Compensation

• Used to Serve Organizations Goals

• Enhance Employee Needs but Create Profits
• Relative Worth of Job
• Significant Part of HRM
• Formal Policy Essential
 Compensation Policy Objectives

• To Reward Past Performance

• To Remain Competitive in Marketplace
• To Maintain Equity Among Employees
• To Motivate Future Performance
• To Maintain a Realistic Budget
• To Attract New Employees
• To Reduce Turnover
 Total Compensation

Direct Compensation Indirect Compensation

Base Pay Pay for Time Not Worked Security Plans

• Wages • Vacations • Pension
• Salary • Breaks • Social Security
• Holidays
Incentives • Disability Insurance
• Sick Days
• Commissions Employee Services
• Jury Duty
• Piece rate • Educational Assistance
Insurance Plans
• Bonuses • Recreational Programs
• Medical
• Stock Options • Hospital • Food Services
• Profit Sharing • Dental
• Gainsharing • Life
• Surgical
Compensation Policy Concerns

• Pay a Fair Base Pay Rate

• Reward Enhanced Performance
Pay-for-Performance Standard

Standard by which managers tie

compensation to employee
effort and performance.
 Pay-for-Performance Standard

• Merit Pay
• Cash Bonuses
• Incentive Pay
• Goal: Increase Performance 15-35%
 Pay Equity
An employee’s perception that
compensation received is
equal to the value of the work
performed.
Motivating Value of
Compensation
• Pay Equity (Perception of fair
value)
• Pay Expectancy
(Rewards, Received = Expected)
• Pay Secrecy
 Bases for Compensation

• Hourly
• Monthly
• Daily
• Annual
• Piecework
• Straight Commission
 Hourly Work

• Work paid on an hourly basis.

HOUR
Piecework

Work paid according to the

number of units produced.
 FLSA Classification of
Compensation
• Exempt
(Management/Professional)
• Non-Exempt (hourly)
• Pay: 1.5 times hourly rate over 40 hrs/week
 Exempt Employee
Employees not covered by the
overtime provisions of the Fair
Labor Standards Act.

“Management”
Nonexempt Employees

Employees covered by the

overtime provisions of the
Fair Labor Standards Act.

“Labor”
External and Internal Factors Affecting the
Wage Mix
External Factors Internal Factors

Conditions of the labor market

Area wage rates Worth of job

Cost of living Wage Mix Employee’s

relative worth
Collective bargaining
Employer’s ability
Government Influence to pay
 External Influences on Wage
Rates
• Labor Market Conditions
• Area Wage Rates (Surveys)
• Cost of Living (CPI Adjustments)
• Collective Bargaining
• Government
Internal Influences on Wage
Rates
• Worth of the Job
• Employee's Relative Worth
(merit)
• Employer's Ability to Pay
(competitiveness)
 Consumer Price Index (CPI)

• Measure of the average change in prices over

time in a fixed “market basket” of goods and
services.

“Inflation Influence”
 Escalator Clauses

• Clauses in labor agreements

that provide for quarterly cost-
of-living adjustments in wages,
basing the adjustments upon
changes in the consumer price
index.
 Real Wages

• Wage increases larger than rises in the

consumer price index; that is, the real earning
power of wages.
 Job Evaluation
Systematic process of
determining the relative worth
of jobs in order to establish
which jobs should be paid
more than others within an
organization.
 Job Evaluation

• Determine "Relative" Worth of Jobs

• Hierarchy of Jobs (ranking)
• Assign Pay Rates
• Purpose: Establish Internal Equity
Four Basic Systems

• Job Ranking
• Job Grading
• Point System
• Factor Comparison
 Job Ranking System
• Simplest and oldest system of
job evaluation by which jobs
are arrayed on the basis of their
relative worth.
 Job Ranking System
• Establish Committee
• Define all Jobs
• Identify Critical Factor (Responsibilities of
Importance)
• Rank Every Job by Critical Factors
Job Classification System

• System of job evaluation by

which jobs are classified and
grouped according to a series of
predetermined wage grades.
 Job Grade System
• Determine Number of Grades (e.g. 20)
• Describe Each Grade
• Review Each Job Description
• Fit Job into Grade

“Government”
 Point System
• Quantitative job evaluation
procedure that determines the
relative value of a job by the
total points assigned to it.

70

60

50

40 Li n e 1
Li n e 2
30 Li n e 3
20

10

0
 Point System (Quantitative)
• Identify Compensatable Factors (e.g.)
– Skill
– Responsibility
– Effort
– Environment
• Establish Degree Within each Factor (e.g. 1-9)
• Create a Point Manual
– Defines Factors (3-9)
– Definitive Degrees (1-9)
• Analyze each Job
• Assign Points
• Rank by Points
 Hay Profile Method
• Job evaluation technique using
three factors – knowledge,
mental activity, and
accountability – to evaluate
executive and managerial
positions.

