1. Compensation

2. Compensation Used to Serve Organizations Goals
Enhance Employee Needs but Create Profits
Relative Worth of Job
Significant Part of HRM
Formal Policy Essential

3. Compensation Policy Objectives
To Reward Past Performance
To Remain Competitive in Marketplace
To Maintain Equity Among Employees
To Motivate Future Performance
To Maintain a Realistic Budget
To Attract New Employees
To Reduce Turnover

4. Indirect Compensation
Total Compensation
Direct Compensation
Indirect Compensation
Base Pay
Wages
Salary
Incentives
Commissions
Piece rate
Bonuses
Stock Options
Profit Sharing
Gainsharing
Pay for Time Not Worked
Vacations
Breaks
Holidays
Sick Days
Jury Duty
Insurance Plans
Medical
Hospital
Dental
Life
Surgical
Security Plans
Pension
Social Security
Disability Insurance
Employee Services
Educational Assistance
Recreational Programs
Food Services

5. Compensation Policy Concerns
Pay a Fair Base Pay Rate
Reward Enhanced Performance

6. Pay-for-Performance Standard
Standard by which managers tie compensation to employee effort and performance.

7. Pay-for-Performance Standard
Merit Pay
Cash Bonuses
Incentive Pay
Goal: Increase Performance 15-35%

8. Pay Equity
An employee’s perception that compensation received is equal to the value of the work performed.

9. Motivating Value of Compensation
Pay Equity (Perception of fair value)
Pay Expectancy (Rewards, Received = Expected)
Pay Secrecy

10. Bases for Compensation
Hourly
Monthly
Daily
Annual
Piecework
Straight Commission

11. Hourly Work
Work paid on an hourly basis.
HOUR

12. Piecework
Work paid according to the number of units produced.

13. FLSA Classification of Compensation
Exempt (Management/Professional)
Non-Exempt (hourly)
Pay: 1.5 times hourly rate over 40 hrs/week

14. Exempt Employee
Employees not covered by the overtime provisions of the Fair Labor Standards Act.
“Management”

15. Nonexempt Employees
Employees covered by the overtime provisions of the Fair Labor Standards Act.
“Labor”

16. External and Internal Factors Affecting the Wage Mix
External Factors
Conditions of the labor market
Area wage rates
Cost of living
Collective bargaining
Government Influence
Internal Factors
Worth of job
Employee’s
relative worth
Employer’s ability
to pay
Wage Mix
Wage Mix

17. External Influences on Wage Rates
Labor Market Conditions
Area Wage Rates (Surveys)
Cost of Living (CPI Adjustments)
Collective Bargaining
Government

18. Internal Influences on Wage Rates
Worth of the Job
Employee's Relative Worth (merit)
Employer's Ability to Pay (competitiveness)

19. Consumer Price Index (CPI)
Measure of the average change in prices over time in a fixed “market basket” of goods and services.
“Inflation Influence”

20. Escalator Clauses
Clauses in labor agreements that provide for quarterly cost-of-living adjustments in wages, basing the adjustments upon changes in the consumer price index.

21. Real Wages
Wage increases larger than rises in the consumer price index; that is, the real earning power of wages.

22. Job Evaluation
Systematic process of determining the relative worth of jobs in order to establish which jobs should be paid more than others within an organization.

23. Job Evaluation Determine "Relative" Worth of Jobs
Hierarchy of Jobs (ranking)
Assign Pay Rates
Purpose: Establish Internal Equity

24. Four Basic Systems Job Ranking Job Grading Point System
Factor Comparison

25. Job Ranking System
Simplest and oldest system of job evaluation by which jobs are arrayed on the basis of their relative worth.

26. Job Ranking System Establish Committee Define all Jobs
Identify Critical Factor (Responsibilities of Importance)
Rank Every Job by Critical Factors

27. Job Classification System
System of job evaluation by which jobs are classified and grouped according to a series of predetermined wage grades.

28. Job Grade System Determine Number of Grades (e.g. 20)
Describe Each Grade
Review Each Job Description
Fit Job into Grade
“Government”

29. Point System
Quantitative job evaluation procedure that determines the relative value of a job by the total points assigned to it.

