1. Developing an Approach to Total Compensation
Chapter 9
Developing an Approach to Total Compensation

2. Chapter Outline THE STRATEGIC IMPORTANCE OF TOTAL COMPENSATION
Attracting and Retaining Talent
Implementing the Business Strategy
TOTAL COMPENSATION WITHIN THE INTEGRATED HRM SYSTEM
Monetary and Nonmonetary Compensation
Other HRM Practices
The External Environment
Legal Constraints and Social Considerations
MANAGING DIVERSITY: BOEING’S NOSE DIVE
The Organization Environment
THE HR TRIAD
THE HR TRIAD: ROLES AND RESPONSIBILITIES FOR TOTAL COMPENSATION
HR Professionals
Managers
Employees
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3. Chapter Outline (cont’d)
PAY STRUCTURES FOR BASE SALARY AND WAGE RATES ESTABLISHING THE INTERNAL VALUE OF JOBS
Objectives of Job Evaluation
Job Ranking Method
Job Classification Method
Point Factor Rating Method
MANAGING CHANGE: BAYER’S NEW PAY SYSTEM
Competency-Based Job Evaluation
Single Plan versus Multiple Plans
Skill-Based Pay
USING EXTERNAL MARKET RATES TO SET PAY LEVELS
Conduct Survey to Assess External Market Rates
Establish the Market Pay Policy
Set the Organization Pay Policy
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4. Chapter Outline (cont’d)
DESIGNING THE INTERNAL PAY STRUCTURE
Job-Based Pay Grades and Ranges
Competency-Based Pay Structure
Skill-Based Pay Structure
BALANCING INTERNAL AND EXTERNAL EQUITY
Pay Differentials
COMMUNICATING THE PAY STRUCTURE
Involve Employees
Focus on the Big Picture
Follow Up
COMPENSATION IN THE CONTEXT OF GLOBALIZATION
CASE STUDY: THE OVERPAID BANK TELLERS
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5. The Strategic Importance of Total Compensation
Three Important Objectives:
Attracting and retaining the talent required for sustainable competitive advantage
Focusing the energy of employees on implementing the organization’s competitive strategy
Controlling costs
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6. Attracting and Retaining Talent
Pay Fairness
What people believe they deserve to be paid in relation to what others deserve to be paid.
Equity
Perceptions based on comparisons between an individual’s ratio of inputs and outcomes and the ratios of others doing similar work.
Inputs: What an employee gives to the job
Outcomes: What people get out of doing the job
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7. Equity Perceptions Self Other
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8. Comparisons That Influence Equity Perceptions
EX 9.1
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9. How Employees Reduce Inequity
Increase inputs (time, effort) to justify higher rewards when they feel overrewarded
Decrease inputs when feeling underrewarded
Change the compensation they receive
Form a union  File a grievance  Leave work early
Choose a different comparison “other”
Rationalize that inequities are justified
Leave the situation by quitting
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10. Low Pay Companies choose to lead, lag, or match market pay rates
External equity
Fairness relative to the external market (outside the organization)
Difficult to make comparisons when companies mix forms of pay (e.g. salary, bonus, benefits)
Dissatisfied employees may
Leave the company
Perform poorly
Steal from the company
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11. Pay Secrecy
Secrecy is the norm—managers get fewer questions about inequitable pay
Employees may have inaccurate information or misperceptions about pay.
Companies can benefit from:
Involving employees in pay system design.
Implement pay systems fairly and provide due process.
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12. Executive Compensation
During the past 20 years, CEOs have seen their pay increase 514%, or 12 times the rate of inflation.
During the same period, the federal minimum wage has increased only 36% and median household income has increased 43%.
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13. Implementing the Business Strategy
Changes in Strategy
Changing Structure
Effective Compensation System
Productivity Improvements
Mergers and Acquisitions
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14. Integrating Compensation Systems Following Mergers and Acquisitions
EX 9.2
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15. Elements of Total Compensation within the Integrated HRM System
EX 9.3
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16. Monetary and NonMonetary Compensation
Direct payments such as salary, wages, and bonuses, and indirect payments such as payments to cover the costs of private and public insurance plans.
Nonmonetary Compensation
Forms of social and psychological rewards—recognition and respect from others, enjoyment from doing the job itself, opportunities for self development, and so on.
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17. Your Money or Your Life? EX 9.4
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18. Other HRM Practices Recruitment and Retention Training and Development
Number and quality of job applications received during recruitment.
Employees’ decisions to stay with their employers.
