Human Resource SECTION 4

Compensating
Management Human
Resources
TENTH EDITON

Robert L. Mathis  John H. Jackson

Chapter 12

Compensation Strategies
and Practices

PowerPoint Presentation
© 2003 Southwestern College Publishing. All rights reserved.
by Charlie Cook
 Learning Objectives

After you have read this chapter, you should be

able to:
– Identify two general types of compensation and the
components of each.
– Give examples of two different compensation
philosophies in organizations.
– Discuss four strategic compensation design issues.
– Describe three considerations affecting perceptions
of pay fairness.
– Identify the basic provisions of the Fair Labor
Standards Act (FLSA).
© 2002 Southwestern College Publishing. All rights reserved. 12–2
 Learning Objectives (cont’d)

– Define job evaluation and discuss four methods for

of performing it.
– Outline the process of building a wage and salary
administration system.
– Discuss how to establish a pay-for-performance
system.

© 2002 Southwestern College Publishing. All rights reserved. 12–3

 Compensation Systems

 Objectives of an Effective Compensation

System:
– Legal compliance with all appropriate laws and
regulations
– Cost effectiveness for the organization
– Internal, external, and individual equity for
employees
– Performance enhancement for the organization

© 2002 Southwestern College Publishing. All rights reserved. 12–4

 Nature of Compensation

 Types of Rewards
– Intrinsic
• Intangible, psychological and social effects of
compensation
– Extrinsic
• Tangible, monetary and nonmonetary effects of
compensation

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 Components of A Compensation Program

Figure 12–1
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 Direct Compensation

Compensation Type
Base Pay The basic monetary compensation that an
employee receives, usually as a wage or
salary.

Wages Payments calculated on the amount of time

worked.

Salary Consistent payments made each period

regardless of the number of hours worked in
the period.

Variable Pay Compensation linked to individual, team, or

organizational performance.

Benefit An indirect reward given to an employee or

group of employees as a part of
organizational membership.

© 2002 Southwestern College Publishing. All rights reserved. 12–7

 Typical Division of HR Responsibilities:
Compensation

Figure 12–2
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 Continuum of Compensation Philosophies

Figure 12–3
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 Compensation Approaches

Figure 12–4
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 Compensation Quartile Strategies

Figure 12–5
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 Decisions About Compensation Levels

Compensation Strategies
Above-Market Paying for higher qualified, more productive
workers.

Middle-Market Attempting to balance of employer costs and

need to attract and retain employees.

Below-Market Paying all that the firm can afford

Taking advantage of the abundant supply of
potential employees in a loose labor market.

© 2002 Southwestern College Publishing. All rights reserved. 12–12

 Competency-Based Pay

Limitations Pricing
(How many?) Competencies

Competency-
Based Pay
Systems
KBP/SBP

Maintenance of
Training
Competencies

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 Competency-Based Systems Outcomes

Figure 12–6
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 Individual vs. Team Rewards

Using Team-Based Reward Systems

Use skill-based pay for the base.

Make system simple and understandable.

Use variable pay based on business entity performance

Distribute variable rewards at the team level

Maintain a high degree of employee involvement

© 2002 Southwestern College Publishing. All rights reserved. 12–15

 Perceptions of Pay Fairness

Equity The perceived fairness between what a person

does (inputs) and what the person receives
(outcomes).

Procedural Justice The perceived fairness of the process and

procedures use to make decisions about
employees

Distributive Justice The perceived fairness in the distribution of

outcomes.

Pay Openness The degree of openness or secrecy that an

organization allows regarding its pay system.

External Equity The perception that the organization provides

employees with compensation that comparable
to the compensation of employees with similar
jobs in other organizations.

© 2002 Southwestern College Publishing. All rights reserved. 12–16

 Equity Considerations in Compensation

Figure 12–7
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 Fair Labor Standards Act (FSLA) of 1938

Provisions of the Act

Minimum wage requirement sets wage floor

Child labor (under 14 years old) is prohibited

Requires overtime payments for non-exempt employees

Exempts highly-paid computer workers

Requires overtime (1½) pay for hours over 40 hours

Requires compensatory time at overtime (1½) pay rates

© 2002 Southwestern College Publishing. All rights reserved. 12–18

 Wage/Hour Status Under Fair Labor Standards Act

Figure 12–8a
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 Wage/Hour Status Under Fair Labor Standards Act

Figure 12–8b
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 Wage/Hour Status Under Fair Labor Standards Act

Figure 12–8c
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 The IRS Test for Employees and
Independent Contractors

Source: U.S. Internal Revenue Service.

