020055 Human Resource Management

Week 9

Compensation
Core Text
Course structure
Fundamentals of Human Resource Management Week 1 Introduction to HRM
Week 2 Human Resource Planning
by Gary Dessler
Week 3 Job Analysis & Design
5th edition (global edition), 2019
Week 4 Recruitment & Selection
Pearson
Week 5 Training & Development
Week 6 Performance Appraisal
Week 7 Managing Careers & Retention
Week 8 Presentation
Week 9 Compensation
Week 10 Employee Health & Safety,
Employee Relations, and Unions
Week 11 Review
Return to Week 7

▸ Understanding Career Management

▸ Define clearly the roles of employers and employees in career
management
▸ Explain the nature of turnover and know how to control the high
turnover rate
 Moving to Week 9

COMPENSATION
Learning Objectives
By the end of this week, you should have a good understanding of:

▷ Define and give an example of how to conduct a job

evaluation and set pay rates.
▷ Explain pay structures
▷ Understand the requirements for a sound employee benefits
program and list the major types of employee benefits
▷ Understand the need to link incentives and benefits to
improve productivity and performance
Learning Contents

01 The nature of Total Rewards & Compensation

02 Compensation System Design Issues

03 Pay Structures

04 Incentives

05 Employee Benefits
1- The Nature of Total Rewards & Compensation

Concepts

TOTAL REWARDS
monetary and non-monetary rewards provided by companies to
attract, motivate, and retain employees

▷ encompassing compensation and benefits, personal and professional growth

opportunities and a motivating work environment
▷ traditional financial rewards, and non-financial and intangible rewards
▷ also telecommuting programs, health and well-being programs, training &
development
1- The Nature of Total Rewards & Compensation

Elements of Total Rewards Components of Compensation

o tangible direct rewards o tangible rewards
o tangible indirect rewards o intangible rewards
o intangible rewards o base pay
o variable pay
o benefits
1- The Nature of Total Rewards & Compensation

Aligning total rewards with strategy

▷ creating a total pay package that produces the

employee behaviors the firm needs to support and
achieve its competitive strategy

▪ total rewards encompassing the traditional pay, incentives,

benefits, and also career management & job recognition
1- The Nature of Total Rewards & Compensation

Equity and its impact on pay rates

Adam’s Equity Theory of Motivation
people are strongly motivated to maintain a balance between what they
perceive as their contributions and their rewards

four forms of equity should be addressed:

▷ external equity
▷ internal equity
▷ individual equity
▷ procedural equity
1- The Nature of Total Rewards & Compensation

Laws governing Rewards & Compensation

in The US
o Davis-Bacon Act (1931)
o Walsh-Healey Public Contract Act (1936)
o Title VII of the 1964 Civil Rights Act
o Fair Labor Standards Act (FLSA, 1938)
o Equal Pay Act (1963)
o Employee Retirement Income Security Act (ERISA) (1974) in Vietnam?
o Wagner Act – The National Labor Relations Act (1935)
o Child Labor Provisions
o Overtime Provisions
o Special Pay/ Overtime Issues
o Pay for internships
2- Compensation System Design Issues
1 - Motivation theories and
compensation philosophies
▷ Expectancy Theory (Vroom, 1964)
▷ Equity Theory (Adams, 1963)
▷ Entitlement philosophy
▷ Performance philosophy
2 – Compensation fairness
and equity
▷ External equity
▷ Internal equity
▷ Pay secrecy
3 – Market competitive
compensation
▷ Lead-the-Market strategy
▷ Match-the-Market strategy
▷ Lag-the-Market strategy
4 – Competency-based pay
▷ Rewards individuals for the
capabilities they demonstrate and
acquire
3- Pay Structure

Determine Pay rates

Compensation philosophy Job analysis Job evaluation

Internal focus External focus

Ranking Job classification Point method Market-based approaches

Pay structures Pay decision

Job grades Pay ranges Performance Tenure

3- Pay Structure

Job evaluation

What is job evaluation?

a systematic comparison done to determine the worth of one
job relative to another
▷ to determine a job’s relative worth
▷ result in a wage or salary structure

the basic principle

jobs that require greater qualifications, more responsibilities, and more
complex duties should receive more pay than jobs with lesser requirements
3- Pay Structure

