A Framework for Human Resource Management, 5th ed. Gary Dessler

Compensating Employees Ch 11 & 12

When you finish studying this chapter, you should be able to: Explain each of the five basic steps in establishing pay rates. Discuss four basic factors determining pay rates. Compare and contrast piecework and team or group incentive plans. List and describe each of the basic benefits most employers might be expected to offer.

Introduction Employee compensation refers to all forms of pay or rewards going to employees and arising from their employment direct financial payments indirect payments

Employee Compensation Direct financial payments payments in the form of wages, salaries, incentives, commissions, and bonuses Indirect payments payments in the form of financial benefits like employer-paid insurance and vacations

Pay Factors Legal Union Policy Equity

Some Important Compensation Laws Fair Labor Standards Act contains minimum wage, maximum hours, overtime pay, equal pay, record-keeping, and child labor provisions covering the majority of U.S. workers Executive, administrative, and professional employees are generally exempt from the act’s minimum wage and overtime requirements

Some Important Compensation Laws (cont.) Equal Pay Act employees of one sex may not be paid wages at a rate lower than that paid to employees of the opposite sex for doing roughly equivalent work

Some Important Compensation Laws (cont.) Title VII of the Civil Rights Act makes it an unlawful practice for an employer to discriminate against any individual with respect to hiring, compensation, terms, conditions, or privileges of employment because of race, color, religion, sex, or national origin Title VII of the Civil Rights Act makes it an unlawful practice for an employer to discriminate against any individual with respect to hiring, compensation, terms, conditions, or privileges of employment because of race, color, religion, sex, or national origin

Some Important Compensation Laws (cont.) Age Discrimination in Employment Act Americans with Disabilities Act Family and Medical Leave Act

How Unions Influence Compensation Decisions National Labor Relations Act (NLRA) of 1935 granted employees the right to organize and to bargain collectively National Labor Relations Act (NLRA) of 1935 granted employees the right to organize, to bargain collectively, and to engage in concerted activities for the purpose of collective bargaining or other mutual aid or protection

Compensation Policies A hospital might have a policy of starting nurses at a wage at least 20% above the prevailing market wage. The average base pay for an executive secretary ranges from $37,300 in Albuquerque New Mexico to $41,900 (Tampa, Florida), $59,800 (New York, New York), and $60,100 (San Francisco, California). An employer’s strategy and compensation policies significantly impact the wages and benefits it pays. For example, a hospital might have a policy of starting nurses at a wage at least 20% above the prevailing market wage. Other important policies include the basis for salary increases, foreign pay differentials, and overtime pay policy. Locality also plays a role. For example, the average base pay recently for an executive secretary would have ranged from $37,300 in Albuquerque New Mexico to $41,900 (Tampa, Florida), $59,800 (New York, New York), and $60,100 (San Francisco, California). [i] [i] "Salaries for similar jobs very significantly across the United States", compensation & benefits Review, January/February 2006, page nine

Equity and Its Impact on Pay Rates External equity pay must compare favorably with rates in other companies, or an employer will find it hard to attract and retain qualified employees

Equity and Its Impact on Pay Rates (cont.) Internal equity each employee should view his or her pay as equitable given other employees’ pay in the organization

How Employers Establish Pay Rates Conduct a salary survey Employee committee determines the worth of each job Group similar jobs into pay grades Price each pay grade by using wage curves Develop rate ranges Conduct a salary survey of what other employers are paying for comparable jobs Employee committee determines the worth of each job in your organization through job evaluation Group similar jobs into pay grades Price each pay grade by using wage curves Develop rate ranges

Step 1: Conduct the Salary Survey Salary (or compensation) surveys formal or informal surveys of what other employers are paying for similar jobs Used to price benchmark jobs Collect data on benefits Salary (or compensation) surveys––formal or informal surveys of what other employers are paying for similar jobs used to price benchmark jobs. collect data on benefits Department of Labor publishes the National Compensation Survey

Step 2: Determine the Worth of Each Job Job evaluation formal and systematic comparison of jobs to determine the worth of one job relative to another Compensable factors factors that determine your definition of job content, establish how the jobs compare to each other, and set the compensation paid for each job

