1. Cash, Bonuses, Insurance,
Compensation
Cash, Bonuses, Insurance,
Vacation, Holidays
Perks, Recognition

2. What does compensation (what you receive for your services) mean to you?
compensation means different things to different people:
>return on effort
>reward for satisfactory or outstanding work
>indicative of value attached to skills and abilities
>return on investment in education and training
>source of personal wealth
>important determinant of economic and social well being

3. A Definition . . . All forms of
financial return,
tangible services and
benefits
that employees receive as part of their employment relationship

4. Components of a Total Compensation Program - 1
Financial
Direct
wages, salaries, commissions, bonuses
Indirect
insurance plans
life, health, dental, disability
social assistance benefits
retirement plans, social security, workers’ comp
paid absences
vacations, holidays, sick leave

5. Components of a Total Compensation Program - 2
Non-Financial
The Job
interesting, challenging, responsible
opportunity for recognition, advancement
feeling of achievement
Job Environment
policies, supervision, co-workers, status symbols, working conditions, flextime, compressed work week, job sharing, telecommuting, flexible benefits programs

6. Factors that Influence Wage Levels
Conditions of
Labor Market
Compensation
Policy of
Organization
Area Wage
Rates
WAGE
MIX
Worth of
Job
Determining the wage offered an employee is a function of both internal and external factors (referred to as the “wage mix”). Internal factors include:
Employer’s Compensation Policy. Each employer views compensation as one of the variables under their control and so uses pay as a tool for accomplishing organization goals. In general, companies may lead, match, or trail pay standards relative to the competition and/or combine base pay with incentives to reward specific goal-based accomplishment.
Worth of a Job. Where a formal compensation system is lacking, pay is set on the subjective opinion of the responsible party’s evaluation of the worth of a job.
Employee’s Relative Worth. The differential contributions and accomplishments of different employees (both hourly and salaried), may be reflected in different levels of pay, often within a given range for an employment level.
Employer’s Ability to Pay. All organizations have finite budgets and compensation is limited to what is available.
External factors include:
Conditions of the Labor Market. The labor market reflects the forces of supply and demand for qualified labor within an area.
Area Wage Rates. The company should be aware of the prevailing wage rates being paid in the area of operation.
Cost of Living. Inflation increases the cost of living and compensation rates have to be adjusted upward periodically. A common benchmark is the consumer price index (CPI), compiled by the federal government.
Collective Bargaining. Collective bargaining pools the power of the labor force in an effort to negotiate an increase in real wages (pay increases above the CPI).
Legal Requirements. Legislative actions, such as minimum wage laws, typically set a floor for compensation, at least for hourly employees.
Cost of
Living
Employee’s
Relative Worth
Collective
Bargaining
Employer’s
Ability to Pay
Legal
Requirements

7. Designing a Compensation System
Steps in the Decision Process

8. Step 1 - Establish General Wage Level for Organization
Factors to consider:
Other firm’s rates
Union demands
Cost-of-living changes
Firm’s ability to pay

9. Step 2 - Establish Wage Structure (The Pay for Each Job)
Employ a job evaluation system
Ranking
Job Classification
Point System
Factor Comparison
Results:
pay grades
rate ranges

10. Step 3 - Establish Pay for Each Individual on Each Job
Inputs:
Performance appraisal information
Seniority system

11. A Pay Model -- 3 Basic Components
I. Compensation Objectives
II. Foundation Concepts
III. Techniques for Management

12. A Pay Model I. Compensation Objectives - 1
Organization Performance
Labor Costs
Attitudes and Behaviors
Laws and Regulations
Facilitate Organization Performance
Control Labor Costs
Influence Employee Attitudes and Behaviors
attract
retain
motivate
Comply with Laws and Regulations
Fair Labor standards Act
sets minimum wage
exempt/non-exempt; 1 1/2 for OT
ages of employees
Equal Pay Act
equal pay for equal work
Comparable Worth?

13. A Pay Model I. Compensation Objectives - 2
Influence forms & procedures
For example:
if objective is pay for performance, emphasize incentives, merit pay plans
if objective is stable, experienced workforce, emphasize seniority-based pay

14. A Pay Model II. Foundation Concepts
Equity
External Equity
Comparison: outside organization
Internal Equity
Comparison: inside organization, among jobs
Employee Equity
Comparison: individuals doing same job for same organization
>Equity = building block foundation on which pay systems are designed >Review equity theory: outcomes to inputs
External Equity
Comparison: outside organization
2 issues: are rates competitive enough to attract/retain employees
control HR costs so org prices remain competitive
Internal Equity
Comparison: inside organization, among jobs
does 1 job require more/less skill or experience than another
is output of one job more/less value than that of another
Employee Equity
Comparison: individuals doing same job for same organization
should all employees receive the same pay?

15. Under-reward Inequity
Equity Theory
Equity
Op/Ip = Oo/Io
Under-reward Inequity
Op/Ip < Oo/Io
Over-reward Inequity
Op/Ip > Oo/Io
p = personal, o = comparison other
I = Inputs
effort, ability, experience
O = Outcomes
pay, benefits, perks

16. Why does Equity Matter? What Behaviors are Likely to Occur when Inequity is Felt?
Reducing one’s own inputs
Increasing one’s outcomes
Leaving the situation

17. A Pay Model III. Techniques for Management
A. Pay Level
B. Pay Structure
C. Individual Pay Rates

18. A Pay Model III. Techniques for Management A. Pay Level
Defined: average rates paid by employer
Applicable concept: External Equity
3 Pure Alternatives
lead competition
match competition
lag competition
Mechanism used: Market Wage Survey
Market Wage Survey --
>done by interview, mailed questionnaire, telephone
>done by org or consultants
KEY FACTORS:
benchmark job
work content relatively stable over time
held by large # of employees
free of discriminatory patterns
not subject to recent surpluses/shortages
job description
employers to include
geographic area to cover
data gathered
median
minimum
maximum
average

19. Market Wage and Salary Surveys
Select key jobs.
Determine relevant labor market.
Select organizations.
Decide on information to collect: wages/benefits/pay policies.
Compile data received.
Determine wages and benefits to pay.

