Compensation & Benefits – Basic Compensation & Employee Benefits CHAPTER 9 HRM

Compensation & Benefits –9-2 Compensation  Compensation  is the set of rewards that organizations provide to individuals in return for their willingness to perform various jobs and tasks within the organization.  Internal equity  in compensation refers to comparisons that employees make to other employees within the same organization.  External equity  in compensation refers to comparisons employees make to others performing similar jobs in different organizations.

Compensation & Benefits –9-3 Basic Purposes of Compensation Reward and motivate Internal equity External equity Legal compliance Compensatio n Expense control

Compensation & Benefits –9-4 Wages versus Salaries  Wages  generally refer to hourly compensation paid to operating employees; the basis for wages is time.  Salary  is income that is paid an individual not on the basis of time, but on the basis of performance.

Compensation & Benefits –9-5 Strategic Options for Compensation Anticipation of setting pay level Determination of market pay Pay below market rate Pay above market rate Pay market rate

Compensation & Benefits –9-6 Organizational Pay Rates Pay above market rate Pay at market rate Pay below market rate Attracts better employeesAttracts better employees Minimizes voluntary turnoverMinimizes voluntary turnover Fosters strong culture and competitive superiorityFosters strong culture and competitive superiority Additional compensation costsAdditional compensation costs Sense of entitlementSense of entitlement Higher quality of human resources at midrange of market-driven compensation costsHigher quality of human resources at midrange of market-driven compensation costs Does not attract higher performersDoes not attract higher performers Turnover will vary with labor demands of competing firmsTurnover will vary with labor demands of competing firms Lower compensation costsLower compensation costs Useful in labor markets where unemployment is highUseful in labor markets where unemployment is high Lower-quality employeesLower-quality employees Low morale/job satisfactionLow morale/job satisfaction Higher turnover; especially among high performersHigher turnover; especially among high performers AdvantagesDisadvantages

Compensation & Benefits –9-7 Determinants of Compensation Strategy Factors contributing to a firm’s compensation strategy Relationship of overall strategy to compensation strategy Growth rate of firm and demand for human resources Financial condition of the firm (i.e., ability to pay) Overall attractiveness of firm (i.e., location, culture) Legal context of federal, state, and local labor regulations Union influence and presence in labor market

Compensation & Benefits –9-8 Pay Surveys and Compensation  Pay surveys  are surveys of compensation paid to employees by other employers in a particular geographic area, an industry, or an occupational group.  assist firms in avoiding problems of external equity when attempting to set compensation strategy for themselves.

Compensation & Benefits –9-9 Developing Pay Surveys Select Employers with Comparable Jobs Determine Jobs to be Surveyed Decide What Information Is Needed Conduct Survey

Compensation & Benefits –9-10 Establishing Pay Structures

Compensation & Benefits –9-11 Traditional Pay Structure vs. Broadbanding

Compensation & Benefits –9-12 Pay Scattergram

Compensation & Benefits –9-13 Determining a Wage and Salary Structure Factor comparison method Job ranking method Classification system Point system Job Evaluation Regression- based system

Compensation & Benefits –9-14 Job Evaluation and Job Worth Job Ranking Point System

Compensation & Benefits –9-15 Job Evaluation and Job Worth  Factor comparison method  assesses jobs on a factor-by-factor basis, using a factor comparison scale as a benchmark.  Regression-based system  uses a statistical technique called multiple regression to develop an equation that establishes the relationship between different dimensions of the job and compensation.

Compensation & Benefits –9-16 Factor Comparison Method of Job Evaluation  Six steps:  Comparison factors are selected and defined.  Benchmark or key jobs are identified.  Benchmark jobs are ranked on each compensation factor.  A part of each benchmark job’s wage rate is allocated to each job factor.  Two sets of ratings are prepared, based on the ranking and the assigned wages, to determine the consistency demonstrated by the evaluators.  A job comparison chart is developed to display the benchmark jobs and the monetary values that each job receives for each factor.

Compensation & Benefits –9-17 A Sample Wage Structure Salary (in dollars) | 1 ABC | 2 DEF | 3 GHI | 4 JKLM 5 NOP Midpoint Minimum Midpoint Maximum Maximum Minimum Minimum Midpoint Maximum Minimum Midpoint Maximum Minimum Midpoint Maximum Grade (class): Containing jobs:

Compensation & Benefits –9-18 Wage and Salary Administration  Managing compensation  allows the organization to control compensation costs and to maintain a compensation structure that fits the needs of both the organization and its employees. As organizational circumstances change, it may become necessary to modify or change the compensation strategy.  Determining individual wages  has its basis in the organization’s awarding differential compensation to employees on the basis of qualifications, seniority, or other job-related factors.

Compensation & Benefits –9-19 Wage and Salary Administration  Pay secrecy  refers to the extent to which an individual’s compensation in an organization is secret.  Arguments for pay secrecy  An individual’s compensation is a private matter and not for public knowledge.  Knowing pay levels fosters jealousy and resentment.  Argument against pay secrecy  Public knowledge about an open-pay system creates proper perceptions of equity and motivates performance.  Pay compression  occurs when individuals of substantially different levels of experience or seniority are paid similar wages or salaries.

Compensation & Benefits –9-20 Typical Employee Compensation

Compensation & Benefits –9-21 Meet employee expectations Improve satisfaction/ decrease turnover Respond to external forces Attract better employees Indirect Compensation and Employee Benefits Indirect compensation and employee benefits

Compensation & Benefits –9-22 Mandated by Law Optional Health Care Unemployment Insurance Workers’ Compensation Time Not Worked Pay Social Security Unpaid Leave (FMLA) Life & Care Insurance Retirements & Pensions Types of Employee Benefits Benefits refer to rewards, incentives, and other things of value that an organization provides its employees beyond their wages, salaries, and other forms of direct financial compensation.

Compensation & Benefits –9-23 Paid Time Off Paid holidays Paid vacations Sick leave Personal leave

Compensation & Benefits –9-24 Cafeteria-Style Benefit Plans  Cafeteria-style benefit plans  allow employees to choose the benefits they really want.  maximize the effectiveness of the benefit program for the organization and the employees.  can lead to increased satisfaction and reduced turnover.  can be used to encourage employees to chose more cost- effective benefits (e.g., HMO versus traditional medical plans).  can entail significant administrative costs.  mean that costs of some benefits cannot be amortized across less-intense users (adverse selection).  must be monitored to ensure that employees make rational choices about benefits.