Training and Development
Value of tuition reimbursements, management development programs offered by employers
Performance Measurement
Alignment between the pay system and performance measurement affects employees’ motivation
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19. The External Environment
Labor Market Conditions
Pay level (external)
Pay mix (internal)
Legal and Social
Considerations
Legislation
Comparable worth
Labor Unions
Union Contract Wage clauses
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20. Comparing the Pay Mix for Different Categories of Employees
EX 9.5
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21. Potential Pay Mixes for Different Stages of the Industry Life Cycle
EX 9.6
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22. Legal Constraints Davis-Bacon (1931) and Walsh-Healy (1936) Acts
Federal construction contractors required to pay prevailing wages to laborers and mechanics
Fair Labor Standards Act (1938)
Set minimum wage
Requires overtime for nonexempt workers
Establishes child labor standards
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23. Exempt Employees Under FLSA
Persons not covered by overtime and minimum wage provisions
Includes executives, managers, professionals, and administrators
Must be paid fixed salary and meet criteria for job content by:
Undertaking management duties
Directing the work of two or more employees
Controlling or greatly influencing hiring, firing, and promotion decisions
Exercising discretion E
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24. Legal Constraints (cont’d)
Living Wage Laws:
Enacted by some local governments to ensure pay reflects cost of living
Equal Pay Act (1963)
Amendment to FLSA that prohibits gender-based wage discrimination for “substantially” equal jobs
Pay Equity (Comparable Worth) Policies
Based on race/gender differences in “true worth” of nonidentical jobs
Implemented by some state and local governments and some unions
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25. The Organization Environment
Strategy
Size
Approach to Compensation
Corporate Culture
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26. Pay for Engineers in Companies of Various Sizes (Annual Salary in U. S
Pay for Engineers in Companies of Various Sizes (Annual Salary in U.S. Dollars)
EX 9.7
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27. Comparison of Compensation at Costco and Wal-Mart
EX 9.8
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28. The HR Triad: Roles and Responsibilities for Total Compensation
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29. How Much Managers Know versus What They Should Know
EX 9.9
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30. Pay Structures for Base Salary and Wage Rates
Combining job evaluation information and information about market pay rates to establish a policy that governs the base pay received by employees.
Base Pay
The wage or salary, exclusive of incentive pay or benefits that an employee receives.
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31. Establishing the Internal Value of Jobs: Objectives of Job Evaluation
The procedure for gathering information about a job and its relative value within the organization—a consideration for internal equity in the job-based pay structure of an organization.
Salary Surveys
Market information gathered about what other employers pay—validation of external equity in valuing jobs in an organization.
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32. Common Job Evaluation Practices
EX 9.10
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33. Job Evaluation Methods
Job Ranking Method
Places jobs into a rank order according to the perceived overall value or importance of the job.
Is convenient when only a few jobs need to be evaluated and one person is familiar with them.
Job Classification Method
Groups jobs into a set of classifications based on the job descriptions, and then ranks the jobs that are found within each classification.
Jobs classified as being similar are usually referred to as being in the same job grade.
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34. Job Evaluation Methods (cont’d)
Point Factor Rating Method
Uses a sophisticated system of points to assign values to jobs.
Compensable factors
The dimensions of work that an organization chooses to use when establishing the relative value of jobs.
Standardized factors (Hay Guide Chart-Profile)
Problem solving, know-how, accountability
Custom-designed factors
Factors developed by an organization to align its pay system with its strategic objectives.
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35. Job Evaluation Methods (cont’d)
Point Factor Rating Method
STEP 1: Select Compensable Factors
STEP 2: Assign Factor Weights
STEP 3: Define Factor Degrees
STEP 4: Establish the Degree of Each Factor Present in Each Job
STEP 5: Calculate Job Values
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36. Example of a Compensable Factor and Related Degree Statements
PART B: EXAMPLE OF A COMPENSABLE FACTOR AND RELATED DEGREE STATEMENTS
PROBLEM SOLVING: This factor examines the types of problems dealt with in your job. Indicate the one level that is most representative of most of your job responsibilities.
Degree 1: Actions are performed in a set order according to written or verbal instructions. Problems are referred to a supervisor.
Degree 2: Routine problems are solved and various choices are made regarding the order in which the work is performed, within standard practices. Information may be obtained from various sources.
Degree 3: Various problems are solved that require general knowledge of company policies and procedures applicable within own area of responsibility. Decisions are made based on a choice from established alternatives. Actions are expected to be within standards and established procedures.
Degree 4: Analytical judgment, initiative, or innovation is required in dealing with complex problems or situations. Evaluation is not easy because there is little precedent or information may be incomplete.
