Compensation Compensation is the reward that individuals receive in exchange for performing tasks A major cost of doing business The chief reason people seek employment U.S. employers pay an average of $23.65 per hour worked $17.02 = straight-time wages and salaries $6.63 = benefits

Compensation Direct Indirect Non-financial Wages Salary Bonuses Commissions Insurance Vacation Childcare Praise Self-esteem Recognition

Objective of Compensation Adequate Equitable Acceptable to employees Balanced Effective compensation Cost effective Provides incentive Secure

External Influences on Compensation Labor Market The Economy External Influences Unions Government

Government Influences The government requires employers to deduct funds from employees’ wages for… Federal income taxes Social security taxes State and local income taxes Other ways government influences compensation If the government is the employer, it can legislate pay levels by setting statutory rates The government may create jobs for certain categories of workers, thus reducing the supply of workers and affecting pay rates

Union Influences Unions exert influence on compensation programs Unionized workers work longer hours and earn more than non-unionized workers Unions are pacesetters in demands for pay, benefits, and improved working conditions There is supportive interaction between unions and the government The Davis-Bacon Act requires employers with government contracts to pay prevailing wages The Wagner Act makes it illegal to change wage rates during a union organizing campaign

The Labor Market and Compensation Styles of managing and rewarding are changing in response to diversity Diversity is more than demographics; it means differing value, lifestyles, even body types Changing demographics require employers to offer more, and more varied, benefits to motivate, satisfy, retain employees

Legal Considerations Discrimination: Must apply same decision rules to all employees eligible for the reward or incentive. Employees protected by Title VII and Equal Pay Act. Taxes and accounting rules: For example, those governing capital gains, deferred compensation and stock plans. Like any employment decision, employers must make sure that incentives and rewards are equitably administered. If a group of employees are eligible to receive a reward, the criteria must be applied equitably across all employees in that group. Note that the criteria must be applied equitably, not equally. This does not mean that all employees should receive the same reward; the process, however, must be applied fairly and the outcomes distributed fairly, based on the set of performance standards set and achieved. In addition, depending on employers’ choices of the types of incentives and rewards they offer, there may be some unanticipated or unplanned tax consequences for employees. For example, with incentive stock options, tax is deferred as long-term capital gains (15 percent) when the stock is actually sold by the employee. For employees with non-qualified stock options, the spread (i.e., the difference between the price at which the employee bought the stock and the current market value) is viewed as income and is treated as compensation, which is taxed at a rate higher than 15 percent. If the instructor is knowledgeable in this area, they could offer other tax and accounting issues that employers and employees might consider as they decide the mix of rewards. 8

Pay and Pay Decisions Pay is a powerful tool for meeting the organization’s goals. Pay has a large impact on employee attitudes and behaviors. Pay influences the kinds of people who are attracted to (or remain with) the organization. Employees attach great importance to pay decisions when they evaluate their relationship with their employer. This chapter describes how managers weigh the importance and costs of pay to arrive at a structure for compensation and the levels of pay for different jobs. Pay Decisions 9

Factors Influencing Pay Decisions Establishing a pay structure simplifies the process of making decisions about individual employees’ pay by grouping together employees with similar jobs. As shown in Figure 11.1, HR professionals develop this structure based on: Legal requirements Market forces The organization’s goals 10

Legal Requirement for Pay Government regulation affects pay structure in the areas of: Equal employment opportunity Minimum wage Pay for overtime Prevailing wages for federal contractors All of an organization’s decisions about pay should comply with applicable laws. 11

Legal Requirement for Pay Employers must not base differences in pay on an employee’s age, sex, race, or other protected status. Any differences in pay must be tied to job responsibilities or performance. The goal is equal pay for equal work. Minimum wage is the lowest amount that employers may pay under federal or state law, stated as an $/hour. The overtime rate is 1½ times the employee’s usual hourly rate; exempt employees (not covered by FSLA) do not get overtime…they are not hourly These laws do not guarantee equal pay for men and women, whites and minorities, or any other groups, because so many legitimate factors, from education to choice of occupation, affect a person’s earnings. Prevailing wage rules require federal contractors to pay their employees at rates at least equal to the typical wages in the area. 12

