Compensation and Benefits Human Resource Management

Compensation Hot topics Compensation Management Benefits

Hot or Warm Topics Executive compensation - Are corporate executives overpaid or underpaid? Sex discrimination and comparable worth Open vs. secret pay plans Skill-based compensation plans Team vs. individual pay

Executive Compensation (2005) RankName Company Pay ($mil)5-Yr Pay ($mil)RankNameCompany5-Yr Pay ($mil) 1 Richard D Fairbank Capital One Richard D Fairbank 2Terry S Semel Yahoo Terry S Semel 3 Henry R Silverman Cendant Henry R Silverman 4 Bruce Karatz KB Home Bruce Karatz 5 Richard S Fuld Jr Lehman Bros Richard S Fuld Jr 6 Ray R Irani Occidental Pet Ray R Irani 7 Lawrence J Ellison Oracle Lawrence J Ellison 8 John W Thompson Symantec John W Thompson 9 Edwin M Crawford Caremark Rx Edwin M Crawford 10 Angelo R Mozilo Countrywide Angelo R Mozilo 11 John T Chambers Cisco Systems John T Chambers 12 R Chad Dreier Ryland Group R Chad Dreier

Executive Compensation (2008) Average compensation for 200 chief executives at America's largest public companies was $10.8 million Sanjay Jha Motorola $104.4 million Larry EllisonOracle$84.6 million Robert IgerWalt Disney$51.1 million Kenneth ChenaultAmerican Express$42.8 million Vikram PanditCitigroup$38.2 million Mark HurdHewlett-Packard$34.0 million Jack FuscoCalpine$32.7 million Rupert MurdochNews Corp.$30.1 million David CoteHoneywell International$28.7 million A.G. LafleyProcter & Gamble$25.6 million

CEO Compensation Compared to Average Production Worker to to to to to to to to to 1 Since 1990, if the minimum wage rate had risen at the same rate as CEO pay, minimum wage would now be $23.03 instead of $

Europe's 25 Highest-Paid CEOs(2005) 1. Lindsay Owen-Jones, L'Oreal (France), $28.3M 2. John Browne, BP (Britain), $14.0M 3. Arun Sarin, Vodaphone (Britain), $12.2M 4. Henri De Castries, AXA (France), $9.1M 5. Josef Ackermann, Deutsche Bank (Germany), $8.4M H_europe.html

% ChangeCEO Pay/Relative to Worker Pay (2005)*US CEO (2005) Australia 292% % Belgium Canada France Germany Italy Japan Netherlands New Zealand Spain Sweden Switzerland UK US16939 * Ratio of CEO compensation to the compensation of manufacturing production workers. Source: Authors’ analysis of Towers Perrin (1988, 2003, and 2005).

2005 $31,858 $41,386 $9, % 2004 * $32,285 $42,160 $9, % 2003 $30,724 $40,668 $9, % 2002 $30,203 $39,429 $9, % 2001 $29,215 $38,275 $9, % 2000 $27,355 $37,339 $9, % 1999 $27,208 $37,701 $10, % 1998 $27,290 $37,296 $10, % 1997 $26,720 $36,030 $9, % 1996 $25,919 $35,138 $9, % 1995 $25,260 $35,365 $10, % 1994 $25,558 $35,513 $9, % 1993 $25,579 $35,765 $10, % 1992 $25,791 $36,436 $10, % The Wage Gap Over Time Year Women's Men's Dollar Percent Earnings Earnings Difference

1991 $25,457 $36,440 $10, % 1990 $25,451 $35,538 $10, % 1989 $25,310 $36,855 $11, % 1988 $24,774 $37,509 $12, % 1987 $24,663 $37,389 $12, % 1986 $24,479 $38,088 $13, % 1985 $23,978 $37,131 $13, % 1984 $23,453 $36,842 $13, % 1983 $22,961 $36,106 $13, % 1982 $22,367 $36,224 $13, % 1981 $21,830 $36,854 $15, % 1980 $22,279 $37,033 $14, % 1979 $22,446 $37,622 $15, % The Wage Gap Over Time Year Women's Men's Dollar Percent Earnings Earnings Difference

1978 $22,617 $38,051 $15, % 1977 $21,743 $36,901 $15, % 1976 $21,738 $36,114 $14, % 1975 $21,297 $36,207 $14, % 1974 $21,419 $36,456 $15, % 1973 $21,397 $37,381 $15, % 1972 $21,185 $36,614 $15, % 1971 $20,691 $34,771 $14, % 1970 $20,567 $34,642 $14, % 1969 $20,156 $34,241 $14, % 1968 $18,836 $32,389 $13, % 1967 $18,241 $31,568 $13, % 1966 $17,874 $31,055 $13, % 1965 $17,852 $29,791 $11, % The Wage Gap Over Time Year Women's Men's Dollar Percent Earnings Earnings Difference

Median Annual Earnings of Full- time Workers (Bureau of Labor Statistics, 2000 census) Physicians, surgeons$140,000 88,000 Lawyers 90,000 66,000 Judges, magistrates 88,000 50,000 Actuaries 80,000 56,000 Pharmacists 70,000 63,000 Teacher assistants 20,000 15,000 Cooks ,000 MaleFemale

Compensation Goals Attracting good employees Retaining good employees Motivating employees Complying with the law Having a cost effective compensation system

Compensation and the Three Equities External Equity Attracting good employees Internal Equity Retaining good employees Individual or Employee Equity Motivating employees

External Equity Attracting good employees Labor Market Model Market Surveys Pay strategy/policies

Internal Equity Retaining good employees Job Evaluation Techniques Ranking Jobs are compared to each other based on their overall worth to the company. The ‘worth’ of a job is usually measured by judgments of skill, effort, responsibility, and working conditions. The advantage of the ranking method is that it is simple. The disadvantages, similar to the ranking method of performance appraisal, are that the intervals between the ranks are assumed to be equal, the judgments are global, and as the number of jobs for evaluation increases it becomes increasingly difficult. Also, the evaluators must have knowledge of all jobs.

