© 2010 Cengage Learning. Atomic Dog is a trademark used herein under license. All rights reserved. Chapter 9 Determining Pay and Benefits

© 2010 Cengage Learning. Atomic Dog is a trademark used herein under license. All rights reserved. Chapter Outline 9-1 Gaining Competitive Advantage 9-2 HRM Issues and Practices 9-3 The Manager’s Guide

© 2010 Cengage Learning. Atomic Dog is a trademark used herein under license. All rights reserved. 9-1a Opening Case: Gaining Competitive Advantage at Old Country Buffet Problem: A turnover problem among frontline service employees. Solution: Implementing an incentive program for managers. How the incentive plan enhanced competitive advantage  Within three years, manager turnover rate dropped from 40 to 14 percent, with 272 managers eligible for the Founder’s Club. Sales increased by 7 percent, and guest counts by 4 percent, resulting in an increase of $43 million in total profits.

© 2010 Cengage Learning. Atomic Dog is a trademark used herein under license. All rights reserved. 9-1b Linking Pay and Benefits to Competitive Advantage If effective, a firm’s compensation system can:  Improve cost efficiency.  Ensure legal compliance.  Enhance the success of recruitment efforts.  Reduce morale and turnover problems.

© 2010 Cengage Learning. Atomic Dog is a trademark used herein under license. All rights reserved. 9-2a Influence of Compensation on Attitudes and Behavior Equity theory  Formulated by J. Stacy Adams.  People form equity beliefs based on two factors: -Inputs (I): The perceptions that people have concerning what they contribute to the job (e.g., skill and effort). -Outputs (O): The perceptions that people have regarding the returns they get (e.g., pay) for the work they perform.  People judge the equity of their pay by comparing their outcome-to-input ratio (O/I) with another person’s ratio, who is referred to as one’s “referent other.”

© 2010 Cengage Learning. Atomic Dog is a trademark used herein under license. All rights reserved. 9-2a Influence of Compensation on Attitudes and Behavior (cont.) Equity: O/I ratios of the individual and his or her referent other are perceived as being equal. Inequity: O/I ratios of the individual and his or her referent other are perceived as being unequal. When employees’ O/I ratios are less than that of their referent others, they feel they are being underpaid. When employees’ O/I ratios are greater, they feel they are being overpaid.

© 2010 Cengage Learning. Atomic Dog is a trademark used herein under license. All rights reserved. 9-2a Influence of Compensation on Attitudes and Behavior (cont.) When underpaid, employees tend to decrease inputs or escape the situation. Overpaid employees consider overpayment just as satisfying as equity or somewhat dissatisfying, but not nearly as dissatisfying as underpayment.

© 2010 Cengage Learning. Atomic Dog is a trademark used herein under license. All rights reserved. 9-2b Establishing Pay Rates within an Organization Employees believe their pay is equitable when they perceive these circumstances:  Internal consistency: Pay is fair relative to the pay coworkers in the same organization receive.  External competitiveness: Pay is fair relative to the pay received by workers in other organizations who hold similar positions.  Employee contributions: Pay fairly reflects their input to the organization.

© 2010 Cengage Learning. Atomic Dog is a trademark used herein under license. All rights reserved. 9-2b Establishing Pay Rates within an Organization (cont.) Achieving internal consistency  Determine the overall importance or worth of each job.  Job evaluation is the systematic process for determining the worth of a job.  Standards for job evaluation -Consistency -Freedom from bias -Correctability -Representativeness -Accuracy of information

© 2010 Cengage Learning. Atomic Dog is a trademark used herein under license. All rights reserved. 9-2b Establishing Pay Rates within an Organization (cont.)  How job evaluation is conducted: Point-factor method -Step 1: Select and define the compensable factors used to determine job worth. -Step 2: Determine the number of levels or degrees for each factor. -Step 3: Carefully define each degree level. -Step 4: Weigh each compensable factor in terms of its relative importance. -Step 5: Assign point values to the degrees associated with each compensable factor. -Step 6: Calculate the total point value for a job by summing the points earned on each compensable factor.

