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COMPENSATION Part I
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Chapter Objectives Describe the various forms of compensation.
Explain the concept of equity in financial compensation. Identify the determinants of financial compensation. Discuss compensation legislations Describe factors that should be considered when the labor market is a determinant of financial compensation.
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Compensation: An Overview
Compensation - Total of all rewards provided employees in return for services Direct financial compensation - Pay received in the form of wages, salaries, bonuses, and commissions Indirect financial compensation - All financial rewards not included in direct compensation Nonfinancial compensation - Satisfaction a person receives from job itself or from work environment
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Components of a Total Compensation Program External Environment Internal Environment
Financial Non-Financial 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 Employee Stock Option Plans Supplemental Unemployment Benefits Employee Services Premium Pay Unique Benefits The Job Skill Variety Task Identify Task Significance Autonomy Feedback Job Environment Sound Policies Competent Employees Congenial Coworkers Suitable Status Symbols Working Conditions Workplace Flexibility Flextime Compressed Work Week Job Sharing Flexible Compensation Telecommuting Part-time Work Modified Retirement
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Equity in Financial Compensation
Equity - 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 their jobs within same organization
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Equity in Financial Compensation (Continued)
Employee equity - Paid according to factors unique to employee, such as performance level or seniority Team equity – Reward based on teams productivity
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Primary Determinants of Individual Financial Compensation
The Organization Compensation Policies Organizational Politics Ability to Pay The Employee Job Performance Merit Pay Variable Pay Competency-Based Pay Seniority Experience Organization Membership Potential Political Influence Luck Job Pricing The Labor Market Compensation Surveys Expediency Cost of Living Labor Unions Society The Economy Legislation Individual Financial Compensation The Job Job Analysis Job Descriptions Job Evaluation Collective Bargaining
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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 they do not require highly capable employees
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The Labor Market as a Determinant of Financial Compensation
Compensation surveys Expediency Cost of living Labor unions Society Economy Legislation
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Compensation Surveys What are other firms paying?
Geographic area of survey Specific firms to contact Jobs to include
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Expediency There are times when compensation survey data is ignored
High tech environment In some labor markets where managers must at times be left to their own devices
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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 the inflation rate
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Labor Unions Mandatory collective bargaining between management and unions as “wages, hours, and other terms and conditions of employment.” Cost-of-living allowance Unions may attempt to create, preserve, or even destroy pay differentials.
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Society Compensation often affects firm’s pricing of it goods and/or services Consumers may be interested in compensation decisions
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The Economy Affects financial compensation decisions
Depressed economy generally increases the labor supply Cost of living often rises as the economy expands
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Compensation Legislation
Fair Labor Standards Act of 1938, as Amended Equal Pay Act of 1963
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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
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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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Equal Pay Act of 1963 Prohibits employer from paying employee of one gender less than employee of opposite gender Both employees must do work that is the same or substantially the same
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The Job as a Determinant of Financial Compensation
Job itself continues to be a factor, especially in those firms that have internal pay equity as a 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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Job Evaluation Firm determines the relative value of one job in relation to another Ranking Classification Factor comparison
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Ranking Method Simplest method Raters examine description of each job
Jobs arranged in order according to value
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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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Factor Comparison Method
Mental requirements Skills Physical requirements Responsibilities Working conditions
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Job Pricing Placing a dollar value on worth of a job
Pay grades - Grouping of similar jobs to simplify pricing jobs Pay ranges - Minimum and maximum pay rate with enough variance between the two to allow for a significant pay difference Broadbanding – Collapses many pay grades into a few wide bands or improve effectiveness Adjusting pay rates - Overpaid and underpaid jobs
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Pay Ranges for Pay Grades
Scatter Diagram of Evaluated Jobs Illustrating the 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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Broadbanding Technique that collapses many pay grades (salary grades) into a 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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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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Employee as a Determinant of Financial Compensation
Performance-based Pay Skilled-based Pay Competency-based Pay Seniority Experience Potential Political Influence Luck
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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 a demotivator
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Performance-Based Pay
Merit pay - Pay increase given to employees based on their level of performance as indicated in the appraisal Variable pay - Compensation based on performance (bonus) Piecework – Employees paid for each unit they produce
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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 a demotivator
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Competency-Based Pay Compensates on basis of demonstrated expertise
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Seniority Length of time an employee has been associated with the company, division, department, or job Labor unions tend to favor seniority
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Experience Regardless of nature of job, very few factors have a more significant impact on performance than experience
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Potential Organizations do pay some individuals based on their potential Many young employees are paid well because of their potential
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Political Influence Should not be used to determine financial compensation To deny its existence would be unrealistic A person's pull or political influence may sway pay and promotion decisions
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Luck “It certainly helps to be in the right place at the right time.”
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