1. Compensation
Compensation is the reward that individuals receive in exchange for performing tasks
A major cost of doing business
The chief reason people seek employment
U.S. employers pay an average of $ per hour worked
$17.02 = straight-time wages and salaries
$6.63 = benefits

2. Compensation Direct Indirect Non-financial Wages Salary Bonuses
Commissions
Insurance
Vacation
Childcare
Praise
Self-esteem
Recognition

3. Objective of Compensation
Adequate
Equitable
Acceptable to employees
Balanced
Effective compensation
Cost effective
Provides incentive
Secure

4. External Influences on Compensation
Labor Market
The Economy
External Influences
Unions
Government

5. Government Influences
The government requires employers to deduct funds from employees’ wages for…
Federal income taxes
Social security taxes
State and local income taxes
Other ways government influences compensation
If the government is the employer, it can legislate pay levels by setting statutory rates
The government may create jobs for certain categories of workers, thus reducing the supply of workers and affecting pay rates

6. Union Influences Unions exert influence on compensation programs
Unionized workers work longer hours and earn more than non-unionized workers
Unions are pacesetters in demands for pay, benefits, and improved working conditions
There is supportive interaction between unions and the government
The Davis-Bacon Act requires employers with government contracts to pay prevailing wages
The Wagner Act makes it illegal to change wage rates during a union organizing campaign

7. The Labor Market and Compensation
Styles of managing and rewarding are changing in response to diversity
Diversity is more than demographics; it means differing value, lifestyles, even body types
Changing demographics require employers to offer more, and more varied, benefits to motivate, satisfy, retain employees

8. Legal Considerations Discrimination:
Must apply same decision rules to all employees eligible for the reward or incentive.
Employees protected by Title VII and Equal Pay Act.
Taxes and accounting rules:
For example, those governing capital gains, deferred compensation and stock plans.
Like any employment decision, employers must make sure that incentives and rewards are equitably administered. If a group of employees are eligible to receive a reward, the criteria must be applied equitably across all employees in that group. Note that the criteria must be applied equitably, not equally. This does not mean that all employees should receive the same reward; the process, however, must be applied fairly and the outcomes distributed fairly, based on the set of performance standards set and achieved.
In addition, depending on employers’ choices of the types of incentives and rewards they offer, there may be some unanticipated or unplanned tax consequences for employees. For example, with incentive stock options, tax is deferred as long-term capital gains (15 percent) when the stock is actually sold by the employee. For employees with non-qualified stock options, the spread (i.e., the difference between the price at which the employee bought the stock and the current market value) is viewed as income and is treated as compensation, which is taxed at a rate higher than 15 percent. If the instructor is knowledgeable in this area, they could offer other tax and accounting issues that employers and employees might consider as they decide the mix of rewards. 8

9. Pay and Pay Decisions
Pay is a powerful tool for meeting the organization’s goals.
Pay has a large impact on employee attitudes and behaviors.
Pay influences the kinds of people who are attracted to (or remain with) the organization.
Employees attach great importance to pay decisions when they evaluate their relationship with their employer.
This chapter describes how managers weigh the importance and costs of pay to arrive at a structure for compensation and the levels of pay for different jobs.
Pay Decisions 9

10. Factors Influencing Pay Decisions
Establishing a pay structure simplifies the process of making decisions about individual employees’ pay by grouping together employees with similar jobs.
As shown in Figure 11.1, HR professionals develop this structure based on:
Legal requirements
Market forces
The organization’s goals 10

11. Legal Requirement for Pay
Government regulation affects pay structure in the areas of:
Equal employment opportunity
Minimum wage
Pay for overtime
Prevailing wages for federal contractors
All of an organization’s decisions about pay should comply with applicable laws. 11

12. Legal Requirement for Pay
Employers must not base differences in pay on an employee’s age, sex, race, or other protected status.
Any differences in pay must be tied to job responsibilities or performance.
The goal is equal pay for equal work.
Minimum wage is the lowest amount that employers may pay under federal or state law, stated as an $/hour.
The overtime rate is 1½ times the employee’s usual hourly rate; exempt employees (not covered by FSLA) do not get overtime…they are not hourly
These laws do not guarantee equal pay for men and women, whites and minorities, or any other groups, because so many legitimate factors, from education to choice of occupation, affect a person’s earnings.
Prevailing wage rules require federal contractors to pay their employees at rates at least equal to the typical wages in the area. 12