© 2010 Cengage Learning. Atomic Dog is a trademark used herein under license. All rights reserved. 9-2b Establishing Pay Rates within an Organization (cont.)  Assigning jobs to pay grades -Jobs are grouped into pay grades based on the total number of points received. -Pay grades: Job groupings in which all jobs assigned to the same group are subject to the same range of pay. -Companies must decide how many pay grades to establish.

© 2010 Cengage Learning. Atomic Dog is a trademark used herein under license. All rights reserved. 9-2b Establishing Pay Rates within an Organization (cont.) Achieving external competitiveness  Collecting salary survey information -Provides information on pay rates offered by a firm’s competitors for certain benchmark jobs.  Establishing a pay policy -A pay policy stipulates how well a company will pay its employees relative to the market. -Majority of firms pay at the market rate. -When setting its pay policy, a company must consider its strategic plan.

© 2010 Cengage Learning. Atomic Dog is a trademark used herein under license. All rights reserved. 9-2b Establishing Pay Rates within an Organization (cont.)  Establishing pay rates -Market rates identified by salary surveys are used for benchmark jobs. -For non-benchmark jobs, pay rates are set based on the pay policy line. -Pay policy line: A regression line that shows the statistical relationship between job evaluation points and prevailing market rates.

© 2010 Cengage Learning. Atomic Dog is a trademark used herein under license. All rights reserved. 9-2b Establishing Pay Rates within an Organization (cont.) Recognizing employee contributions  An organization must establish a pay range for each pay grade.  Each employee must then be placed within that range based on their contribution to the organization.  Pay range specifies the minimum and maximum pay rates for all jobs within a grade.

© 2010 Cengage Learning. Atomic Dog is a trademark used herein under license. All rights reserved. 9-2b Establishing Pay Rates within an Organization (cont.) Establishing a pay range  Most employers set market rate as the midpoint of the range.  The spread from the midpoint usually varies, becoming larger as one progresses to higher pay grades.  The mechanism for placing each employee within a pay range differs for new and existing employees.  New employees are usually paid at the bottom of the pay range unless their qualifications exceed the minimum.

© 2010 Cengage Learning. Atomic Dog is a trademark used herein under license. All rights reserved. 9-2b Establishing Pay Rates within an Organization (cont.) Skill-based pay  A compensation approach that grants employees pay increases for acquiring new, job-related skills.  Usually implemented as follows: 1.Identify tasks that need to be performed. 2.Determine what skills are needed to perform the tasks. 3.Develop tests or measures to determine whether an individual has learned the skills. 4.Price each skill based on its value to the organization. 5.Communicate to employees the skills they can learn and how much they will be paid for learning them.

© 2010 Cengage Learning. Atomic Dog is a trademark used herein under license. All rights reserved. 9-2b Establishing Pay Rates within an Organization (cont.) Skill-based pay Strengths  Financial incentive to improve skills.  Effective communication and problem solving skills.  Commitment to the organization. Weaknesses  Additional labor costs.  May lead to inequity perceptions.  Not cost-effective if company does not use the new skills.  Problems determining the skill levels of different employees.  Administrative burden.  Least effective in bureaucratic organizations.

© 2010 Cengage Learning. Atomic Dog is a trademark used herein under license. All rights reserved. 9-2c Legal Constraints on Pay Practices The law imposes constraints on organizational pay practices in two major areas:  Minimum wage and overtime  Pay discrimination

© 2010 Cengage Learning. Atomic Dog is a trademark used herein under license. All rights reserved. 9-2c Legal Constraints on Pay Practices (cont.) Minimum wage and overtime  The Fair Labor Standards Act (FLSA) primarily regulates minimum wage and overtime pay practices.  The act exempts small organizations and certain types of employees from its minimum wage and overtime requirements.  Job categories exempted include executive, administrative, professional, and outside sales employees.

© 2010 Cengage Learning. Atomic Dog is a trademark used herein under license. All rights reserved. 9-2c Legal Constraints on Pay Practices (cont.)  Minimum wage provisions: If a state’s minimum wage level differs from the federal minimum wage level, the employer must pay the higher of the two rates.  Overtime provisions: All nonexempt employees who work in excess of 40 hours/week, must be paid for overtime worked, no less than one-half times the employee’s regular pay rate.