30. Point System (Quantitative)
Identify Compensatable Factors (e.g.)
Skill
Responsibility
Effort
Environment
Establish Degree Within each Factor (e.g. 1-9)
Create a Point Manual
Defines Factors (3-9)
Definitive Degrees (1-9)
Analyze each Job
Assign Points
Rank by Points

31. Hay Profile Method Knowledge Mental Activity Accountability
Job evaluation technique using three factors – knowledge, mental activity, and accountability – to evaluate executive and managerial positions.
Knowledge
Mental Activity
Accountability

32. Point Values for Job Factors of the National Metal Trades Association
1st Degree
2nd Degree
3rd Degree
4th Degree
5th Degree
Skill
1. Job knowledge 14 28 42 56 70
2. Experience 22 44 66 88
110
3 initiative and ingenuity
Effort
4. Physical demand 10 20 30 40 50
5. Mental or visual demand 5 15 25
Responsibility
6. Equipment or process
7. Material or product
8. Safety of others
9. Work of others
Job Conditions
10. Working conditions
11. Hazards
SOURCE: Developed by the National Metal Trades Association. Reproduced with permission of the American Association of Industrial Management, Springfield, MA.

33. Description of Knowledge Factors and Degrees of the National Metal Trades Association
This factor measures the knowledge or equivalent training required to perform the position duties.
1st Degree
Use of reading and writing, adding and subtracting of while numbers; following of instructional use of fixed gauges, direct reading instruments, and similar devices where interpretation is not required.
2nd Degree
Use of addition, subtraction, multiplication, and division of numbers including decimals and fractions; simple use of formulas, charts, tables, drawings, specifications, schedules, wiring diagrams; use of adjustable measuring instruments; checking of reports, forms, records, and comparable data where interpretation is required.
3rd Degree
Use of mathematics together with the use of complicated drawings, specifications, charts, tables; various types of precision measuring instruments. Equivalent to one to three years applied trades training in a particular or specialized occupation.
4th Degree
Use of advanced trades mathematics, together with the use of complicated drawings, specifications, charts, tables, handbook formulas; all varieties of precision measuring instruments. Equivalent to complete accredited apprenticeship in a recognized trade, craft or occupation; or equivalent to a two-year technical college education.
5th Degree
Use of higher mathematics involved in the application of engineering principles and their performance of related practical operations, together with a comprehensive knowledge of the theories and practices of mechanical, electrical, chemical. Civil, or like engineering field. Equivalent to complete four years of technical college or university education.
SOURCE: Developed by the National Metal Trades Association. Reproduced with permission of the American Association of Industrial Management, Springfield, MA.

34. Factor Comparison System
Similar to Point System
Distinguished by "Key Jobs"
Compensatable Factors
Skill
Responsibility
Mental Effort
Working Conditions
Physical Effort
Assign & Value to Factor
Each Job is Assigned a Factor
Add up Values to get Wage Rate

35. Characteristics of Key Jobs
Have importance to employees and organizations
Vary in terms of job requirements
Possess relatively stable job content
Are used as important jobs in salary surveys

36. Compensation Structure
Job Evaluation First
Assign a Wage Rate Second
Base Rate on Wage "Survey"
Geographical Area of Worker Draw

37. Components of the Wage Structure
Range Steps
Midpoint of Range
Rate Range
Range Overlap
Wage Classes

38. Wage and Salary Survey
Surveys of the wages paid to employees of other employers in the surveying organization’s relevant labor market.

39. Wage and Salary Surveys
Select key jobs.
Determine relevant labor market.
Select organizations.
Decide on information to collect: wages/benefits/pay policies.
Compile data received.
Determine wages and benefits to pay.

