Compensation

Cash, Bonuses, Insurance, Vacation, Holidays Perks, Recognition

What does compensation (what you receive for your services) mean to you?

A Definition . . .
All forms of
financial return, tangible services and benefits

that employees receive as part of their employment relationship

Components of a Total Compensation Program - 1

Financial Direct
wages, salaries, commissions, bonuses

Indirect
insurance plans
life, health, dental, disability

social assistance benefits

retirement plans, social security, workers comp

paid absences
vacations, holidays, sick leave

Components of a Total Compensation Program - 2

Non-Financial The Job
interesting, challenging, responsible opportunity for recognition, advancement feeling of achievement

Job Environment
policies, supervision, co-workers, status symbols, working conditions, flextime, compressed work week, job sharing, telecommuting, flexible benefits programs

Factors that Influence Wage Levels

Conditions of Labor Market Area Wage Rates Cost of Living Compensation Policy of Organization Worth of Job

WAGE MIX

Employees Relative Worth

Collective Bargaining
Legal Requirements Employers Ability to Pay

Designing a Compensation System

Steps in the Decision Process

Step 1 - Establish General Wage Level for Organization

Factors to consider: Other firms rates Union demands Cost-of-living changes Firms ability to pay

 Employ a job evaluation system

Ranking Job Classification Point System Factor Comparison

Step 2 - Establish Wage Structure (The Pay for Each Job)

Results:
pay grades rate ranges

Step 3 - Establish Pay for Each Individual on Each Job

Inputs: Performance appraisal information Seniority system

A Pay Model -- 3 Basic Components

I. Compensation Objectives II. Foundation Concepts III. Techniques for Management

A Pay Model I. Compensation Objectives - 1

Organization Performance Labor Costs Attitudes and Behaviors Laws and Regulations

A Pay Model I. Compensation Objectives - 2

Influence forms & procedures For example:
if objective is pay for performance, emphasize incentives, merit pay plans if objective is stable, experienced workforce, emphasize seniority-based pay

A Pay Model II. Foundation Concepts

Equity External Equity Comparison: outside organization Internal Equity Comparison: inside organization, among jobs Employee Equity Comparison: individuals doing same job for same organization

Equity Theory
Equity Op/Ip = Oo/Io Under-reward Inequity Op/Ip < Oo/Io Over-reward Inequity Op/Ip > Oo/Io
p = personal, o = comparison other I = Inputs effort, ability, experience O = Outcomes pay, benefits, perks

Why does Equity Matter? What Behaviors are Likely to Occur when Inequity is Felt?

A Pay Model III. Techniques for Management

A. Pay Level B. Pay Structure C. Individual Pay Rates

A Pay Model III. Techniques for Management

A. Pay Level
Defined: average rates paid by employer Applicable concept: External Equity 3 Pure Alternatives
lead competition match competition lag competition

Mechanism used: Market Wage Survey

Market 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.

Market Wage Levels

Which company is leading the market? Which company is lagging the market? What would the wage level line look like for a company that was meeting/matching the market?

A Pay Model III. Techniques for Management

B. Pay Structure
Defined: pay rates for different jobs within a single organization Applicable concept: Internal Equity Pay more for jobs with
greater qualifications less desirable working conditions more valuable output

Mechanism used: Job Analysis & Job Evaluation

Job Evaluation
defined: the systematic evaluation of job descriptions outcome: a hierarchy of organizational jobs according to their content and value to the organization Methods:
ranking classification factor comparison point method

Job Ranking System

Simplest and oldest system of job evaluation by which jobs are arrayed on the basis of their relative worth

Job Classification System

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

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

Factor Comparison System

Job evaluation system that permits the evaluation process to be accomplished on a factor-by-factor basis by developing a factor comparison scale

Hay Profile Method

Job evaluation technique using three factors knowledge, mental activity, and accountability to evaluate executive and managerial positions

A Pay Model III. Techniques for Management

C. Individual Pay Rates

Defined: pay rates for different individuals doing the same job within an organization Applicable concept: Employee Equity 2 Techniques
Flat Rate Pay Ranges

Mechanisms used: Performance or Seniority

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

Components of the Wage Structure

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

Elements of the Rate Range

Common Pay Grade Ranges

Laborers & Trades, up to 20% Clerical, Technical, Para-professional, 15-49% First Level Supervisors, Professionals 30-50% Middle and Senior Level Management, 40-100%

Monitoring Compensation Costs

Compra-Ratio Formula: Actual Average Pay for Grade
Midpoint Pay for Grade A compra ratio < 1 indicates lag A compra-ratio > indicates excess

How Would You Handle Outliers?

An individual whose current pay is beyond the maximum of the pay grade for his/her job

An individual whose current pay is below the minimum of the pay grade for his/her job

Federal Wage Laws

Davis-Beacon Act of 1931

Walsh-Healy Act of 1936

Fair Labor Standards Act of 1938

Nonexempt Employees
Employees covered by the overtime provisions of the Fair Labor Standards Act

Exempt Employees
Employees not covered by the overtime provisions of the Fair Labor Standards Act

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

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