Job evaluation: compensable factors

an intuitive approach
decide that one job is more important than another, and not dig any deeper

alternative approach
compare the jobs by focusing on certain basic factors the jobs have in common

compensable factors
A fundamental, compensable element of a
job, such as skills, effort, responsibility, and
working conditions.
3- Pay Structure

Job evaluation: Salary survey

by combining “the relative worth of the keys in one firm” (based on the job evaluation)
and the salary survey, creating a market-competitive pay plan.

market-competitive pay plan

determining prevailing wage rates
>>> to see what others are paying for
similar jobs
A pay system in which the
employer’s actual pay rates are
competitive with those in the
relevant labor market
3- Pay Structure

Job evaluation: The process

A judgmental process, demanding close cooperation among supervisors, HR,
and employees and union representatives

1 2 3
identifying the choosing a job
getting cooperation
need for the evaluation
from employees
program committee
3- Pay Structure

Job evaluation: Methods

Ranking
ranking each job relative to all other jobs, usually based on overall difficulty

Classification
categorize jobs into groups; are of roughly the same value for pay purposes

Point Method
in which a number of compensable factors are identified and then the degree to which
each of these factors is present on the job is determined
3- Pay Structure

Rate Ranges & Pay Structure

Pay Grades
comprised of jobs of approximately
equal difficulty

Pay/ Rate Ranges

a series of steps or levels within a pay
grade, usually based on years of services

Wage curve
show a relationship between the value
of the job and the average wage paid
for this job
4- Incentives

Individual Incentives

tie personal effort to additional rewards for individuals to achieving

higher productivity

▷ financial incentives >>> financial rewards paid to workers whose

production exceeded some pre-determined standard.
▷ variable pay >>> any plan that ties pay to productivity or profitability,
usually as one-time lump payments, e.g. profit-sharing plans
4- Incentives

Individual Incentives

▷ piecework plans – straight piecework, standard hour plan

▷ merit pay as incentives
▷ non-financial and recognition-based awards
4- Incentives

Team and Organization Incentive Plans

team/ group incentive plans

a plan in which a production standard is set
for a specific work group, and its members
are paid incentives if the group exceeds the ▷ gainsharing plan
production standard. ▷ profit-sharing plan
▷ earning-at-risk pay plan
organization-wide incentive plans ▷ stock option plan
plans in which all or most employees can ▷ employee stock ownership
participate, and that generally tie the reward plan (ESOP)
to some measure of company-wide
performance.
5- Employee Benefits

benefits?
indirect financial and non-financial
payments employees receive for
continuing their employment with
the company

▷ pay for time not worked and

insurance benefits
▷ retirement & other benefits
▷ personal services & family-friendly
benefits
IN SUMMARY

Total Rewards & Compensation

• monetary and non-monetary rewards provided by companies to attract, motivate, & retain employees
• employee compensation includes both direct financial payments and indirect financial statements.
The process of establishing pay rates while ensuring external, internal, and procedural equity
• conducting a salary survey, determining the worth of each job, doing a job evaluation, grouping jobs,
pricing each pay grade with wage curves, fine-tuning pay rates.
Job evaluation
• a systematic comparison to determine the worth of one job relative to another based on compensable factors
• methods: ranking, job classification, the point method
Incentives
• tangible rewards that encourage or motivate actions for individuals to achieve a higher productivity
• individual incentives, team and organizationwide incentives.
Benefits
• indirect financial and nonfinancial payments employees receive for continuing their
employment with the company
• pay for time not worked and Insurance benefits; retirement and other benefits;
personal services and family-friendly benefits
CRITICAL THINKING

Self-Assessment Questions

◆ Compare and contrast the following methods of job evaluation: ranking,

classification, and point method.
◆ Which are benefits to be designed for part-time and contingent workers?
 Carter Cleaning Company: The New Pay Plan
Read The case study ‘Carter Cleaning company’ in your Textbook, pg. 352).

Questions:
1. Is the company at the point where it should be setting up a formal salary
structure based on a complete job evaluation? Why?
2. Is Jack Carter’s policy of paying 10% more than the prevailing rates a
sound one, and how could that be determined?
3. Similarly, is Carter’s male-female differential wise? If not, why not?
4. Specifically, what would you suggest Jennifer do now with respect to her
CASE STUDY company’s pay plan?
ANALYSIS
To Our Next Week

Employee Health & Safety, Employee Relations, & Unions

Read
Chapter 13 – Labor Relations and Collective Bargaining
Chapter 14 – Improving Occupational Safety, Health & Risk Management