© 2010 Cengage Learning. Atomic Dog is a trademark used herein under license. All rights reserved. 9-2c Legal Constraints on Pay Practices (cont.) Pay and discrimination  The Equal Pay Act (EPA)  The gender pay gap  Comparable worth and the law

© 2010 Cengage Learning. Atomic Dog is a trademark used herein under license. All rights reserved. 9-2c Legal Constraints on Pay Practices (cont.) The Equal Pay Act  Prohibits sex discrimination in pay.  The ‘‘equal pay for equal work’’ standard requires that jobs requiring an equal level of skill, effort, and responsibility and performed under similar working conditions must be paid equally.  Unequal pay for equal work is allowed if differences are based on seniority, productivity, merit, or any factor other than sex.

© 2010 Cengage Learning. Atomic Dog is a trademark used herein under license. All rights reserved. 9-2c Legal Constraints on Pay Practices (cont.) The gender pay gap  Despite the existence of EPA, pay gap still exists between the sexes.  This pay gap has been attributed to women working part-time, staying for a shorter period in the workforce, and being less effective in negotiating starting salaries.  The ‘‘equal pay for equal worth’’ standard is called comparable worth.

© 2010 Cengage Learning. Atomic Dog is a trademark used herein under license. All rights reserved. 9-2c Legal Constraints on Pay Practices (cont.) Comparable worth and the law  To win a comparable worth case, plaintiffs must prove disparate impact caused by intentional discrimination.  Employers can win the case if they can prove that pay differences are not the result of intentional discrimination.

© 2010 Cengage Learning. Atomic Dog is a trademark used herein under license. All rights reserved. 9-2d Employee Benefit Options Workers’ compensation  Designed to provide financial protection for individuals injured on the job.  Compensation is provided for: -Medical expenses. -Lost wages from the time of injury until their return to the job. -Death, dismemberment, or permanent disability.  Payouts for workers’ compensation have more than tripled in the past 20 years, the fastest growing category of claims being mental stress.

© 2010 Cengage Learning. Atomic Dog is a trademark used herein under license. All rights reserved. 9-2d Employee Benefit Options (cont.) To successfully combat mental stress claims for workers’ compensation, employers should:  Formulate a preventive strategy based on an analysis of the workplace to determine stress risks.  Develop programs for stress reduction.  Reduce levels of workplace stress.  Teach workers how to handle stress.

© 2010 Cengage Learning. Atomic Dog is a trademark used herein under license. All rights reserved. 9-2d Employee Benefit Options (cont.) Unemployment compensation  Provide income to unemployed individuals who have lost a job through no fault of their own.  Eligible workers receive weekly stipends for 26 weeks.  Disqualification criteria for receiving benefits: -Quitting one’s job without good cause. -Being discharged for misconduct connected with work. -Refusing suitable work while unemployed.

© 2010 Cengage Learning. Atomic Dog is a trademark used herein under license. All rights reserved. 9-2d Employee Benefit Options (cont.) Social Security Act of 1935  Provides monthly benefits to retired workers who are at least 62 years of age, disabled workers, and their eligible spouses and dependents.  Financed by contributions made by the employee and matched by the employer.  Computed as a percentage of the employee’s earnings.  Provides Medicare coverage for anyone who is entitled to retirement benefits.

© 2010 Cengage Learning. Atomic Dog is a trademark used herein under license. All rights reserved. 9-2d Employee Benefit Options (cont.) Consolidated Omnibus Budget Reconciliation Act (COBRA) -Provides continuation of health insurance coverage for a period of up to three years for employees who leave a company through no fault of their own. -Employees are required to pay premiums at the company’s group rate.

© 2010 Cengage Learning. Atomic Dog is a trademark used herein under license. All rights reserved. 9-2d Employee Benefit Options (cont.) Insurance programs:  Health insurance programs -cover hospitalization, physician care, and surgery.  Long-term disability (LTD) insurance -Provides replacement income for an employee who cannot return to work for an extended period of time due to illness or injury. -Program may be temporary or permanent.  Life insurance -Premiums are usually paid by the employers. -Employees are often given the opportunity to expand their coverage by purchasing additional insurance.

