Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall Human Resource Management 11th Edition Chapter 9 DIRECT FINANCIAL COMPENSATION Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall

HRM in Action: Outrageous Severance Pay? Most people do not understand that massive severance payments are not set up by boards of directors when CEOs quit or have been fired Payments were negotiated prior to being hired Securities and Exchange Commission has adopted far-reaching executive compensation disclosure rules that apply to publicly traded companies Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall

Outrageous Severance Pay Examples Chuck Prince of Citigroup paid $25.6 million Stanley O’Neal of Merrill paid $48 million AT&T CEO David Dorman received $29 million in cash and additional severance. To help cover Dorman’s IRS bill, the board provided $11 million more. Brian M. Storms’ departure as Marsh Inc.’s chairman and chief executive officer cost the brokerage firm nearly $20 million. Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall

Compensation: An Overview Compensation - Total of all rewards provided employees in return for services Direct financial compensation - Pay received in form of wages, salaries, bonuses, and commissions Indirect financial compensation (benefits) - All financial rewards not included in direct compensation Nonfinancial compensation - Satisfaction person receives from job itself or from psychological and/or physical environment in which person works Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall

Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall Total Rewards Concept Anything that company provides an employee is included in Total Rewards Ranges from base pay and benefits to organization’s culture and environment Put together to make a coherent and integrated whole Idea of a three-legged stool Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall

Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall Components of Total Compensation Program External Environment Internal Environment Compensation Financial Nonfinancial Direct Wages Salaries Commissions Bonuses Indirect (Benefits) Legally Required Benefits Social Security Unemployment Compensation Workers’ Compensation Family & Medical Leave Voluntary Benefits Payment for Time Not Worked Health Care Life Insurance Retirement Plans Disability Protection Employee Stock Option Plans Supplemental Unemployment Benefits (SUB) Employee Services Premium Pay Customized Benefit Plans The Job Skill Variety Task Identity Task Significance Autonomy Feedback Job Environment Sound Policies Capable Managers Competent Employees Congenial Coworkers Appropriate Status Symbols Working Conditions Workplace Flexibility Flextime Compressed Workweek Job Sharing Telecommuting Part-time Work Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall

Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall Equity Theory Motivation theory that people assess their performance and attitudes by comparing both their contribution to work and benefits they derive from it to contributions and benefits of comparison others whom they select – and who in reality may or may not be like them Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall

Equity in Financial Compensation Financial equity - Perception of fair pay treatment for employees External equity - Employees are paid comparably to workers who perform similar jobs in other firms Internal equity - Employees are paid according to relative value of jobs within same organization Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall

Equity in Financial Compensation (Cont.) Employee equity - Individuals performing similar jobs for same firm are paid according to factors unique to employee, such as performance level or seniority Team equity - More productive teams are rewarded more than less productive groups Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall

Primary Determinants of Direct Financial Compensation Organization Compensation Policies Organizational Level Ability to Pay Employee Job Performance Skills Competencies Seniority Experience Organization Membership Potential Political Influence Luck Job Pricing Labor Market Compensation Surveys Expediency Cost of Living Labor Unions Economy Legislation Direct Financial Compensation Job Job Analysis Job Descriptions Job Evaluation Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall

Organization as a Determinant of Direct Financial Compensation Compensation Policies Organizational Level Ability to Pay Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall

Compensation Policies Pay leaders - Pay higher wages and salaries. Believe that they will be able to attract high-quality, productive employees and thus achieve lower per-unit labor costs Market rate, or going rate - Pay what most employers pay for same job Pay followers - Pay below market rate because poor financial condition or believe do not require highly capable employees Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall

Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall Organizational Level Upper management often makes decisions to ensure consistency Extreme pressure to retain top performers may override desire to maintain consistency in pay structure Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall

Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall Ability to Pay Organization’s assessment of ability to pay is important factor in determining pay levels Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall

Labor Market as Determinant of Direct Financial Compensation Potential employees located within geographic area from which employees are recruited Pay for same jobs in different labor markets may vary considerably Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall

Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall Compensation Surveys What are other firms paying? Geographic area of survey Specific firms to contact Jobs to include Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall

Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall Expediency Managers in highly technical and specialized areas occasionally need to use nontraditional means to determine what constitutes competitive compensation for scarce talent and niche positions Need real-time information Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall

Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall Cost of Living When prices rise over a period of time and pay does not, real pay is actually lowered Some firms index pay increases to inflation rate Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall

Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall Labor Unions Mandatory collective bargaining between management and unions as “wages, hours, and other terms and conditions of employment.” Cost-of-living allowance has been disappearing Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall

Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall The Economy Affects financial compensation decisions Depressed economy generally increases labor supply Cost of living often rises as economy expands Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall

Compensation Legislation Davis-Bacon Act of 1931 Walsh-Healy Act of 1936 Fair Labor Standards Act of 1938, as Amended Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall

Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall Davis-Bacon Act of 1931 First national law to deal with minimum wages Federal construction contractors with projects over $2000 to pay at least prevailing wages in area Secretary of Labor sets prevailing wage at union wage, regardless of what average wage is in affected locality Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall

Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall Walsh-Healy Act of 1936 Companies with federal supply contracts exceeding $10,000 pay prevailing wages Requires 1½ times regular pay rate for hours over 8 per day or 40 per week Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall

Fair Labor Standards Act of 1938, as Amended Most significant law affecting compensation Establishes minimum wage Requires overtime pay and record keeping Provides standards for child labor Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall

Exempt and Nonexempt Employees Exempt employees - Categorized as executive, administrative, professional employees, and outside salespersons Nonexempt employees - Those in jobs not conforming to above definition Most employees who earn less than $23,660 will be considered nonexempt no matter what duties are Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall

Job as Determinant of Direct Financial Compensation Job itself a factor, especially in firms that have internal pay equity as primary consideration Organizations pay for value they attach to certain duties, responsibilities, and other job-related factors, such as working conditions Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall

Job Analysis and Job Descriptions Before organization can determine relative difficulty or value of jobs, must first define content Done by job analysis / job descriptions Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall

Job Evaluation Firm determines relative value of one job in relation to another Ranking Classification Factor comparison Point Hay guide chart-profile method Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall

Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall Ranking Method Simplest method Raters examine description of each job Jobs arranged in order according to value Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall

Classification Method Define number of classes or grades to describe group of jobs Compare job description with class description Class description that most closely agrees with job description determines job classification Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall

Factor Comparison Method 5 universal job factors - Mental requirements, skills, physical requirements, responsibilities, and working conditions Need not keep entire job in mind; raters make decisions on separate aspects or factors of job Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall

Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall Point Method Numerical values assigned to specific job components Sum of values gives quantitative assessment of job’s relative worth Job factors selected according to nature of specific group of jobs Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall

Procedure for Establishing Point Method of Job Evaluation Select Job Cluster Identify Compensable Factors Determine Degrees and Define Each Compensable Factor Determine Factor Weights Determine Factor Point Values Validate Point System Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall

Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall A Point Method Example Select Job Cluster - Assume we are going to develop point system for administrative job cluster Identify Compensable Factors - Assume compensable factors identified are education, job knowledge, contacts, complexity of duties, and initiative Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall

A Point Method Example (Cont.) Determine Degrees and Define Each Compensable Factor - In administrative job cluster, Education, Job Knowledge, and Initiative have been determined to have five degrees; Contacts has four; and Complexity of Duties has three Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall

A Point Method Example (Cont.) FACTOR: CONTACTS Level (Degrees) Points IV Usual purposes of contacts are to discuss problems and possible 90 solutions, to secure cooperation or coordination of efforts, and to get agreement and action; more than ordinary tact and persuasiveness required. III Usual purposes of contacts are to exchange information and settle 66 specific problems encountered in course of daily work. II Contacts may be repetitive but usually are brief with little or no 42 continuity. I Contacts normally extend to persons in immediate work unit only. 18 Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall

A Point Method Example (Cont.) FACTOR: COMPLEXITY OF DUTIES III Performs work where only general methods are available. Independent 85 action and judgment are required regularly to analyze fact, evaluate situations, draw conclusions, make decision, and take or recommend action. II Performs duties working from standard procedures or generally 51 understood methods. Some independent action and judgment are required to decide what to do, determine permissible variations from standard procedures, review facts in situations, and determine action to be taken, within limits prescribed. I Little or no independent action or judgment. Duties are so standardized 17 and simple as to involve little choice as to how to do them. Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall

A Point Method Example (Cont.) Determine Factor Weights - Assume committee believes education is very important for administrative job cluster and sets weight for education at 35%. Weights of other four factors were determined by committee to be: Job Knowledge - 25 Contacts - 18 Complexity of Duties - 17 Initiative - 5 The percent total is 100% Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall

A Point Method Example (Cont.) Determine Factor Point Values - Committee determines total number of points for plan. Number may vary, but 500 or 1,000 points may work well. Committee has determined that a 500-point system will work. Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall

Job Evaluation Worksheet (500-Point System) Degree of Factor Job Factor Weight 1 2 3 4 5 Education 35% 35 70 105 140 175 Job Knowledge 25% 25 50 75 100 125 Contacts 18% 18 42 66 90 Complexity of Duties 17% 17 51 85 Initiative 5% 10 15 20 Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall

A Point Method Example (Cont.) Validate Point System - Each committee member should take random sample of jobs within chosen job cluster and calculate weights for each job selected Point total for Administrative 2 job is determined to be 239 points Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall

Job Evaluation Worksheet for Administrative 2 Position Degree of Factor Job Factor Weight 1 2 3 4 5 Education 35% 35 70 105 140 175 Job Knowledge 25% 25 50 75 100 125 Contacts 18% 18 42 66 90 Complexity of Duties 17% 17 51 85 Initiative 5% 10 15 20 Total Job Value 239 Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall

Illustration of Arithmetic and Geometric Progression Degree of Factor Job Factor 1 2 3 4 Experience Required 1 year 3 years 5 years 7 years (-------------------- Arithmetic Progression---------------------) Degree of Factor Job Factor 1 2 3 4 Experience Required 1 year 2 years 4 years 8 years (-------------------- Geometric Progression---------------------) Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall

The Hay Guide Chart-Profile Method Refined version of point method Know-how Problem solving Accountability Additional compensable elements, such as working conditions Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall

Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall Job Pricing Placing dollar value on worth of job Pay grades - Grouping of similar jobs to simplify pricing jobs Wage curve - Fitting of plotted points to create smooth progression between pay grades Pay ranges - Minimum and maximum pay rate with enough variance between to allow for significant pay difference Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall

Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall Job Pricing (Cont.) Broadbanding - Collapses many pay grades into few wide bands to improve effectiveness Single rate system - Pay ranges not appropriate for some workplace conditions such as some assembly lines Adjusting pay rates - Overpaid and underpaid jobs Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall

Pay Ranges for Pay Grades Scatter Diagram of Evaluated Jobs Illustrating Wage Curve, Pay Grades, and Pay Ranges Average Pay per Hour (Current Rates or Market Rates) $19.80 5 18.50 4 17.20 3 15.90 Wage Curve Pay Ranges for Pay Grades 2 14.60 14.00 1 13.30 12.90 12.00 100 200 300 400 500 Evaluated Points 1 2 3 4 5 Pay Grades Summary Evaluated Points Pay Grade Minimum Midpoint Maximum 0- 99 1 $12.00 $13.30 $14.60 100-199 2 13.30 14.60 15.90 200-299 3 14.60 15.90 17.20 300-399 4 15.90 17.20 18.50 400-500 5 17.20 18.50 19.80

Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall Broadbanding Technique that collapses many pay grades (salary grades) into few wide bands to improve organizational effectiveness Lateral employee development Develop employee skills and encourage team focus Employee attention directed away from vertical promotional opportunities Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall

Broadbanding and Its Relationship to Traditional Pay Grades and Ranges Average Hourly Pay Grade 4 Grade 3 Band III Grade 2 Band II Grade 1 Band I Low High Job Worth Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall

Employee as Determinant of Direct Financial Compensation Performance - Performance-based Pay Skills - Skill-based Pay Competencies - Competency-based Pay Seniority Experience Membership in the Organization Potential Political Influence Luck Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall

Performance-Based Pay Merit pay - Pay increase given based on level of performance as indicated in appraisal Variable Pay - Compensation based on performance Bonus - Most common type of variable pay for performance. One-time financial award based on productivity Spot bonuses - Relatively small, gifts to employees for outstanding work or effort Piecework - Employees paid for each unit they produce Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall

Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall Skill-Based Pay Compensates on basis of job-related skills and knowledge Employees and departments benefit when employees obtain additional skills Appropriate where work tends to be routine and less varied Must provide adequate training opportunities or system becomes demotivator Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall

Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall Competency-Based Pay Rewards employees for capabilities they attain Competencies include skills but also involve other factors such as motives, values, attitudes, and self-concepts Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall

Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall Seniority Length of time employee has been associated with company, division, department, or job Labor unions tend to favor seniority Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall

Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall Experience Regardless of nature of job, very few factors have a more significant impact on performance than experience Dot-com world has changed attitude with regard to experience Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall

Membership in Organization Components of individual financial compensation are given to employees regardless of particular job they perform or level of productivity Maintains high degree of stability in workforce and recognizes loyalty Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall

Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall Potential Organizations do pay some individuals based on potential Many young employees are paid well because of their potential Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall

Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall Political Influence Should not be used to determine financial compensation To deny its existence would be unrealistic Person's pull or political influence may sway pay and promotion decisions Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall

Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall Luck “It certainly helps to be in the right place at the right time.” Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall

Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall Team-Based Pay If team is to function effectively, firms should provide reward based on overall team performance Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall

Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall Company-Wide Pay Profit sharing - Distribution of predetermined percentage of firm’s profits to employees Gainsharing - Bind employees to firm’s productivity and provide incentive payment based on improved company performance Scanlon plan - Reward to employees for savings in labor costs resulting from employees’ suggestions Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall

Professional Compensation Initially compensated for knowledge they bring to organization Maturity curves reflect relationship between professional compensation and years of experience Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall

Sales Representative Compensation Straight salary Straight commission Endless variety of part-salary, part-commission combinations Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall

Contingent Workers Compensation In most cases, contingency workers earn less pay than permanent counterparts Far less likely to receive health or retirement benefits Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall

Trends & Innovations: Are Top Executives Paid Too Much? Peter Drucker recommends 20-to-1 salary ratio between senior executives and rank-and-file white-collar workers Ratio of chief executives’ compensation to pay of average production worker jumped to 431-to-1 90% of investors think executives are overpaid Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall

Executive Compensation Critical factor in attracting and retaining best managers Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall

Determining Executive Compensation Firms typically prefer to relate salary growth for highest-level managers to overall corporate performance Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall

Types of Executive Compensation Base salary Short-term incentives or bonuses Stock option plans Performance-based pay Executive benefits (perks) Golden parachutes Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall

Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall Base Salary Factor in determining executive’s standard of living Salary provides basis for other forms of compensation; may determine amount of bonuses and certain benefits U.S. tax law does not allow companies to deduct more than $1 million of executive’s salary Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall

Short-Term Incentives or Bonuses Payment of bonuses reflects a managerial belief in their incentive value 90% of executives receive bonuses Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall

Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall Stock Option Plans Manager options to buy specified amount of stock in future at or below current market price Some boards of directors require their top executives to hold some of firm’s stock Financial Accounting Standards Boards requires companies to expense stock options, thereby making them not as attractive Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall

Performance-Based Pay Trend toward more performance-based compensation packages for executives Shareholders become increasingly disenchanted with high levels of executive compensation - performance-based pay may gain in popularity Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall

Executive Benefits (Perks) Special benefits provided by firm to small group of key executives and designed to give executives something extra Conveys status Personal use of corporate jet is soaring among corporate America’s elite as executive perk Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall

Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall Golden Parachutes Perquisite that protects executives in event another company acquires firm or executive is forced to leave firm for other reasons Attempts to rein in obscene golden parachute plans Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall

A Global Perspective: China’s Compensation Problems 25% of Chinese workers had already had 3 or more jobs in their career and 20% expected to leave their positions in next year Employees stay with their company less than 2 years Employees were more likely to stay if they have good manager, were recognized for their contributions, and had great company leadership Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall

Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Printed in the United States of America. Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall