The Strategic Importance of
Total Compensation
• Three Important Objectives:
ØAttracting and retaining the talent required for sustainable competitive advantage
ØFocusing the energy of employees on implementing the organization’s competitive strategy
ØControlling costs
Attracting and Retaining Talent
• Pay Fairness
ØWhat people believe they deserve to be paid in relation to what others deserve to be paid.
• Equity
ØPerceptions 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
Equity Perceptions
Comparisons That Influence Equity Perceptions
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
Ø Form a union Ø File a grievance Ø Leave work early
• Choose a different comparison “other”
• Rationalize that inequities are justified
• Leave the situation by quitting
Low Pay
• Companies choose to lead, lag, or match market pay rates
• External equity
ØFairness relative to the external market (outside the organization)
ØDifficult to make comparisons when companies mix forms of pay (e.g. salary, bonus, benefits)
• Dissatisfied employees may
ØLeave the company
ØPerform poorly
ØSteal from the company
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:
ØInvolving employees in pay system design.
ØImplement pay systems fairly and provide due process.
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%.
Implementing the Business Strategy
Integrating Compensation Systems
Following Mergers and Acquisitions
Elements of Total Compensation within the Integrated HRM System
Monetary and NonMonetary Compensation
• Monetary Compensation
ØDirect 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
ØForms of social and psychological rewards—recognition and respect from others, enjoyment from doing the job itself, opportunities for self development, and so on.
Your Money or Your Life?
Other HRM Practices
• Recruitment and Retention
ØNumber and quality of job applications received during recruitment.
ØEmployees’ decisions to stay with their employers.
• Training and Development
ØValue of tuition reimbursements, management development programs offered by employers
• Performance Measurement
ØAlignment between the pay system and performance measurement affects employees’ motivation
The External Environment
Comparing the Pay Mix for
Different Categories of Employees
Potential Pay Mixes for Different Stages of the Industry Life Cycle
Legal Constraints
• Davis-Bacon (1931) and
Walsh-Healy (1936) Acts
ØFederal construction contractors required to pay prevailing wages to laborers and mechanics
• Fair Labor Standards Act (1938)
ØSet minimum wage
ØRequires overtime for nonexempt workers
ØEstablishes child labor standards
Exempt Employees Under FLSA
• Persons not covered by overtime and minimum wage provisions
ØIncludes executives, managers, professionals, and administrators
• Must be paid fixed salary and meet criteria for job content by:
ØUndertaking management duties
ØDirecting the work of two or more employees
ØControlling or greatly influencing hiring, firing, and promotion decisions
ØExercising discretion
Legal Constraints (cont’d)
• Living Wage Laws:
ØEnacted by some local governments to ensure pay reflects cost of living
• Equal Pay Act (1963)
ØAmendment to FLSA that prohibits gender-based wage discrimination for “substantially” equal jobs
• Pay Equity (Comparable Worth) Policies
ØBased on race/gender differences in “true worth” of nonidentical jobs
ØImplemented by some state and local governments and some unions
The Organization Environment
Pay for Engineers in Companies of Various Sizes
(Annual Salary in U.S. Dollars)
Comparison of Compensation at Costco and Wal-Mart
The HR Triad: Roles and Responsibilities
for Total Compensation
How Much Managers Know versus
What They Should Know
Pay Structures for Base Salary
and Wage Rates
• Pay Structure
ØCombining job evaluation information and information about market pay rates to establish a policy that governs the base pay received by employees.
• Base Pay
ØThe wage or salary, exclusive of incentive pay or benefits that an employee receives.
Establishing the Internal Value of Jobs:
Objectives of Job Evaluation
• Job Evaluation
ØThe 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
ØMarket information gathered about what other employers pay—validation of external equity in valuing jobs in an organization.
Common Job Evaluation Practices
Job Evaluation Methods
• Job Ranking Method
ØPlaces jobs into a rank order according to the perceived overall value or importance of the job.
ØIs convenient when only a few jobs need to be evaluated and one person is familiar with them.
• Job Classification Method
ØGroups jobs into a set of classifications based on the job descriptions, and then ranks the jobs that are found within each classification.
ØJobs classified as being similar are usually referred to as being in the same job grade.
Job Evaluation Methods (cont’d)
• Point Factor Rating Method
ØUses a sophisticated system of points to assign values to jobs.
ØCompensable factors
• The dimensions of work that an organization chooses to use when establishing the relative value of jobs.
ØStandardized factors (Hay Guide Chart-Profile)
• Problem solving, know-how, accountability
ØCustom-designed factors
• Factors developed by an organization to align its pay system with its strategic objectives.
Job Evaluation Methods (cont’d)
• Point Factor Rating Method
ØSTEP 1: Select Compensable Factors
ØSTEP 2: Assign Factor Weights
ØSTEP 3: Define Factor Degrees
ØSTEP 4: Establish the Degree of Each Factor Present in Each Job
ØSTEP 5: Calculate Job Values
Example of a Compensable Factor and Related Degree Statements
Job Evaluation Methods (cont’d)
• Competency-Based Job Evaluation
ØEmphasizes competencies needed to perform job rather than job duties
ØOften used with broadbanding approach
ØPromotes individual development and growth through lateral moves
ØHierarchical, bureaucratic and rule-driven corporate cultures may make implementation difficult.
Job Evaluation Methods (cont’d)
• Single Plan
Ø Partial solution to sex-based pay inequities for specific families of jobs
Ø Communicates a coherent message about organization values
• Multiple Plans
Ø Required if job vary in terms of compensable factors:
• Working conditions
• Physical efforts
• Skills
• Knowledge
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.
Using External Market Rates
to Set Pay Levels
• External Equity
ØExists 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:
ØDetermining external market rates
ØEstablishing the market pay policy
ØSetting the organization pay policy.
Conducting Survey to Assess
External Market Rates
• Define relevant labor market
• Identify benchmark jobs:
ØJobs that are similar
across a range of
organizations
• Obtain market data
Geographic Pay Differentials within the United States
Market Pay Rates for Selected Jobs in Several Industries
Market Pay Policy Line Based on Market Survey Results for Benchmark Jobs
Set the Organization Pay Policy
• Organization Pay Policy
ØSpecifies the pay rates that will be used for the jobs in a particular organization.
• Options
ØA lead policy indicates that the organization intends to pay somewhat above the market rate in valuing employees as a competitive advantage.
ØA match policy sets the organization’s policy line at the middle of the market.
ØA lag policy is where the organization intentionally pays below the market.
Organizational Pay Policies
Designing the Internal Pay Structure
• Job-Based Pay Grades and Ranges
ØPay line is midpoint
ØRange: maximum and minimum pay
• Common ranges:
ØNonexempt
• Laborers: Up to 25%
• Clerical, technical, paraprofessional: 15-50%
ØExempt
• First-level managers. and professionals: 30-50%
• Middle and senior managers: 40-100%
Conventional Job-Based Pay Structure
Designing the Internal Pay Structure (cont’d)
• Competency-Based:
ØPoints assigned to jobs based on competencies required
• Skill-Based
ØBase pay equal regardless of job assignment
ØAdditional pay earned by increasing skills
Balancing Internal and External Equity
Communicating the Pay Structure
Compensation in the Context
of Globalization
• “Keeping the expatriate whole”
• Balance sheet approach
ØProvides a level of net spendable income in the new destination similar to that received in the previous (usually home) location.
Expenses Incurred by Expatriates
and Often Paid by Employers
TERMS TO REMEMBER
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