Knowledge
Mental Activity
Accountability
Point Values for Job Factors of the National Metal
Trades Association
Factors 1st Degree 2nd Degree 3rd Degree 4th Degree 5th Degree
Skill
1. Job knowledge 14 28 42 56 70
2. Experience 22 44 66 88 110
3 initiative and ingenuity 14 28 42 56 70
Effort
4. Physical demand 10 20 30 40 50
5. Mental or visual demand 5 10 15 20 25
Responsibility
6. Equipment or process 5 10 15 20 25
7. Material or product 5 10 15 20 25
8. Safety of others 5 10 15 20 25
9. Work of others 5 10 15 20 25
Job Conditions
10. Working conditions 10 20 30 40 50
11. Hazards 5 10 15 20 25
SOURCE: Developed by the National Metal Trades Association. Reproduced with permission of the American Association of Industrial Management,
Springfield, MA.
Description of Knowledge Factors and Degrees of the National Metal
Trades Association

1. Knowledge
This factor measures the knowledge or equivalent training required to perform the position duties.
1st Degree
Use of reading and writing, adding and subtracting of while numbers; following of instructional use of fixed gauges, direct reading
instruments, and similar devices where interpretation is not required.
2nd Degree
Use of addition, subtraction, multiplication, and division of numbers including decimals and fractions; simple use of formulas, charts,
tables, drawings, specifications, schedules, wiring diagrams; use of adjustable measuring instruments; checking of reports, forms,
records, and comparable data where interpretation is required.
3rd Degree
Use of mathematics together with the use of complicated drawings, specifications, charts, tables; various types of precision measuring
instruments. Equivalent to one to three years applied trades training in a particular or specialized occupation.

4th Degree
Use of advanced trades mathematics, together with the use of complicated drawings, specifications, charts, tables, handbook
formulas; all varieties of precision measuring instruments. Equivalent to complete accredited apprenticeship in a recognized trade,
craft or occupation; or equivalent to a two-year technical college education.
5th Degree
Use of higher mathematics involved in the application of engineering principles and their performance of related practical operations,
together with a comprehensive knowledge of the theories and practices of mechanical, electrical, chemical. Civil, or like engineering
field. Equivalent to complete four years of technical college or university education.
SOURCE: Developed by the National Metal Trades Association. Reproduced with permission of the American Association of Industrial Management,
Springfield, MA.
 Factor Comparison System

• Similar to Point System

• Distinguished by "Key Jobs"
• Compensatable Factors
– Skill
– Responsibility
– Mental Effort
– Working Conditions
– Physical Effort
• Assign & Value to Factor
• Each Job is Assigned a Factor
• Add up Values to get Wage Rate
 Characteristics of Key Jobs

• Have importance to employees and

organizations
• Vary in terms of job requirements
• Possess relatively stable job content
• Are used as important jobs in salary surveys
Compensation Structure
• Job Evaluation First
• Assign a Wage Rate Second
• Base Rate on Wage "Survey"
• Geographical Area of
Worker Draw
 Components of the Wage Structure

18.00
17.50 Midpoint
17.00 of Range
16.50
16.00
15.50
15.00
14.50

Overlap
Rate Range

Range
14.00
Wage Rates

13.50
13.00
12.50
12.00 Range
11.50 Steps
11.00
10.50
10.00 Wage
9.50
9.00 Classes
8.50
8.00

1 2 3 4 5 6 7 8 9 10 11 12 13

Job Classifications or Wage Classes

Minimum Wage Wage Curve Maximum Rate

 Wage and
Salary Survey

• Surveys of the wages paid to

employees of other employers
in the surveying organization’s
relevant labor market.
 Wage and Salary Surveys

1. Select key jobs.

2. Determine relevant labor market.
3. Select organizations.
4. Decide on information to collect:
wages/benefits/pay policies.
5. Compile data received.
6. Determine wages and benefits to pay.
 Wage Curve
• Curve in a scattergram
representing the relationship
between relative worth of jobs
and wage rates.