40. Wage Curve
Curve in a scattergram representing the relationship between relative worth of jobs and wage rates.

41. Wage Rates
Point Value of Jobs

42. Survey Data Government Statistical Survey Employer Initiated Survey
By Job Classification
World Wide Web

43. Pay Grades
Groups of jobs within a particular class that are paid the same rate or rate range.

44. SINGLE RATE STRUCTURE Evaluated Points Wage Rates
8.00
9.00
10.00
11.00
12.00
13.00
14.00
15.00
Organization wage curve
150
200
250
300
350
400
450 1 2 3 4 5 6 7 8
Wage Classes

45. Point Conversion Table
Wage Class
Point Range
Hourly Rate Range 1 $ 2 $ 3 $ 4 $ 5 $ 6 $ 7 $ 8 $

46. Wage Structure with Increasing Rate Ranges

47. Issues in Rate Structures
Wage Rate Compression
Narrow Difference from Job to Job
White-Grey-Blue Collar Impact
Low Morale/Turnover/Behavior
Two Tier Wage Systems
A/B Scales
Time of Employment
Grandfathering
Cost of Living Comparison (COLA)

48. Government Regulations
Overtime Mandate (1 1/2 times over 40 hours)
Pay Prevailing Rates in Area
Minimum Wages
Child Labor (16-19 yrs)
Equal Rights for All

49. Comparable Worth
The concept that male and female jobs that are dissimilar, but equal in terms of value or worth to the employer, should be paid the same.

50. Wage-Rate Compression
Compression of differentials between job classes, particularly the differential between hourly workers and their managers.

51. Advantages of Incentive Pay Programs
Employee effort is focused on important targets
Rewards are variable costs linked to results
Incentives are directly related to improved performance
Incentives reward those responsible for higher performance

52. Straight Piecework
Incentive plan under which employees receive a certain rate for each unit produced.

53. Differential Piece Rate
Compensation rate under which employees whose production exceeds the standard amount of output receive a higher rate for all of their work than the rate paid to those who do not exceed the standard amount.

54. Employee Opposition to Incentive Plans
Production standards are set unfairly.
Incentive plans are really “work speedup.”
Incentive plans create competition among workers.
Increased earnings result in tougher standards.
Payout formulas are complex and difficult to understand.
Incentive plans cause friction between employees and management.

55. Six Components of Effective Incentive Plan Administration
Grant incentives based on performance
Adequate financial resources to reward performance
Clearly defined and accepted performance standards
Easily understood payout formula
Reasonable administrative costs
Wide coverage of employees

56. Merit Guidelines
Guidelines for awarding merit raises that are ties to performance objectives.

57. Motivating Through Merit Raises

58. Bonus
Incentive payment that is supplemented to the base wage.

59. Team or Group Incentive Plan
Compensation plan where all team members receive an incentive bonus payment when productive or services standards are met or exceeded.

60. Standard Hourly Plan
Incentive plan that sets rates based upon the completion of a job in a predetermined standard time.

61. Criticisms of Executive Incentive Plans
Incentive payments are excessive compared with return to stockholders.
Time periods for judging and rewarding performance are too short.
Quarterly earnings growth is emphasized at the expense of research and development.
Emphasis is placed upon equaling or exceeding executive salary survey averages.
Benefits do no relate closely to individual performance

62. Perquisites
Special benefits given to executives; often referred to as perks.

63. Executive Perquisites
Company-provided car
Free financial consulting
Club memberships
Use of company plane and yacht
Low-cost or no-cost loans
Special travel allowances
Limousine service
Kidnap and ransom protection
Free legal counseling
Family member travel allowances
Home entertainment allowance
Payment of children’s educational expense
Executive dining room
Estate planning

64. Straight Commission Plan
Compensation plan based upon a percentage of sales.

65. Straight Salary Plan
Compensation plan that permits salespeople to be paid for performing various duties that are not reflected immediately in their sales volume.

66. Combined Salary and Commission Plan
Compensation plan that includes a straight salary and a commission.

67. Gainsharing Plans
Programs under which both employees and the organization share the financial gains according to a predetermined formula that reflects improved productivity and profitability.

68. Profit Sharing
Any procedure by which an employer pays, or makes available to all regular employees, in addition to base pay, special current or deferred sums based upon the profits of the enterprise.

69. Relationship of Compensation Management to Other HRM Functions

70. Compensation Hot Links
Abbott, Langer, and Associates
ERI
Hewitt Associates
Office Team
Robert Half
America’s Job Bank
World at Work (Formerly ACA)