Figure 12–9
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 Other Laws Affecting Compensation

 Davis-Bacon Act of 1931

– Required payment of “prevailing wage” by firms
engaged in federal construction projects.
 Walsh-Healy Public Contracts Act and the
Service Contracts Act
– Extended the payment of “prevailing wage” to
service contracts
– Required overtime payment for any employee hours
worked over eight hours in one day; applies only to
to federal contracts, not the private sector.

© 2002 Southwestern College Publishing. All rights reserved. 12–23

 Pay and Gender

 Equal Pay Act of 1963

– Requires that men and women be paid the same
for performing substantially similar jobs with limited
non-gender exceptions (e.g., merit and seniority).
 Issue of Pay Equity
– Similarity in pay for all jobs requiring comparable
level of knowledge, skills, and abilities, even if
actual duties and market rates differ significantly.

© 2002 Southwestern College Publishing. All rights reserved. 12–24

 Compensation
Administration
Process

Figure 12–10
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 Job Evaluation

 Job Evaluation
– The systematic determination of the relative worth
of jobs within an organization.
 Benchmark Job
– A job found in many organizations and performed
by several individuals who have similar duties that
are relatively stable and require similar KSAs.

© 2002 Southwestern College Publishing. All rights reserved. 12–26

 Job Evaluation

Ranking Classification

Job
Evaluation
Methods
Factor Point
Comparison Method

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 Job Evaluation Point Chart

Figure 12–11
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 Legal Issues and Job Evaluation

Americans with Disabilities Act

Job evaluations may not identify job functions related to
physical demands as essential

Job Evaluation

Gender Issues
Traditional job evaluations place less weight on knowledge,
skills, and working conditions for female-dominated jobs

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 Developing Pay Surveys

Select Employers with Comparable Jobs

Determine Jobs to be Surveyed

Decide What Information Is Needed

Conduct Survey

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 Pay Structures

 Market Line
– The line on a graph showing the relationship
between the job value, as determined by job
evaluation points, and pay survey rates.
 Common Pay Structures
– Hourly and salaried
– Office, plant, technical, professional, managerial
– Clerical, information technology, professional,
supervisory, management, and executive

© 2002 Southwestern College Publishing. All rights reserved. 12–31

 Establishing
Pay
Structures

Figure 12–12
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 Pay Structures (cont’d)

 Pay Grades
– A grouping of individual jobs having approximately
the same job worth.
 Broadbanding
– The practice of using fewer pay grades having
broader pay ranges that in traditional systems.
– Benefits
• Encourages horizontal movement of employees
• Is consistent with trend towards flatter organizations
• Creates a more flexible organization
• Encourages competency development
• Emphasizes career development

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 Traditional Pay Structure vs. Broadbanding

Figure 12–13
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 Pay Scattergram

Figure 12–14
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 Typical Pay Range Widths

Figure 12–15
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 Example of
Pay Grades
and Pay
Ranges

Figure 12–16
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 Pay Rate Issues

 Rates Out of Range

– Red-Circled Employees
• An incumbent (current jobholder) who is paid above
the range set for the job.
– Green-Circled Employees
• An incumbent who is paid below the range set for the
job.
 Pay Compression
– A situation in which pay differences among
individuals with different levels of experience and
performance in the organization becomes small.

© 2002 Southwestern College Publishing. All rights reserved. 12–38

 Issues Involving Pay Increases

 Seniority
– Time spent in an organization or on a particular job.
– Used to determine eligibility for organizational
rewards and benefits.
 Maturity Curve
– A curve that depicts the relationship between
experience and pay rates.
– Assumption is that as experience increases,
proficiency and performance increase.

© 2002 Southwestern College Publishing. All rights reserved. 12–39

 Issues Involving Pay Increases

 Cost-of-Living Adjustments (COLA)

– A percentage increase in wages that allows
employees to maintain the same real wages in a
period of economic inflation.
– Adjustments are tied to changes in an economic
measure (e.g., the Consumer Price Index).
 Lump-Sum Increases (LSI)
– A one-time payment of all or part of a yearly pay
increase.
– Lump-sum payments do not increase base wages

© 2002 Southwestern College Publishing. All rights reserved. 12–40

 Pay Adjustment Matrix

Figure 12–17
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 Compa-Ratio Example

 Compa-ratio
– The pay level divided by the midpoint of the pay
range.

$16.50 (current pay)

Employee R   100  Compa - ratio  110
15.00 (midpoint)

$13.05 (current pay)

Employee J   100  Compa - ratio  87
15.00 (midpoint)

© 2002 Southwestern College Publishing. All rights reserved. 12–42