Job Evaluation Methods Ranking method ranks each job relative to all other jobs Job classification manager categorizes jobs into groups based on their similarity in terms of compensable factors such as skills and responsibility

Ranking Method of Job Evaluation Obtain job information Select raters and jobs to be rated Select compensable factors Rank jobs Combine ratings

Job Evaluation Methods Point method involves identifying several compensable factors, each having several degrees, and then assigning points based on the number of degrees, to come up with an actual number of points for each job

Step 3: Group Similar Jobs into Pay Grades comprises jobs of approximately equal difficulty or importance as determined by job evaluation

Step 4: Price Each Pay Grade—Wage Curves shows the average pay rates currently being paid for jobs in each pay grade Purpose of a wage curve is to show the relationship between (1) the value of the job as determined by one of the job evaluation methods and (2) the current average pay rates for the grades purpose is to show relationship between (1) the value of the job (2) the current average pay rates

Plotting a Wage Curve

Step 5: Develop Rate Ranges May be 10 levels or steps and 10 corresponding pay rates within each pay grade Employer may fine-tune pay rates to account for any unique circumstances

Pricing Managerial and Professional Jobs Emphasize nonquantifiable factors such as judgment and problem solving Tendency is to pay managers and professionals based on their performance

Executive Compensation Variance Three main factors Job complexity Ability to pay Human capital

Pricing Managerial and Professional Jobs Four main components: Base salary Short-term incentives Long-term incentives Executive benefits and perks

Strategy and Executive Pay Identify the company's strategic direction, and translate this into specific business goals List the skills and competencies your professional employees should have to accomplish these goals

Strategy and Executive Pay (cont.) Evaluate the extent to which the existing pay plan produces these skills and competencies Design and implement the new pay plan

Current Trends in Compensation Competency–Skill-based pay employee is paid for the range, depth, and types of skills and knowledge he is capable of using rather than for the responsibilities of the job currently held Competencies demonstrable personal characteristics such as knowledge, skills, and behaviors Competencies - demonstrable characteristics of the person, including knowledge, skills, and behaviors, that enable performance

Current Trends in Compensation (cont.) Skill-based pay programs employer defines specific skills, and has a method for determining the person’s pay based on his or her skill competencies

Current Trends in Compensation (cont.) Broadbanding collapsing salary grades and ranges into just a few wide levels or bands, each of which contains a relatively wide range of jobs and salary levels

Board Oversight of Executive Pay Has our compensation committee thoroughly identified its duties and processes? Is our compensation committee being appropriately advised? Are there particular executive compensation issues that our committee should address? Do our procedures demonstrate diligence and independence? Is our committee appropriately communicating its decisions?

Incentive Plans Individual incentive programs Variable pay give performance-based pay to individual employees who meet their individual performance standards Variable pay refers to group pay plans that tie payments to productivity

Piecework Plans Piecework pay is tied directly to what the worker produces paid a “piece rate” for each unit he or she produces

Team or Group Incentive Plans Companies often want to pay groups on an incentive basis, such as when they want to encourage teamwork Main disadvantage is that each worker’s rewards are not based just on his own efforts

Incentives for Managers and Executives Stock option the right to purchase a specific number of shares of company stock at a specific price during a period of time

Incentives for Salespeople Most companies pay their salespeople a combination of salary and commissions Typically a 70% base salary/30% incentive mix

Auto-dealers Compensation Compensation for car salespeople ranges from a high of 100% commission to a small base salary with commission Commission is generally based on the net profit on the car It encourages the salesperson to hold firm on the retail price, and to push “after-sale products” Compensation for car salespeople ranges from a high of 100% commission to a small base salary with commission accounting for most of the total compensation. Commission is generally based on the net profit on the car when it’s delivered to the buyer. This promotes precisely the sorts of behaviors the car dealers want to encourage. For example, it encourages the salesperson to hold firm on the retail price, and to push “after-sale products” like floor mats, side moldings, undercoating, car alarms, and trunk-mounted CDs. Car dealers also use short-term incentives. For helping sell slow-moving vehicles, the salesperson may be offered a “spiff”—a car dealer term for an extra-incentive bonus over commission.[i] [i] Peter Glendinning, “Kicking the Tires of Automotive Sales Compensation,” Compensation and Benefits Review (September/October 2000): 47–53; and Michele Marchetti, “Why Sales Contests Don’t Work,” Sales and Marketing Management 156, (January 2004): 19.

