1. Chapter 10: Compensation

2. Objectives After reading this chapter, you should be able to:
Describe the purpose of compensation.
Discuss the importance of equity relative to a firm’s compensation decisions.
Understand the process and rationale for establishing internal alignment of pay systems.
Explain how a firm ensures that it is externally competitive in what it pays.
Identify alternative compensation approaches that companies can use.
Describe the impact organizational demands have on a how a company manages its compensation decisions.
Discuss environmental factors that affect the compensation that a firm offers.
Outline the regulations that affect how employees are compensated.

4. Purpose of Compensation
To entice employees to work for the company
To motivate employees to perform at a high level
To ensure employees stay at the company

5. Total Compensation
Compensation – monetary and nonmonetary rewards employees receive in exchange for work they do for organization
Total rewards – sum of all aspects of compensation package
Compensation philosophy – communicates information to employees about what is valued

7. Internal Alignment Relative worth among jobs in the company
Job evaluation – systematic process of establishing the relative worth of the jobs within the company
Pay rates established for jobs, not people

8. Types of Job Evaluation
Job Ranking
Job Classification
Point Method
Factor Comparison

9. Job Ranking Qualitative method
Involves reviewing job descriptions and listing jobs in order from highest to lowest worth to company
Easier to do with fewer jobs
Subjective so harder to explain to employees

10. Job Ranking Example
Jobs for a hotel are listed based on “relative worth” to the company with first job listed having most worth:
General manager
Comptroller
Facilities manager
Housekeeping supervisor
Front desk clerk
Bell hop

11. Job Classification Qualitative method
Involves developing broad descriptions for groups that are similar in terms of tasks, duties, responsibilities, and qualifications
Variation used by government
Challenge is what to do with jobs with parts that fit two categories

12. Job Classification Example
ECONOMIST, GS
Scope of assignment
The scope of economist assignments typical of the GS-13 level, as at other levels, may be based on either breadth or depth. In a large and varied operation, the GS-13 economist will characteristically be responsible for a pattern of small studies or program segments which represents in itself an integrated program. Such assignments involve the initiation, formulation, planning, execution, and control of major special studies or continuing projects.
Partial description from:

13. Point Method Quantitative method
Assigns compensable factors to create relative worth hierarchy for jobs in the company
Compensable factors – aspects of jobs, such as skill, effort, responsibility, and working conditions,
that exist across jobs in a company,
that are needed by employees for the firm to achieve its objectives, and
for which the company is willing to pay

16. Benchmark Jobs Used to represent range of jobs in a company
Used for comparing jobs in companies with jobs in other companies to establish pay rates
Typically benchmark jobs are:
Stable over time
Well known and recognized
Clearly and concisely described
Accepted in external labor market for setting wage rates
Compensated at an appropriate wage rate

17. Job Grades
Groupings of jobs with comparable points that reflect the hierarchy of jobs in a company to establish wage rates
Company may have one or many job grade plans

18. Factor Comparison Quantitative method
Ranks benchmark jobs in relation to each other on factors such as mental requirements, physical requirements, skill, responsibility, working conditions
Hybrid method combining aspects of job ranking and point method
Breaks wage rate down into small parts and assigns amount of wage to each part
Complex and challenging and requires frequent updating

20. Salary Surveys
Systematic process for collecting information about wages in external labor market
Reliability and validity important
Data usually from salaries in same industry
Benchmark jobs should represent range and type of jobs in company

23. Job Pricing Systematic process of assigning monetary rates to jobs
Helps ensure internal wages align with external wages
Used to develop company pay policy
Wage curve – market line that represents the relationship between job evaluation points and salaries paid for the jobs

25. Company Pay Policy Decision should follow pay philosophy:
Pay at the market
Pay above the market
Pay below

26. Pay Grades and Pay Ranges
Each grade and range has:
Minimum of range
Midpoint of range
Maximum of range
Also:
Overlap of range important as signal to employees
Nonbenchmark jobs slotted into appropriate pay grades once plan is established

27. Broadbanding
Consolidates large number of pay grades into a few “broad” grades (bands)
Maximum pay range 100% - 400% higher than minimum
Gives managers more flexibility
Need to ensure there is logic for jobs to be in same band

28. Setting Employee Pay
Initially determined by education, work experience, and related
Current employee pay result of meeting performance metrics and COLAs
Two special cases:
Red-circled jobs – person is paid above maximum of range
Green-circled jobs – person is paid below minimum of range

29. Alternative Approaches to Compensation
Skill-Based and Knowledge-Based Pay
Competency-Based Pay
Market Pricing

30. Administering Compensation
Need:
Handbook explaining plan
Trained managers
Communication with all employees
Evaluation of plan success
Plan can be:
Closed pay system
Open pay system

33. Compensation in Practice: Organizational Demands
Strategy
Internal value of jobs
Compensation mix
Company characteristics
Ability to provide compensation
Types of compensation

34. Compensation in Practice: Organizational Demands (continued)
Culture
Priorities of firm’s compensation policies
Employees’ expectations and attitudes toward compensation
Employee concerns
Equity versus equality
Fairness of rewards (e.g., inversion, compression)

35. Compensation in Practice: Environmental Demands
Labor force
Level of compensation
Form of compensation employee desires
Technology
Ease of collecting compensation data
How compensation is tracked and delivered
What is considered compensable work

36. Compensation in Practice: Environmental Demands (continued)
Globalization impacts
Where compensation decisions are made
Acceptableness of compensation
Pay rates
Ethics/social responsibility
What compensation signals to employees
Attitudes about the living wage and comparable worth

37. Compensation in Practice: Regulations
Davis-Bacon Act
Contractors and subcontractors with contracts in excess of $2,000 with federal government must pay workers minimum wage
Wage must be at least equal to local prevailing wages
Also must provide local prevailing benefits

38. Compensation in Practice: Regulations (continued)
Walsh-Healey Public Contracts Act (PCA)
Applies to contractors with over $10,000 in contracts involved in manufacturing or providing goods and services to U.S. government
Requires paying workers federal minimum wage for first 40 hours and 1.5 times minimum for additional work during week

39. Compensation in Practice: Regulations (continued)
Fair Labor Standards Act (FLSA)
Establishes minimum wage
Defines exempt versus nonexempt employees and requirements for each
Sets what constitutes a work week and overtime requirements for pay over those hours
Restricts use of child labor
Requires employers to keep records