13. Child Labor Laws
Children aged 16 and 17 may not be employed in hazardous occupations defined by the U.S. Department of Labor.
Children aged 14 and 15 may work only outside school hours, in jobs defined as nonhazardous, and for limited time periods.
A child under age 14 may not be employed in any work associated with interstate commerce.
Exemptions include baby-sitting, acting, and delivering newspapers.
The FLSA sharply restricts the use of child labor, with the aim of protecting children’s health, safety, and educational opportunities.
The restrictions apply to children younger than 18. 13

14. Economic Influences on Pay
Product Markets
Labor Markets
The organization’s product market includes organizations that offer competing goods and services.
Organizations compete on quality, service, and price.
The cost of labor is a significant part of an organization’s costs.
Organizations must compete to obtain human resources in labor markets.
Competing for labor establishes the minimum an organization must pay to hire an employee for a particular job.
An organization cannot make spending decisions independent of the economy.
Organizations must keep costs low enough that they can sell their products profitably, yet they must be able to attract workers in a competitive labor market. 14

15. Pay Level: Deciding What to Pay
Pay at the rate set by the market
Pay at a rate above the market
Pay at a rate below the market
Although labor and product markets limit organizations’ choices about pay levels, there is a range within which organizations can make decisions.
The size of this range depends on the details of the organization’s competitive environment.
If many workers are competing for a few jobs, employers will have more choice.
Employers can be more flexible about pay policies if they use technology and work design to get better results from employees than competitors do. 15

16. Comparing Market Pay
Benchmarking – a procedure where an organization compares its own practices against those of others
Pay surveys
Trade and industry groups
Professional groups
Employees compare their pay and contributions by:
What they think employees in other organizations earn for doing the same job.
What they think other employees holding different jobs within the organization earn for doing work at the same or different levels.
What they think other employees in the organization earn for doing the same job as theirs.
HR professionals need to determine whether to gather data focusing on particular industries or on job categories.
Instructors: see the HR How To on page 320 in the text. 16

17. Pay Equity
If employees conclude that they are under-rewarded, they are likely to make up the difference in one of three ways:
They might put forth less effort (reducing their inputs).
They might find a way to increase their outcomes (e.g., stealing).
They might withdraw (by leaving the organization or refusing to cooperate).
Employees’ beliefs about fairness also influence their willingness to accept transfers or promotions.
Equity theory tells organizations that employees care about their pay relative to what others are earning and that these feelings are based on what employees perceive (what they notice and form judgments about). An organization can do much to contribute to what employees know and, as a result, what they perceive.
If the organization researches salary levels and concludes that it is paying its employees generously, it should communicate this. If the employees do not know what the organization learned from its research, they may reach an entirely different conclusion about their pay. 17

18. The Pay-Level Decision
Pay-level Strategies
Attracts and holds the best employees
High
Pacesetter
Minimum level needed to hire enough workers
Low
All the company can pay
The going rate plus or minus 5 percent
Comparable
Most frequently used

19. Pay Structure Steps
Job Evaluation
Job Structure
Define Key Jobs
Pay Survey
Pay Policy Line
Pay Rates
Pay Grades
Pay Ranges
Pay Structure
The pay structure reflects decisions about how much to pay (pay level) and the relative value of each job (job structure).
The organization’s pay structure should reflect what the organization knows about market forces, as well as its own unique goals and the relative contribution of each job to achieving the goals.
By balancing this external and internal information, the organization’s goal is to set levels of pay that employees will consider equitable and motivating.
Organizations typically apply the information by establishing some combination of:
Pay rates
Pay grades
Pay ranges 19

20. Pay and Employees’ Satisfaction
Relative deprivation theory suggests that pay dissatisfaction is a function of six judgments…
Discrepancy between what workers want and receive
Discrepancy between comparison outcome and what they get
Past expectations of receiving more rewards
Low expectations for the future
A feeling of deserving or being entitled to more
Not feeling personally responsible for poor results

21. Pay and Employees’ Productivity
Ability
Safety
Adequate equipment
Performance requires motivation plus…
Good working conditions
Health
Good leadership & managers

22. Pay and Employees’ Productivity
Some argue that
Tying pay to performance destroys the intrinsic reward of doing a job well
The importance of money varies from person to person
If an organization has an incentive pay system but pays for seniority, the motivation of pay is lost
Be sure that compensation systems are directly connected to expected behaviors