1. Chapter 9 Managing Compensation

2. Learning Outcomes
Distinguish a strategic compensation program from one that is non-strategic
Determine how to design pay systems
Estimate whether or not a pay system is consistent within the firm as well as comparable to industry standards and government laws
Be able to design a compensation scorecard

3. Figure 9.1 - Compensation Components

4. Figure 9.2 - Compensation Alignment

5. Goals of Strategic Compensation Policy
Compensation of employees in ways that enhance motivation and growth
To reward employees’ past performance
To remain competitive in the labor market
To maintain salary equity among employees
To mesh employees’ future performance with organizational goals
To control the compensation budget
To attract new employees
To reduce unnecessary turnover

6. Pay-for-Performance Standard
Standard by which managers tie compensation to employee effort and performance
Refers to a wide range of compensation options
Includes merit-based pay, bonuses, salary commissions, job and pay banding, team/group incentives, and gainsharing programs

7. Motivating Employees through Compensation
Pay equity: Employee’s perception that compensation received is equal to the value of the work performed
Distributive fairness - Motivation theory that explains how people respond to situations in which they feel they have received less/more than they deserve

8. Kinds of Pay Equity External equity
People in similar jobs compare themselves to what others are making in different organizations
External equity
People compare themselves to peers in different jobs in the same organization
Internal equity
People compare themselves to others in their organization with the same job
Individual equity

9. Bases for Compensation
Hourly work
Piecework
Salaried employees
Nonexempt employees
Exempt employees

10. Figure 9.6 - Factors Affecting the Pay Mix

11. Important Terms in Pay Mix
Consumer price index (CPI)
Measure of the average change in prices over time in a fixed market basket of goods and services
Escalator clauses
Labor agreements clauses that provide for quarterly cost-of-living adjustments in wages, basing the adjustments on changes in the CPI
Real wages
Wage increases larger than rises in the CPI, that is, the real earning power of wages

12. 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
Methods of comparison
Rank the value of jobs from highest to lowest
Classify jobs so they can be benchmarked internally and externally
Award points to each job based on how much they are linked to organizational objectives

13. Wage and Salary Surveys
Survey of the wages paid to employees of other employers in the surveying organization’s relevant labor market
Labor market - Area from which employers obtain certain types of workers
Collecting survey data
HRIS and salary surveys
Employer-initiated surveys

14. Wage Curve, Pay Grades, and Rate Ranges
Curve in a scattergram representing the relationship between relative worth of jobs and pay rates
Wage curve
Groups of jobs within a particular class that are paid the same rate
Pay grades
Range of rates for each pay grade that may be the same for each grade or proportionately greater for each successive grade
Red circle rates: Payment rates above the maximum of the pay range
Rate ranges

15. Figure 9.7 - Freehand Wage Curve

16. Competence-Based Pay
Pay based on an employee’s skill level, variety of skills possessed, or increased job knowledge
Systems represent fundamental change in the attitude of management regarding:
How work should be organized
How employees should be paid for their work efforts
Encourages employees to acquire training when new or updated skills are needed by an organization

17. Minimum Wage and Pay Compression
Pay rate compression: Compression of pay between new and experienced employees caused by the higher starting salaries of new employees
Differential between hourly workers and their managers
Reasons for pay compression are market based than government based

18. Compensation Assessment
Assessing the effectiveness of compensation system is important to linking compensation with strategy
Measures
Help the company detect potential compensation problems
Make compensation decisions more transparent
Improve the alignment of compensation decisions with organizational objectives

19. Compensation Assessment
Compensation scorecard: Displays the results for all the measures that a company uses to monitor and compare compensation among internal departments or units
Creates a comparative tool within the organization that can reinforce desired outcomes that are unique to the company’s strategy