70

60
50
W o rt h o f
40 Jobs
30 W a g e Ra te s

20
10

0
0 5 10
Wage Rates

Point Value of Jobs

Survey Data

• Government Statistical Survey

• Employer Initiated Survey
• By Job Classification
• World Wide Web
 Pay Grades

Groups of jobs within a

particular class that are paid
the same rate or rate range.
 SINGLE RATE STRUCTURE

15.00

14.00

13.00
Wage Rates

12.00

11.00

10.00
Organization wage curve
9.00

8.00
150 200 250 300 350 400 450
Evaluated Points
1 2 3 4 5 6 7 8
Wage Classes
 Point Conversion Table

Wage Class Point Range Hourly Rate Range

1 101-150 $14.25-15.50
2 151-200 $15.25-16.50
3 201-250 $16.25-17.50
4 251-300 $17.25-18.50
5 301-350 $18.25-19.50
6 351-400 $19.25-20.50
7 401-450 $20.25-21.50
8 450-500 $21.25-22.50
 Wage Structure with
Increasing Rate Ranges
 Issues in Rate Structures

• Wage Rate Compression

• Narrow Difference from Job to Job
• White-Grey-Blue Collar Impact
• Low Morale/Turnover/Behavior
• Two Tier Wage Systems
• A/B Scales
• Time of Employment
• Grandfathering
• Cost of Living Comparison (COLA)
 Government Regulations

• Overtime Mandate (1 1/2 times over 40 hours)

• Pay Prevailing Rates in Area
• Minimum Wages
• Child Labor (16-19 yrs)
• Equal Rights for All
 Comparable Worth
• The concept that male and
female jobs that are dissimilar,
but equal in terms of value or
worth to the employer, should
be paid the same.
Wage-Rate Compression

• Compression of differentials
between job classes,
particularly the differential
between hourly workers and
their managers.
 Advantages of
Incentive Pay Programs
• Employee effort is focused on important
targets
• Rewards are variable costs linked to results
• Incentives are directly related to improved
performance
• Incentives reward those responsible for higher
performance
 Straight Piecework
• Incentive plan under which
employees receive a certain rate
for each unit produced.
 Differential Piece Rate
• Compensation rate under which employees
whose production exceeds the standard
amount of output receive a higher rate for all
of their work than the rate paid to those who
do not exceed the standard amount.
 Employee Opposition to
Incentive Plans
• Production standards are set unfairly.
• Incentive plans are really “work speedup.”
• Incentive plans create competition among workers.
• Increased earnings result in tougher standards.
• Payout formulas are complex and difficult to
understand.
• Incentive plans cause friction between employees and
management.
 Six Components of
Effective Incentive Plan Administration

1. Grant incentives based on performance

2. Adequate financial resources to reward
performance
3. Clearly defined and accepted performance
standards
4. Easily understood payout formula
5. Reasonable administrative costs
6. Wide coverage of employees
 Merit Guidelines

Guidelines for awarding merit

raises that are ties to
performance objectives.
Motivating Through
Merit Raises
 Bonus

• Incentive payment that is

supplemented to the base
wage.
Team or Group Incentive Plan

Compensation plan where all team

members receive an incentive
bonus payment when productive
or services standards are met or
exceeded.
Standard Hourly Plan

• Incentive plan that sets rates

based upon the completion of a
job in a predetermined
standard time.
Criticisms of Executive Incentive
Plans
• Incentive payments are excessive compared with
return to stockholders.
• Time periods for judging and rewarding performance
are too short.
• Quarterly earnings growth is emphasized at the
expense of research and development.
• Emphasis is placed upon equaling or exceeding
executive salary survey averages.
• Benefits do no relate closely to individual
performance
 Perquisites

Special benefits given to

executives; often referred to as
perks.
 Executive Perquisites
• Company-provided car
• Free financial consulting
• Club memberships
• Use of company plane and yacht
• Low-cost or no-cost loans
• Special travel allowances
• Limousine service
• Kidnap and ransom protection
• Free legal counseling
• Family member travel allowances
• Home entertainment allowance
• Payment of children’s educational expense
• Executive dining room
• Estate planning
 Straight
Commission
Plan

Compensation plan based upon

a percentage of sales.
Straight Salary Plan

Compensation plan that

permits salespeople to be
paid for performing various
duties that are not reflected
immediately in their sales
volume.
 Combined Salary
and
Commission Plan

Compensation plan that includes

a straight salary and a
commission.
 Gainsharing Plans
Programs under which both employees and
the organization share the financial gains
according to a predetermined formula that
reflects improved productivity and
profitability.
 Profit Sharing

Any procedure by which an

employer pays, or makes
available to all regular
employees, in addition to base
pay, special current or deferred
sums based upon the profits of
the enterprise.
 Relationship of Compensation
Management to Other HRM Functions
Compensation Hot Links

Abbott, Langer, and Associates

ERI

Hewitt Associates

Office Team

Robert Half

America’s Job Bank

World at Work (Formerly ACA)