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Human Resource Management: Functions, Applications, Skill

Development by Robert N. Lussier and John R. HendonChapter 11

Compensation Management

Compensation

�Is the total of an employee’s pay and benefits.

�Costs are frequently 65 to 70 percent of total

production costs in today’s firms.

�Affects the process of both attracting and of

retaining employees.

� Therefore, firms should design the system

to meet the various needs of employees.

Compensation Management

The Compensation System

Includes anything that an employee may value and

desire and that the employer is willing and able to

offer in exchange.

Compensation components – all rewards that can be

classified as monetary and in-kind payments.

Non compensation components – all rewards other

than monetary and in-kind payments (e.g. company

cafeterias and gyms).

Compensation Management

Types of Compensation

Base pay – Wages are paid on an hourly basis; salary is based on a longer time period.Wage and salary add-ons – includes overtime pay, shift differential, premium pay for working weekends and holidays, etc.

Incentive pay – (a.k.a. “variable pay”) is “pay for performance”, and commonly includes piece work in production and commission sales.

Benefits – indirect compensation that provides something of value to the employee.

Compensation Management

Motivation and Compensation Planning

Goal of compensation – to motivate employees to do

the things the firm needs, consistently, over time.

Expectancy Theory – employees believe the rewards

for accomplishing a task are worth the effort.

� Clearly define goals and how to achieve them.

� Tie performance to rewards.

� Be sure rewards have value to employees.

� Make sure management does what it says it will.

Compensation Management

Motivation and Compensation PlanningEquity theory – employees are motivated when the ratio of their perceived outcomes to inputs is at least roughly equal to other referent individuals.

� Employees perceive being under-rewarded �decrease inputs, increase outcomes.

� Employees perceive being over-rewarded – thisdoes not usually disturb employees.

� Employees perceive being equitably rewarded –will continue to perform if still content that their incomes and outputs are in balance.

Compensation Management

Learning Theories

Positive reinforcement – if employees get something they want in return for doing what the firm needs, they are more likely to continue doing the same.

Negative reinforcement – firms take away something employees don’t want, motivation increases.

Avoidance reinforcement – work standards dictate work/compensation levels.

Punishment – used when employee do not meet work standards.

Compensation Management

Organizational Philosophy �� Decisions

Ability to pay.

What types of compensation?

Pay for performance or for longevity?

Skill-based or competency-based?

At, above or below the Market?

Wage compression.

Pay secrecy.

Compensation Management

Legal and Fairness Issues in Compensation

Firms must offer equal pay for equal work,

unless there is a difference in productivity,

seniority, merit, or other factors “other than

sex”.

Compensation Management

Fair Labor Standards Act of 1938 (Amended)

Covers minimum wage, overtime issues, and child labor rules for most U.S.-based businesses.

Minimum wage is the lowest hourly rate of pay generally permissible by federal law.

�Employees with specific duties are exempt from minimum wage, overtime, and child labor rules.

Compensation

Management

Compensation Management

Overtime

A federally mandated, higher-than-

minimum wage, required for nonexempt

employees if they work more than 40

hours/week.

�Is currently set by the FLSA as “time and

a half”, or 150% of the employee’s

normal wages.

Compensation Management

FLSA and Child Labor

� 14 and 15 year olds may work outside school hours

no more than ”three hours on a school day, 18 hours

in a school week, eight hours on a non-school day,

and 40 hours in a non-school week.” Permissible

work hours are also restricted.

� 16 and 17 year olds cannot be employed in

hazardous jobs, but their work hours are

unrestricted.

� Individuals 18 or older can be hired for all work.

Compensation Management

Pay Equity and Comparable Worth

Comparable worth – when jobs are distinctly different but entail similar levels of ability, responsibility, skills, and working conditions, they are of equal value and should have the same pay scale.

�The comparable work concept is broader than “equal pay for equal work” because the work need only be similar, not the same.

Compensation Management

Job Evaluation

Is the process of determining the worth of each position relative to the other positions within the organization.

Job ranking – subjectively ordering jobs from lowest to highest or vice versa, in terms of value to the company.

Point-factor – objectively breaking down a job into “compensable factors” and applying points to each factor based on the job’s level of difficulty.

Factor comparison – analyzing and ranking “compensable factors” of benchmark jobs in pay surveys and ranking all of the firm’s jobs against the benchmark.

Compensation

Management

Compensation Management

Job Structure and Pay Levels

Pay structure creates a hierarchy of jobs and their

rates of pay within the organization; made up of job

structures and pay levels.

� Job structure is the stacking up of the jobs in the

organization from the lowest to the highest levels.

� Pay levels provide minimum to maximum pay for

a group or subset of jobs in the organization

Compensation Management

Creation of Pay Levels

A single pay level (a.k.a. “pay grade”) is made up of several to many different jobs.

�Each pay level has a maximum and minimum pay rate.

�Pay rates are determined by comparisons with Labor Market Competition (minimum pay level), Product Market Competition (top pay level), and supply and demand, to insure equity.

Compensation Management

Compensation

Management

Compensation Management

Delayering and Broadbanding

Delayering – the process of changing the

company structure to get rid of some of the

vertical hierarchy (reporting levels).

Broadbanding – the combining of multiple pay

levels into one.

Compensation Management