Classification method Jobs are classified into a grade/category structure. Each tier of the structure has a description and associated job titles. For example, the Westinghouse system had: –Grade 1 Unskilled ex. File clerk –Grade 2 Skilled ex. Typist, lathe operator –Grade 3 Interpretive ex. Chief clerk –Grade 4 Creative ex. Engineers, sales reps –Grade 5 Executive ex. Department heads –Grade 6 Administrative ex. Chief engineer, Director of R&D –Grade 7 Policy ex. Vice-president of Marketing Each job is assigned to the grade/category providing the closest match to the job. Standards are developed mainly along occupational lines. The standards help identify and describe key characteristics of occupations that are important for distinguishing different levels of work. Pay ranges are then assigned to grades. The advantages of this method are that it is simple and has been in use for many years. Its disadvantages include the fact that classification judgments are subjective, and the standard used for comparison may have built-in biases. Also, some jobs may fit into more than one grade/category or their descriptions are so broad that they do not relate to specific jobs.

Factor Comparison Select benchmark jobs. Sets of compensable factors are identified as determining the worth of jobs. The number of factors is usually four or five and typically relate to skill, responsibility, effort and working conditions. Jobs are then ranked on each factor. Wages are then allocated to the factors. The organization’s other jobs are then compared to the benchmark jobs and rates of pay for each of the other jobs. Factor comparison has the advantage that the value of the job is expressed in monetary terms, and the method is applicable to a wide range of jobs. The method’s disadvantages are that the pay points for each factor is based on subjective judgments.

Point Method The point method is an extension of the factor comparison method. Usually between eight and fourteen compensable factors (typically related to skill, effort, responsibility, and working conditions) are identified as determining the worth of jobs. Factors are divided into degrees Points are assigned the degrees Benchmark jobs are compared to market rates

Individual or Employee Equity Motivating performance

JOB ATTRIBUTE RANKING Please rank, from 1 to 10 in order of importance, with 1 being the most important, the following job attributes. In the first column indicate the rank in terms of your own preferences and in the second column indicate how you think others will rank these same job attributes. Your RankingOthers' Ranking Advancement__________ Benefits__________ Company__________ Co-workers__________ Hours__________ Pay__________ Job Security__________ Supervisor__________ Type of Work__________ Working Conditions__________

JOB ATTRIBUTE RANKING The following median rankings are based on the responses of 39,788 job applicants (Minneapolis Gas Company). (Minneapolis Gas Company). MEN WOMEN MEN WOMEN SelfOthersSelfOthers Advancement Benefits Company Co-workers Hours Pay Job Security Supervisor Type of Work Working Conditions

What Do Workers Want From Their Jobs? Supervisors Workers Good working conditions 4 9 Feeling "in" on things 10 2 Tactful disciplining 7 10 Full appreciation for work done 8 1 Management loyalty to workers 6 8 Good wages 1 5 Promotion and growth with company 3 7 Sympathetic understanding of personal problems 9 3 Job security 2 4 Interesting work = most important in job 10 = least important in job (From Lawrence Lindahl, " What Makes a Good Job?", Personnel, (January 1949)

What do new graduates value in jobs? Company culture 6.2 Advancement opportunities 6.0 Nature of work (e.g., challenging)5.9 Training provided 5.7 Work/non-work balance 5.5 Monetary compensation 5.3 Benefits 5.2 Location 5.0 Vacation time 4.6 Level of job security 3.9 Size of company 3.7 International assignments 3.3 Rated on seven point scale (1 = not important to 7 = very important). Source: Human Resource Management (2003), 42, p

What do applicants with college degrees want in jobs? Type of work Advancement Co-workers Company Security Location 6.2 Supervisor Pay Working conditions Benefits Hours sample = 623, 1978 sample = 4,535 Source: Journal of Occupational & Organizational Psychology (2003), 66, p

Individual or Employee Equity Motivating performance At the individual level Pluses and minuses Methods/techniques At the organization level Pluses and minuses Methods/techniques

Compensation and the Legal Environment The Fair Labor Standards Act of 1938 Minimum Wage Exempt vs. Non-exempt and overtime asp The Equal Pay Act of 1963

Benefits The Cost of Benefits Mandatory Workers’ Compensation Unemployment Insurance Family Medical Leave Social Security Retirement income Disability income Medicare Survivor benefits 2011 rates –Social security 6.2% on first $106,800 (4.2 in 2011) –Medicare 1.45% unlimited

Benefits Non-mandatory Insurance Health –Cost escalation –COBRA –HIPAA –Types of health insurance »Traditional indemnity plans »HMO »PPO Retirement ERISA (1974) –Vesting »Full vesting after 5 years »20% per year after 3 years –Fiduciary standards –Pension Benefit Guarantee Corporation Defined benefit Defined contribution –401(k), 403(b) » –IRA –SEP –Keogh

Benefits continued Paid time off Employee services