Compensation Part 1: Base Pay OS652 HRM Fisher October 26, 2004

2 Agenda How do we decide how much people get paid? – Internal vs. external equity – Pay system design

3 Pay System Goals Support strategic objectives – May include organizational change Attract, retain, motivate employees Fairness Compliance What are we paying for? Skills? Performance? Time at the office?

4 Organizational stance on equity Prioritizing internal vs. external equity Should drive decisions about setting base pay and making individual raise decisions External equity related to the market: – Lead – Lag – Meet

5 Governmental regulation Minimum wage – Federal wage provides the floor (currently $5.15) – Many states have passed higher minimums, living wage laws Fair Labor Standards Act – Overtime must be paid to non-exempt employees for hours worked over 40 per week – Do not have to pay exempt employees (management, professionals, administrative) overtime – Hourly employees tend to be non-exempt, but guidelines for determining this are complex Child labor Does not mandate vacation, holiday, or sick pay, pay raises, or fringe benefits

6 Equal Pay Act Amendment to FLSA Cannot base pay on gender – Salary gap is still 75.5/100 (2003 data)

7 EPA, continued To justify pay gap, must show differences in – Skill – Effort – Level of responsibility – Working conditions Seniority systems, merit systems are OK Title VII covers pay discrimination for other protected classes

8 Forms of Compensation Base wage or salary (fixed) Performance-based (variable or at-risk) – Merit – Incentives – Commissions – Piece rates Attraction and retention bonuses Benefits Value of total compensation package

9 Setting Pay Levels: Job Evaluation Assessing the relative internal worth of the organization ’ s jobs. Note: Job evaluation is not the same thing as job analysis or performance evaluation.

10 Two Common Job Evaluation Methods Ranking Method – Compare one job with the others – Simplest and quickest job evaluation approach – Most useful for a small number of jobs – Downsides of using this method? Point method – Assigns a numeric score to a job based upon levels of compensable factors in job – Highly stable, valid over time – Hay system is one of the most popular

11 Compensable Factors The characteristics of a job that the organization values and chooses to pay for Examples: – Degree of responsibility – Years of schooling or experience – Discretion in performing work How can compensable factors be determined? What data would be used?

12 Salary structures By position Pay grades Broadbanding – Job evaluation places jobs in a small number of broad pay ranges Benefits/drawbacks of various structures?

13 Salary Surveys Help organizations determine appropriate base pay relative to external sources Free ones are typically less detailed – Salary.com (Monster.com links to this) – America ’ s Career InfoNet (acinet.org)

14 For next class Topic: Individual pay decisions – How do managers use pay to motivate or reward employees? – How can organizations maintain equity over time? Presentation