© 2010 Cengage Learning. Atomic Dog is a trademark used herein under license. All rights reserved.

9-2d Employee Benefit Options (cont.) Pensions  Defined benefit plans: Specify the amount of pension a worker will receive on retirement.  Defined contribution plans: Specify the rate of employer and employee contributions.  Pension plans once established must follow rules laid down by the Employee Retirement Income Security Act (ERISA) of Ensures that employees will receive the pension benefits due to them, even if the company goes bankrupt or merges with another firm.

© 2010 Cengage Learning. Atomic Dog is a trademark used herein under license. All rights reserved.

9-2e Benefits Administration Flexible benefit plans  Also known as cafeteria plans.  Allow employees to choose among various benefits and levels of coverage.  Enable employees to choose options that best fit their own needs.  Makes employees aware of the value of the benefits their employers provide.  Reduce compensation costs because employers no longer have to pay for unwanted benefits.  Employers and employees can save on taxes.

© 2010 Cengage Learning. Atomic Dog is a trademark used herein under license. All rights reserved. 9-2e Benefits Administration (cont.) Cost containment  Contain worker’s compensation costs.  Delete benefits.  Implement utilization review programs.  Choose the right health insurance carrier.  Increase the attractiveness of benefits.

© 2010 Cengage Learning. Atomic Dog is a trademark used herein under license. All rights reserved. 9-3a Compensation and the Manager’s Job A manager’s responsibilities regarding pay  Evaluate the worth of jobs.  Negotiate starting salaries.  Recommend pay raises and promotions.  Compliance with the FLSA.  Notify the HRM department of job changes. A manager’s responsibilities regarding benefits  Deal with employees on workers’ compensation leave.  Help to contain unemployment compensation costs.

© 2010 Cengage Learning. Atomic Dog is a trademark used herein under license. All rights reserved. 9-3b How the HRM Department Can Help Pay-related responsibilities  Establish rates of pay.  Establish procedures for administering pay plans.  Ensure compliance with antidiscrimination laws. Benefit-related responsibilities  Select and administer the organization’s benefit options.  Communicate benefits-related information to employees.

© 2010 Cengage Learning. Atomic Dog is a trademark used herein under license. All rights reserved. 9-3b How the HRM Department Can Help (cont.) Communicating benefits-related information  Prepare an easy-to-understand handbook to describe the cost and coverage of each benefit option.  Draft periodic supplements to the handbook.  Appoint an HR professional for answering questions.  Conduct regularly scheduled training classes.  Use the company newsletter to provide information on new benefits or for updates on existing programs.

© 2010 Cengage Learning. Atomic Dog is a trademark used herein under license. All rights reserved. 9-3c HRM Skill-Building for Managers Understanding the overtime provisions of the FLSA  Overtime must be calculated on a weekly basis.  When calculating overtime, a worker’s hours cannot be averaged over two or more weeks.

© 2010 Cengage Learning. Atomic Dog is a trademark used herein under license. All rights reserved. 9-3c HRM Skill-Building for Managers  To lessen the chance of having to pay for unauthorized overtime: -Communicate the company’s overtime policy to all nonexempt employees. -Do not pressure or even encourage employees to report for work early, stay late, or take work home. -Do not penalize employees simply because they work only scheduled hours and do not come in early or stay late without being told to do so. -Be aware of common employee practices; do not permit or require employees to put in extra, off-the-clock time.

© 2010 Cengage Learning. Atomic Dog is a trademark used herein under license. All rights reserved. 9-3c HRM Skill-Building for Managers (cont.) Negotiating starting salaries  Understand that applicants will typically wait for you to make the first offer.  The initial salary offer you make should be based on two considerations: candidate qualifications and salary histories.  As a general rule, the initial salary offer should be commensurate with the applicant’s skill level.  Offer should be about 10 to 30 percent greater than the applicant’s previous salary to entice the candidate to accept the offer.