20. Market Wage Levels Which company is leading the market?
Company A’s Wage Level
Market Wage Level
Company B’s Wage Level
Which company is leading the market?
Which company is lagging the market?
What would the wage level line look like for a company that was meeting/matching the market?

21. A Pay Model III. Techniques for Management B. Pay Structure
Defined: pay rates for different jobs within a single organization
Applicable concept: Internal Equity
Pay more for jobs with
greater qualifications
less desirable working conditions
more valuable output
Mechanism used: Job Analysis & Job Evaluation
Effects of Structure: experts argue that equitable pay structures are related to everything from employee performance to strikes
Effects employee decisions to
join
stay
leave organization
whether or not to invest in additional training required for promotions, new jobs

22. Job Evaluation defined: the systematic evaluation of job descriptions
outcome: a hierarchy of organizational jobs according to their content and value to the organization
Methods:
ranking
classification
factor comparison
point method

23. Standard for Comparison
Unit of
Comparison
Other Jobs
Fixed Criteria
Whole
Job
Ranking
Classification
Job
Factors
Factor
Comparison
Point

24. Job Ranking System Simplest and oldest system of job
evaluation by which jobs are arrayed
on the basis of their relative worth

25. Job Classification System
System of job evaluation by which jobs
are classified and grouped according
to a series of predetermined wage grades

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

27. Factor Comparison System
Job evaluation system that permits the
evaluation process to be accomplished
on a factor-by-factor basis by developing
a factor comparison scale

28. Hay Profile Method Job evaluation technique using three
factors – knowledge, mental activity,
and accountability – to evaluate
executive and managerial positions

29. A Pay Model III. Techniques for Management C. Individual Pay Rates
Defined: pay rates for different individuals doing the same job within an organization
Applicable concept: Employee Equity
2 Techniques
Flat Rate
Pay Ranges
Mechanisms used: Performance or Seniority
Flat Rate
common in union contracts
distrust of evaluation system
Pay Ranges
set limits on rates an employer will pay for a particular job
design: 1) develop classes or grades
groups of jobs
considered substantially similar for pay purposes
2) set midpoints, maximums, minimums
Next issue: progression through the ranges
criteria? seniority, merit

30. Wage Curve Curve in a scattergram representing
the relationship between relative worth
of jobs and wage rates

31. Components of the Wage Structure

32. Pay Grades Groups of jobs within a particular class
that are paid the same rate or rate range

33. Elements of the Rate Range

34. Common Pay Grade Ranges
Laborers & Trades, up to 20%
Clerical, Technical, Para-professional, 15-49%
First Level Supervisors, Professionals 30-50%
Middle and Senior Level Management, %

35. Monitoring Compensation Costs
Compra-Ratio
Formula:
A compra ratio < 1 indicates lag
A compra-ratio > indicates excess
Actual Average Pay for Grade
Midpoint Pay for Grade
pay structure represents policy, but practice may not always coincide
>1 way to examine the correspondence is to compute a Compra-Ratio
>the actual average pay for grade/midpoint pay for grade
>provides a direct assessment of the degree to which actual pay is consistent with the pay policy
a CR of less than 1 suggests that actual pay is LAGGING behind policy
a CR of more than 1 suggests that pay and costs exceed policy

36. How Would You Handle Outliers?
An individual whose current pay is beyond the maximum of the pay grade for his/her job
An individual whose current pay is below the minimum of the pay grade for his/her job

37. Fair Labor Standards Act of 1938
Federal Wage Laws
Davis-Beacon Act of 1931
Compensation management is subject to state and federal regulation. On the state level, a majority of states have minimum wage laws or wage boards that fix minimum wage rates on an industry-by-industry basis. On the federal level, three principal acts of legislation affect wages:
Davis-Beacon Act of Also called the Prevailing Wage Law, this law requires that the minimum wage paid to persons employed on federal public works projects worth more than $2,000 be at least equal to the prevailing rates and that overtime be 1.5 times this rate. “Prevailing” is defined as the rate paid to at least 30 percent of the workers in the area. In areas where there is a mixture of both union and non-union labor, this 30 percent rule is controversial. If the union represents at least 30 percent of the labor force, then federal contracts there might pay significantly higher wages than are received by the majority of workers.
Walsh-Healy Act of Called the Public Contracts Act, Walsh-Healy covers workers employed on government contract work for supplies, equipment, and materials greater than $10,000. The act requires employers to pay employees at least the prevailing rates and overtime of 1.5 times the regular rate for work beyond 8 hours a day and 40 hours a week. The wage rate computation must also include any bonuses or incentive payments part of the employee’s total earnings. Walsh-Healy also restricts child and convict labor practices.
Fair Labor Standards Act of 1938 (as amended). Called the Wage and Hour Act, this bill and amendments cover those employees engaged in the production of goods for interstate and foreign commerce. Major provisions are concerned with minimum wage and overtime payments, child labor, and equal rights.
Walsh-Healy Act of 1936
Fair Labor Standards Act of 1938

38. Nonexempt Employees Employees covered by the overtime
provisions of the Fair Labor Standards Act

39. Exempt Employees Employees not covered by the overtime
provisions of the Fair Labor Standards Act

40. 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

41. Wage-Rate Compression
Compression of differentials between
job classes, particularly the differential
between hourly workers and their managers