Non-Tangible and Recognized-Based Awards Studies show that recognition has a positive impact on performance, either alone or in conjunction with financial rewards

Online Award Programs Recognition programs are expensive to administer Firms partner with online incentive firms to expedite process

Incentive Plans Merit pay Profit-sharing plan any salary increase awarded to an employee based on his or her individual performance Profit-sharing plan most employees receive a share of the company’s annual profits

Incentive Plans Employee stock ownership plan (ESOP) a corporation contributes shares of its own stock—or cash to be used to purchase such stock—to a trust established to purchase shares of the firm’s stock for employees

Broad-based Stock Options With companies now having to show stock options as an expense when awarded, some firms feel awarding stock instead of stock options is a more direct and immediate way of linking pay to performance

Incentive Plans Gainsharing plans want to encourage improved employee productivity by sharing resulting financial gains with employees

Scanlon Plan Philosophy of cooperation Identity Competence Involvement system Sharing of benefits formula

Earnings-at-Risk Pay Plans some portion of the employee's base salary is at risk

HRIS and Productivity Enterprise Incentive Management (EIM) software is used to automate the planning and management of incentive plans

Employee Benefits Benefits defined as all the indirect monetary and nonmonetary payments an employee receives for continuing to work for the company Employee benefits account for over one-third of the total cost of company payrolls, with health insurance the most expensive single benefit cost

Pay for Time Not Worked Supplemental pay benefits typically one of an employer’s most expensive benefits holidays, vacations, sick leave, and jury duty holidays, vacations, jury duty, bereavement leave, military duty, sick leave, sabbatical leave, maternity leave, and unemployment insurance

Pay for Time Not Worked (cont.) Severance pay a one-time separation payment Worker Adjustment and Retraining Act of 1989

Insurance Benefits Workers’ compensation aimed at providing sure, prompt income and medical benefits to work-related accident victims or their dependents

The Pregnancy Discrimination Act requires employers to treat women affected by pregnancy, childbirth, or related medical conditions the same as any employee not able to work, with respect to all benefits, including sick leave and disability benefits, and health and medical insurance

Insurance Benefits COBRA — Comprehensive Omnibus Budget Reconciliation Act requires most employers to make available to terminated employees continued health benefits for a period of time COBRA — Comprehensive Omnibus Budget Reconciliation Act — requires most private employers to make available to terminated or retired employees and their families continued health benefits for a period, generally 18 months

Cost Control Cost containment specialists Online administration Defined benefits Deductibles Outsourcing Wellness programs Claims audits Medical tourism Long-term care

Retirement Benefits Social Security Retirement benefits Death benefits Disability payments Social Security   three types of benefits retirement benefits, which provide an income if the employee retires at age 62 death benefits, provide monthly payments to dependents disability payments provide monthly payments if the employee becomes totally disabled

Pension Plans Defined benefit pension plan contains a formula for determining retirement benefits so that the actual benefits to be received are defined ahead of time

Pension Plans Defined contribution plan specifies what contribution the employer will make to a retirement or savings fund set up for the employee

Employee Service Benefits Employee Assistance Programs (EAPs) formal employer program for providing employees with counseling and advisory services Employee Assistance Programs (EAPs) - formal employer program for providing employees with counseling and advisory services Personal, legal, and financial services Child and elder care referrals Adoption assistance Mental health counseling Life event planning

Employee Services and Family-Friendly Benefits Flexible benefits plans initially called cafeteria plans because employees could spend their benefits allowances on a choice of benefits options

Employee Leasing Employee leasing leasing firm becomes the legal employer and handles all employee-related paperwork

Strategy and HR     Employers today want to ensure that their compensation plans (1) add value in terms of (2) promoting the employee performance that is required for (3) achieving the firm’s strategic goals.

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