Degree 5: Complex tasks involving new or constantly changing problems or situations are planned, delegated, coordinated, or implemented, or any combination of these. Tasks involve the development of new technologies, programs, or projects. Actions are limited only by company policies and budgets.
EX 9.11
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37. Job Evaluation Methods (cont’d)
Competency-Based Job Evaluation
Emphasizes competencies needed to perform job rather than job duties
Often used with broadbanding approach
Promotes individual development and growth through lateral moves
Hierarchical, bureaucratic and rule-driven corporate cultures may make implementation difficult.
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38. Job Evaluation Methods (cont’d)
Single Plan
Partial solution to sex-based pay inequities for specific families of jobs
Communicates a coherent message about organization values
Multiple Plans
Required if job vary in terms of compensable factors:
Working conditions
Physical efforts
Skills
Knowledge
Developing a core set of values to evaluate all jobs supplemented with a unique set of factors for particular jobs appears to pay off.
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39. Skill-Based Pay
Rewards employees for the range, depth, and types of skills they’re capable of using, regardless of whether the job they currently hold requires the use of those skills.
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40. Using External Market Rates to Set Pay Levels
External Equity
Exists when employees feel they are being paid fairly relative to what people in similar jobs (or with similar competencies) are paid by other employers.
Achieving external equity involves three steps:
Determining external market rates
Establishing the market pay policy
Setting the organization pay policy.
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41. Conducting Survey to Assess External Market Rates
Define relevant labor market
Identify benchmark jobs:
Jobs that are similar across a range of organizations
Obtain market data
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42. Geographic Pay Differentials within the United States
EX 9.12
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43. Market Pay Rates for Selected Jobs in Several Industries
EX 9.13
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44. Market Pay Policy Line Based on Market Survey Results for Benchmark Jobs
EX 9.14
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45. Set the Organization Pay Policy
Specifies the pay rates that will be used for the jobs in a particular organization.
Options
A lead policy indicates that the organization intends to pay somewhat above the market rate in valuing employees as a competitive advantage.
A match policy sets the organization’s policy line at the middle of the market.
A lag policy is where the organization intentionally pays below the market.
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46. Organizational Pay Policies
Note: Based on a survey of 1,180 large private employers. Values indicate the percentage of employers reporting each pay policy. A lag policy is defined as paying at or below the market’s 40th percentile. A match policy is defined as paying at the 40th to 60th percentile. A lead policy is defined as paying above the market’s 60th percentile.
EX 9.15
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47. Designing the Internal Pay Structure
Job-Based Pay Grades and Ranges
Pay line is midpoint
Range: maximum and minimum pay
Common ranges:
Nonexempt
Laborers: Up to 25%
Clerical, technical, paraprofessional: %
Exempt
First-level managers. and professionals: 30-50%
Middle and senior managers: %
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48. Conventional Job-Based Pay Structure
EX 9.16
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49. Designing the Internal Pay Structure (cont’d)
Competency-Based:
Points assigned to jobs based on competencies required
Skill-Based
Base pay equal regardless of job assignment
Additional pay earned by increasing skills
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50. Balancing Internal and External Equity
Pay Equity
Pay
Differentials
Market
Shift
Pay
Compression
Internal
External
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51. Communicating the Pay Structure
Involve Employees
Focus on the Big Picture
Effective Communication
Follow-up
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52. Compensation in the Context of Globalization
“Keeping the expatriate whole”
Balance sheet approach
Provides a level of net spendable income in the new destination similar to that received in the previous (usually home) location. $
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53. Expenses Incurred by Expatriates and Often Paid by Employers
Goods and Services Items such as food, personal care, clothing, household furnishings, recreation, transportation, and medical care.
Housing The major costs associated with the employees’ principal residences.
Income Taxes Payments to federal and local governments for personal income taxes. For U.S. employees, tax liabilities usually increase when they go abroad, so most U.S. employers adopt a tax equalization policy for assignment-related income.
Reserve Contributions to savings, payments for benefits, pension contributions, investments, education expenses, Social Security taxes, and so forth.
Shipment and Storage The major costs associated with shipping and storing personal and household effects.
EX 9.17
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54. TERMS TO REMEMBER Balance sheet approach External equity Base pay
Benchmark jobs
Compensable factors
Compensation survey
Competency-based job evaluation
Equal Pay Act
Exempt employees
External equity
Fair Labor Standards Act (FLSA)
Hay Guide Chart-Profile
Internal equity
Job-based pay structure
Job classification method
Job evaluation
Job ranking method
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