
 Overall profit
• Executive pay
• Profit or stock sharing
• Scanlon-type plans (bonuses for labour cost savings paid to all employees)

IP Plans to Enhance Strategic Directions (1)

 Productivity
• Individual (can lead to competition)
o Piece rate
o Sales commissions
• Group (relationship between individual performance and group’s may not be clear)
o Gainsharing
o Group incentives (encourage peer pressure to perform)
 Teamwork
• Team sales commissions
• Gainsharing
• Competency-based pay

Putting Pay in Context

A reward increases the chance that:
 Specific behaviors and results will be repeated, or
 Employee will engage in new behavior and produce better results.

Rewards Can Include:

 Pay
 Recognition
o Public
o Private
 Status
 Time
 Sabbaticals
 Trust and Respect
 Challenge
 Responsibility
 Freedom
 Relationships
How to Make Rewards Work
 Define and measure performance first and then allocate rewards.
 Only use rewards that are available.
 Make sure all employees are eligible.
 Rewards should be
• Financial & Nonfinancial
• Visible
• Contingent
• Timely
• Reversible