Child Labor Laws Children aged 16 and 17 may not be employed in hazardous occupations defined by the U.S. Department of Labor. Children aged 14 and 15 may work only outside school hours, in jobs defined as nonhazardous, and for limited time periods. A child under age 14 may not be employed in any work associated with interstate commerce. Exemptions include baby-sitting, acting, and delivering newspapers. The FLSA sharply restricts the use of child labor, with the aim of protecting children’s health, safety, and educational opportunities. The restrictions apply to children younger than 18. 13

Economic Influences on Pay Product Markets Labor Markets The organization’s product market includes organizations that offer competing goods and services. Organizations compete on quality, service, and price. The cost of labor is a significant part of an organization’s costs. Organizations must compete to obtain human resources in labor markets. Competing for labor establishes the minimum an organization must pay to hire an employee for a particular job. An organization cannot make spending decisions independent of the economy. Organizations must keep costs low enough that they can sell their products profitably, yet they must be able to attract workers in a competitive labor market. 14

Pay Level: Deciding What to Pay Pay at the rate set by the market Pay at a rate above the market Pay at a rate below the market Although labor and product markets limit organizations’ choices about pay levels, there is a range within which organizations can make decisions. The size of this range depends on the details of the organization’s competitive environment. If many workers are competing for a few jobs, employers will have more choice. Employers can be more flexible about pay policies if they use technology and work design to get better results from employees than competitors do. 15

Comparing Market Pay Benchmarking – a procedure where an organization compares its own practices against those of others Pay surveys Trade and industry groups Professional groups Employees compare their pay and contributions by: What they think employees in other organizations earn for doing the same job. What they think other employees holding different jobs within the organization earn for doing work at the same or different levels. What they think other employees in the organization earn for doing the same job as theirs. HR professionals need to determine whether to gather data focusing on particular industries or on job categories. Instructors: see the HR How To on page 320 in the text. 16

Pay Equity If employees conclude that they are under-rewarded, they are likely to make up the difference in one of three ways: They might put forth less effort (reducing their inputs). They might find a way to increase their outcomes (e.g., stealing). They might withdraw (by leaving the organization or refusing to cooperate). Employees’ beliefs about fairness also influence their willingness to accept transfers or promotions. Equity theory tells organizations that employees care about their pay relative to what others are earning and that these feelings are based on what employees perceive (what they notice and form judgments about). An organization can do much to contribute to what employees know and, as a result, what they perceive. If the organization researches salary levels and concludes that it is paying its employees generously, it should communicate this. If the employees do not know what the organization learned from its research, they may reach an entirely different conclusion about their pay. 17

The Pay-Level Decision Pay-level Strategies Attracts and holds the best employees High Pacesetter Minimum level needed to hire enough workers Low All the company can pay The going rate plus or minus 5 percent Comparable Most frequently used

Pay Structure Steps Job Evaluation Job Structure Define Key Jobs Pay Survey Pay Policy Line Pay Rates Pay Grades Pay Ranges Pay Structure The pay structure reflects decisions about how much to pay (pay level) and the relative value of each job (job structure). The organization’s pay structure should reflect what the organization knows about market forces, as well as its own unique goals and the relative contribution of each job to achieving the goals. By balancing this external and internal information, the organization’s goal is to set levels of pay that employees will consider equitable and motivating. Organizations typically apply the information by establishing some combination of: Pay rates Pay grades Pay ranges 19

Pay and Employees’ Satisfaction Relative deprivation theory suggests that pay dissatisfaction is a function of six judgments… Discrepancy between what workers want and receive Discrepancy between comparison outcome and what they get Past expectations of receiving more rewards Low expectations for the future A feeling of deserving or being entitled to more Not feeling personally responsible for poor results

Pay and Employees’ Productivity Ability Safety Adequate equipment Performance requires motivation plus… Good working conditions Health Good leadership & managers

Pay and Employees’ Productivity Some argue that Tying pay to performance destroys the intrinsic reward of doing a job well The importance of money varies from person to person If an organization has an incentive pay system but pays for seniority, the motivation of pay is lost Be sure that compensation systems are directly connected to expected behaviors