Managing Basic Compensation

Managing Basic Compensation

Chapter Outline

•      Developing a Compensation Strategy

•      Determining a Wage and Salary Structure

•      Wage and Salary Administration

•      Legal Issues in Compensation

•      Evaluating Compensation Policies

Chapter Objectives

•      Describe the basic issues involved in developing a compensation strategy.

•      Discuss how organizations develop a wage and salary structure.

•      Identify and describe the basis issues involved in wage and salary administration.

•      Identify and describe basic legal issues in compensation.

•      Describe the importance to an organization of evaluating its compensation policies.

What Is Compensation?

•      The set of rewards that organizations provide to individuals in return for their willingness to perform various jobs and tasks within the organization

Developing a Compensation Strategy

•      Internal equity

–  Refers to comparisons made by employees to other employees within the same organization

•      External equity

–  Refers to comparisons made by employees to others employed by different organizations performing similar jobs

Wages Versus Salaries

•      Wages

–  Hourly compensation paid to operating employees; the basis for wages is time

•      Salary

–  Income paid to an individual on the basis of performance, not on the basis of time

Strategic Options for Compensation

Determinants of Compensation Strategy

•      A firm in a high-growth mode is constantly striving to attract new employees and may find itself in a position of having to pay above-market rates to do so.

•      A stable firm may be more likely to pay market rates, given the relatively predictable and stable nature of its operations.

•      An organization in retrenchment or decline may decide to pay below-market rates because it wants to reduce the size of its workforce.

Determinants of Compensation Strategy (cont’d)

•      The organization’s ability to pay

•      Ability of the organization to attract and retain employees

•      Legal context

•      Union influences

Pay Surveys and Compensation

•      Pay surveys

–  Surveys of compensation paid to employees by other employers in a particular geographic area, industry, or occupational group

•      The purpose of pay surveys is to ask other organizations what they pay people to perform various jobs.

•      Pay surveys provide the information organizations need to avoid problems of external equity.

Example of a Pay Survey

Determining a Wage and Salary Structure

•      Job evaluation

–  A method for determining the relative value or worth of a job to the organization so that individuals who perform that job can be compensated adequately and appropriately

•      Job ranking

–  A job evaluation method requiring the manager to rank-order jobs, based on their relative importance to the organization, from most important to least important

Determining a Wage and Salary Structure (cont’d)

•      Classification system

–  A job evaluation method that attempts to group sets of jobs together into clusters, often called grades

•      Point system

–  A job evaluation method that requires managers to quantify, in objective terms, the value of the various elements of specific jobs

Determining a Wage and Salary Structure (cont’d)

•      Compensable factors

–  Any aspect of a job for which an organization is willing to provide compensation

•      Point manual

–  In the point system, the point manual carefully and specifically defines the degrees of points from first to fifth

Determining a Wage and Salary Structure (cont’d)

•      Factor comparison

–  A job evaluation method that assesses jobs, on a factor-by-factor basis, using a factor comparison scale as a benchmark

•      Regression-based system

–  A job evaluation method that utilizes a statistical technique called multiple regression to develop an equation that establishes the relationship between different dimensions of job and compensation

Establishing Job Classes

•      Job classes represent gradations of responsibility and competence regarding performance of a specific job.

•      Different levels of competence can exist among different mechanics.

•      Organizations differentiate among people with different competencies.

•      Organizations that use this method should establish their job classes as part of the job evaluation process itself.

Establishing a Pay Structure

•      A pay structure has to specify the level of pay the organization will provide to each job class.

•      A pay structure must identify the pay differentials to be paid to individuals within each job class.

A Sample Wage Structure

Pay-for-Knowledge and Skill-Based Pay

•      Pay-for-knowledge

–  Compensating employees for learning specific information

•      Skill-based pay

–  Rewarding employees for acquiring new skills

Wage and Salary Administration

•      The ongoing process of managing a wage and salary structure

•      All managers must be sensitive to compensation costs and must be vigilant about managing them properly.

•      The ongoing management of compensation and benefits is a critical part of effective wage and salary administration.

Determining Individual Wages

•      For both ethical and legal reasons, the basis for differential pay should not be a non-job-related factor such as gender or race.

•      It is perfectly appropriate and desirable, however, for the organization to reward people with differential compensation based on job-related qualifications.


•      Pay secrecy

–  The extent to which the compensation of any individual in an organization is secret or the extent to which it is formally made available to other individuals

•      Pay compression

–  Occurs when individuals with substantially different levels of experience an/or performance abilities are being paid wages or salaries that are relatively equal

Legal Issues in Compensation

•      The Fair Labor Standards Act includes provisions for the minimum wage, overtime, and child labor.

•      Several minimum wages exist, such as for agricultural jobs.

•      According to overtime pay laws, employees who work more than 40 hours a week must be paid time and a half for all hours over 40 unless they are exempt.

Evaluating Compensation Policies

•      It is important that the organization provide reasonable compensation and appropriate benefits to its employees.

•      It is in the best interests of the stockholders and other constituents of the organization that the firm manage its resources wisely.

•      It is important to asses this topic periodically to ensure that costs are in line.