1. Human Resource Management 10th Edition Chapter 9 DIRECT FINANCIAL COMPENSATION
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2. HRM in Action: 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 the pay of average production worker jumped to 431-to-1
90 percent of investors think that executives are overpaid
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3. 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
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4. Components of Total Compensation Program External Environment Internal Environment
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 Identify Task Significance Autonomy Feedback
Job Environment
Sound Policies
Capable Managers Competent Employees Congenial Coworkers Suitable Status Symbols Working Conditions
Workplace Flexibility Flextime Compressed Workweek Job Sharing Customized Benefit Plans Telecommuting
Part-time Work
More Work, Fewer Hours
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5. 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
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6. 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
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7. 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
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8. 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
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9. Organization as a Determinant of Direct Financial Compensation
Compensation Policies
Organizational Level
Ability to Pay
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10. Compensation Policies
Pay leaders - Pay higher wages and salaries
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
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11. 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
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12. Ability to Pay
Organization’s assessment of ability to pay is important factor in determining pay levels
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13. 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
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14. Compensation Surveys What are other firms paying?
Geographic area of survey
Specific firms to contact
Jobs to include
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15. Expediency
Managers in highly technical and specialized areas occasionally need to utilize nontraditional means to determine what constitutes competitive compensation for scarce talent and niche positions
Need real-time information
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16. 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
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17. 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
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18. The Economy Affects financial compensation decisions
Depressed economy generally increases labor supply
Cost of living often rises as economy expands
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19. Compensation Legislation
Davis-Bacon Act of 1931
Walsh-Healy Act of 1936
Fair Labor Standards Act of 1938, as Amended
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20. 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 the prevailing wage at union wage, regardless of what average wage is in affected locality
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21. 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
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22. 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
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23. 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 their duties are
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24. Job as Determinant of Direct Financial Compensation
Job itself continues to be 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
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25. 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
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26. Job Evaluation
Firm determines relative value of one job in relation to another
Ranking
Classification
Factor comparison
Point
Hay guide chart-profile method
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27. Ranking Method Simplest method Raters examine description of each job
Jobs arranged in order according to value
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28. 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
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29. Factor Comparison Method
Five universal job factors - Mental requirements, skills, physical requirements, responsibilities, and working conditions
Raters need not keep entire job in mind as they evaluate; instead, they make decisions on separate aspects or factors of job
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30. 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
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31. Procedure for Establishing Point Method of Job Evaluation
Select Job Cluster
Identify Compensable Factors
Determine Degrees and Define Each Compensable Factors
Determine Factor Weights
Determine Factor Point Values
Validate Point System
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32. A Point Method Example
Select Job Cluster - Assume we are going to develop point system for the administrative job cluster
Identify Compensable Factors - Assume compensable factors identified are education, job knowledge, contacts, complexity of duties, and initiative
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33. A Point Method Example (Cont.)
Determine Degrees and Define Each Compensable Factors - 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
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34. A Point Method Example (Cont.)
FACTOR: CONTACTS
Level (Degrees) Points
IV Usual purposes of contacts are to discuss problems and possible
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
specific problems encountered in course of daily work.
II Contacts may be repetitive but usually are brief with little or no
continuity.
I Contacts normally extend to persons in immediate work unit only. 18
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35. 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.
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36. A Point Method Example (Cont.)
Determine Factor Weights - Assume the committee believes that education is quite important for administrative job cluster and sets the weight for education at 35%. The weights of other four factors were determined by the committee to be:
Job Knowledge—25
Contacts—18
Complexity of Duties—17
Initiative—5
The percent total is 100%
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37. A Point Method Example (Cont.)
Determine Factor Point Values - Committee determines total number of points for the plan. Number may vary, but 500 or 1,000 points may work well. Committee has determined that a 500 point system will work.
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38. 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
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39. A Point Method Example (Cont.)
Validate Point System - Each committee member should take a 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
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40. 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
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41. Illustration of Arithmetic and Geometric Progression
Degree of Factor
Job Factor
Experience Required 1 year years years years
( Arithmetic Progression )
Degree of Factor
Job Factor
Experience Required 1 year years years years
( Geometric Progression )
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42. The Hay Guide Chart-Profile Method
Refined version of the point method
Know-how
Problem Solving
Accountability
Additional compensable elements, such as working conditions
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43. 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
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44. 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
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45. 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
$ $ $
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46. 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
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47. Broadbanding and Its Relationship to Traditional Pay Grades and Ranges
Average Pay Per Hour
Grade 3
Grade 2
Band B
Grade 1
Band A
Low
High
Job Worth
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48. Employee as Determinant of Direct Financial Compensation
Performance—Performance-based Pay
Skills—Skilled-based Pay
Competencies—Competency-based Pay
Seniority
Experience
Membership in the organization
Potential
Political Influence
Luck
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49. Performance-Based Pay
Merit pay - Pay increase given to employees 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
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50. 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
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51. 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
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52. Seniority
Length of time employee has been associated with company, division, department, or job
Labor unions tend to favor seniority
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53. 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
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54. 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
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55. Potential Organizations do pay some individuals based on potential
Many young employees are paid well because of their potential
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56. 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
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57. Luck “It certainly helps to be in the right place at the right time.”
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58. Team-Based Pay
If team is to function effectively, firms should provide reward based on overall team performance
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59. 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
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60. Professionals Compensation
Initially compensated for knowledge they bring to organization
Maturity curves reflect relationship between professional compensation and years of experience
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61. Sales Representative Compensation
Straight salary
Straight commission
Endless variety of part-salary, part-commission combinations
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62. Contingent Workers Compensation
In most cases, contingency workers earn less pay than permanent counterparts
Far less likely to receive health or retirement benefits
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63. Executive Compensation
Critical factor in attracting and retaining best managers
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64. Determining Executive Compensation
Firms typically prefer to relate salary growth for the highest-level managers to overall corporate performance
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65. Types of Executive Compensation
Base salary
Short-Term Incentives or Bonuses
Stock option plans
Performance-Based Pay
Executive benefits (Perks)
Golden parachutes
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66. Base Salary Factor in determining the executive’s standard of living
Salary provides basis for other forms of compensation; it may determine amount of bonuses and certain benefits
U.S. tax law does not allow companies to deduct more than $1 million of an executive’s salary
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67. Short-Term Incentives or Bonuses
Payment of bonuses reflects a managerial belief in their incentive value
90% of executives receive bonuses
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68. Stock Option Plans
Gives manager option to buy a specified amount of stock in the 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
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69. 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
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70. Executive Benefits (Perks)
Any special benefits provided by a 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 an executive perk
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71. 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
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72. Trends & Innovations: Outrageous Severance Pay Examples?
Philip Purcell, Morgan Stanley, $113 million
Stephen Crawford, Morgan Stanley, $32 million
Harry Stonecipher, Boeing $600,000/year
Carly Fiorina, Hewlett-Packard, $21 million
Franklin Raines, Fannie Mae, $1.4 million/year
Scott Livengood, Krispy Kreme, $46,000/month
James Kilts, Gillette, $100 million
Jack Welch, GE corporate $9 million annual pension plan payout, plus perks such as lifetime use of GE’s $80,000-per-month Manhattan apartment with free food and free maid service; lifetime use of GE fleet of corporate jets, including Boeing 737 jet; new Mercedes plus limousine and driver; and assorted free sports and opera box tickets
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73. A Global Perspective: Costs of Expatriates
Employers today know that it is more expensive to send workers abroad
Tokyo ranks as most expensive city for expatriates, followed by London, Moscow and Osaka, Japan
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